Reform of the European Social Model and Its Possible Impacts on the German Software Industry

1. Introduction

In light of the rapid globalization of the world and the less than satisfactory growth registered in Europe, there have been demands on Europe to implement economic and social reforms to adapt to the changing world.

This paper seeks to address the changes in the European Social Models and how it could affect specific industries and companies in Europe. The paper initially defines the Social Models and focuses on the Continental Social Model. The German software industry is used as a prototype to analyze probable changes in the model. SAP AG is analyzed to look from the perspective of a company that has already embraced globalization.

Finally, four major changes with respect to labour laws, incentivization, employee satisfaction and customer loyalty are analyzed before arriving at a decision with regards to the change in the social model.

2. The European Social Models

There are four types of the European social model covering different geographies across Europe. The four models are depicted below based on their equity and efficiency.

EFFICIENCY

Low

High

EQUITY

High

Continental

Nordic

Low

Mediterranean

Anglo-Saxons

TABLE -1

(Source: - Globalisation and Reforms of European Social Models - Andre Sapir (2005))

The table indicates that the Anglo-Saxon and Nordic models are more efficient and hence sustainable while the Continental and Mediterranean models are considered non- sustainable and have to be modified to be more efficient. 1

The Continental Model has a long-term, process driven strategy and a controlled labour market with importance given to human resource organization and

1 Globalisation and Reforms of European Social Models - Andre Sapir (2005)

Page | 4

organized innovations. Hence, it is considered to be a coordinated market economy or CME.

This is in contrast to the Anglo-Saxon economies which are considered to be liberal market economies or LME's with deregulated labour markets and possessing flexibility to allow "radically innovative" industries. 2

Hence, a change from the Continental model to the Anglo-Saxon model would involve changing most of the basic tenets of the Continental Model and this paper analyses these changes by taking the German software industry into account and delving into a specific example to check the probable implications.

3. The German Software Industry

The German software industry is heavily specialized in enterprise software - software intended for organisations such as businesses or government. The industry is characterised by high appropriability risks and low technological uncertainty.

The key feature of this sector is its emphasis on incremental innovation with effort spent on coordinating varied skills. The work involved is often complex and effort is spent on creating knowledge-sharing and developing tacit knowledge in its employees.

The firms focus on creating Firm Specific Advantages which are difficult to be imitated. Hence, the industry stresses on maximizing the output from their employees by signing them to longer contracts. This helps the employees to gain valuable firm specific knowledge and enhance their competencies. The incentivization strategy of such firms is tuned towards collective gain and not towards personal bonuses, thereby creating a group structure to inhibit personal competition. German firms also enter into long term contracts with their clients that help them to build in-depth understanding of their clients and help develop their businesses. 3

2 Managing Competencies within Entrepreneurial Technologies: A Comparative Institutional Analysis of Software Firms in Germany and the United Kingdom. Casper and Vitols 2005

3 Managing Competencies in Entrepreneurial Technology Firms: A Comparative Institutional Analysis of Germany, Sweden and the UK. Casper and Whitley 2002

Page | 5

4. SAP AG

SAP AG is a German Information Technology giant and, along with Oracle Corporation, is one of the market leaders in the Enterprise software subsector. The story of SAP AG is interesting to analyze because it has had to globalize and adapt to the market demands, in its quest to become the market leader in its niche subsector.

SAP AG was a typical Continental model company for a long time from its inception in 1972 to the late 1990's with focus on complex programmes, long-lasting employee/customer relationships and little or no compatibility with competing vendor products. A severe blow was dealt to SAP AG with the increased impact of the Internet in the late 1990s with several companies interested in getting complimentary suites of products obtainable over the internet and not the expensive, inadaptable SAP AG products.

The company has adjusted to these challenges over time by implementing radical changes since 2002. From its traditional base in Walldorf, Germany, SAP AG has extended their business geographically with key focus areas like Paolo Alto in the USA, India, China and the Czech Republic.

SAP AG has also diversified its products to grow globally. Recognizing the wider business opportunities generated by the internet, SAP AG has created interesting web-linked software and portals like the SAP AG Netweaver and the mySAP.com portal which have helped it to address a part of the internet sub-sector business. SAP AG has further continued its aggressive globalization campaign with acquisitions and product diversifications.4

SAP AG has faced problems in its attempt to globalize as the efforts have satisfied neither its German nor its international employees. There have been accusations of piracy with Oracle winning a piracy suit against SAP AG indicating that the globalization drive has hurt SAP AG. 5

In light of the cries for changing the Continental social model to align the German companies to the globalization demands, it is crucial to diagnose the probable changes and apply them to SAP AG to understand the possible implications for the German Software industry.

4 http://www.culturecounts.com/ArticleDetails.php?index=8 by Phred Dvorak and Leila Abboud - Accessed on 12-November-2011

5