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Berndt-Uwe Pagel, 41, is Senior Vice President of BPO for SAP, an enterprise application software provider. According to IDC, SAP's worldwide market share is 40 percent in human-capital-management software, 24 percent for customer relationship-management software, around 30 percent in ERP software, and 40 percent in supply-chain-management software, based on 2005 software revenues. He explains how the lessons his father taught him were the best roadmap for BPO in a rapidly changing world.

Q: Where did you learn your biggest business lesson?
A: From my father. He told me having talent is not enough. Hard work is necessary, too. He taught me have to have a goal and then work for it.

My father is my role model. He went to war when he was 15. After the war, he went to work in salt mines. But he ended up head of IT for a big chemical company.

Q: What has been your biggest challenge at SAP?
A: In 2000 SAP formed an e-commerce company; I was employee No. 2 and in charge of technology and the business in Europe, Middle East, and Africa. We had 900 people on our payroll within two years. Fortune 500 companies formed e-marketplace consortia and we provided the required software platforms which we operated in a mix of ASP hosting and BPO.

Then the Internet bubble burst. We knew it would happen sooner or later, but we just didn't know when. But at SAP we knew we had to invest and grow to participate in the e-commerce revolution regardless of what would happen.

Then demand almost disappeared overnight and 9/11 created another business nightmare. We decided to integrate our company back into SAP. It was my job to accomplish this integration. Tearing down was just as much work as building up. I had to find new roles for our people. In the end, we kept both our employees and our clients--we didn't lose a single customer. Looking back, it all worked out fine because we went from a start-up to a professional business.

What I learned was that I had an affinity for BPO. Together with my team, I developed a BPO strategy for SAP and then had to execute it. I've been at it for the last three years.

What we are doing today is really the same thing as what we were doing then, only in a different flavor. But this time it's a sustainable business.

Q: What's SAP's role in BPO?
A: We decided we did not want to be a BPO provider. Instead, we want to be a BPO partner. We work with suppliers holistically to improve their businesses. We insure their underlying IT gets the attention it deserves to achieve the business objectives.

Q: And what's the state of BPO today?
A: BPO is still at the edge of becoming a mature business. The role of IT and software is still little understood by many. Some BPO suppliers are still agnostic when it comes to software. But it's impossible to work effectively with multiple software providers, so this will become a problem in the future.

The current BPO challenge is: how do you integrate software into services in a sustainable fashion, i.e., in a way that makes sense for the customer but allows the provider to generate some economies of scale? SAP has the objective to help combine our strong technology platform with business process best practices, likely defined by the BPO provider--thereby transforming those processes.

Q: Isn't that what transformational BPO is all about?
A: There was a big hype around transformational BPO. This is a different animal from transactional BPO, which has clearly defined service level agreements and prices.

You can't sell this as a product easily. To date, there are some dissatisfied buyers who didn't get the transformation they expected and dissatisfied suppliers who are unhappy because the deals turned out to be less profitable than they would like. Suppliers made some promises because they thought they could sustain the results, which didn't always pan out.

Instead, as a customer, you have to work with your partner in a holistic manner if you are going to be successful. You have to deal with risk. You have to create an exit strategy. You have to figure out how to improve the quality of the service. You have to factor in innovation.

Q: How do you do that?
A: You need to standardize. Transactional BPO is already almost 100 percent standardizeable. The trick is to standardize transformational BPO as much as possible.

This is not an easy sell to a buyer. But you have to make customers understand standardization is the key to their BPO success.

You also have to free up dollars for innovation. Today a lot of innovation money is stuck in existing IT budgets.

Q: What problems do you see in the BPO marketplace today?
A: I see three problems. First, the supplier has to be profitable and demonstrate financial viability. If it's not, the buyer ultimately will not be successful.

Second, buyers are looking for continuous improvements, not one-time labor arbitrage gains. Suppliers are challenged to industrialize offerings to achieve maximum economy of scale and drive innovation.

Third, IT agendas have to change. In the past, buyers often demanded their suppliers use their existing IT software and were not willing to change. Today, however, you can't ignore the question: how does my IT platform work end to end? We've been working for the past three years to change that view. We believe suppliers have to recognize that software must become a choice in any RFP.

Q: What will help the market prosper today?
A: Today we need smaller deals, not bigger ones. And we have to get the IT people and the process people--the folks in the human resources or procurement departments--to talk to each other. Today we have too many silos. Both groups need to work jointly on these projects.

Q: What else do buyers and suppliers need to focus on?
A: The end of a contract. In the past, the players ignored this event. Nobody wants to end a contract. Standardization helps here. The more you standardize, the easier it is to find a new supplier or re-insource. A move is much more difficult if the underlying software is proprietary.

Also, buyers need to make sure they own the intellectual property they need to keep options reasonably open when the end of the contract comes.

Q: How does offshore fit into the puzzle?
A: It's just one piece. Labor arbitrage is a one-time solution.

Q: Where did you go to school?
A: I studied computer science in Hildesheim. There were only 25 students in my major. I have a PhD in geographic information systems and software engineering.

Q: What was your first job?
A: Since I now had a PhD, I wanted to become a professor of computer science. I became a teacher and researcher at the University of Hagen in Germany and spent some time as a guest researcher at the University of Maryland. The lesson I learned was university life is all about internal politics. You have to make money for the department. There wasn't enough time to do research and teach, which was what I wanted to do. So I left.

Q: What was your next career path?
A: I wanted to learn about business at large. Changing from the university to business was the most intense time of my life. I had to learn a lot in a short timeframe.

I joined SAP in 1998 as a manager in the Office of the CEO. I sat in on meetings when we negotiated with Fortune 500 companies and observed the CEOs in action. I sat back stage as my boss spoke to 15,000 people at a conference. It was a heady time.

Q: Where were you born?
A: I was born in a middle-class area of Hanover, well known for its Industry and IT Fair. I can still see myself cleaning car windshields to earn enough money to buy an entry ticket to the fair.

Q: What's your favorite book?
A: I read on airplanes. My favorite novel is Perfume: The Story of a Murderer by Patrick Suskind. It's the story of an obsession set in 18th-century France. It will soon be a movie.

Q: What's your favorite movie?
A: Groundhog Day with Bill Murray and Andie McDowell. They live the same day over and over. I've been there! It would be great if one could improve one's personality in a test environment.

Q: What do you do for fun when you're not thinking about BPO?
A: Skiing. Snow boarding. Windsurfing. Golf. I want to teach these sports to my eight-year-old daughter. She's already a good skier and snow boarder.

Publish Date: January 2007

Copyright © 2007 - Everest Partners, L.P.

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