Cost reductions in nearly all lines of business
Cost of product decreased 2% to €839 million, even though this number includes expenses for stock-based compensation, which increased in comparison with the previous year as the price of SAP’s publicly traded shares climbed. Pro-forma cost of product (that is, cost of product before expenses for stock-based compensation and acquisition-related charges) decreased 4% to €805 million. Notable savings were realized by reducing spending on third-party software licenses. Exchange-rate movement also had a positive effect.

Cost of service was €1,694 million, 13% lower than in 2002. At €1,662 million, pro-forma cost of service (that is, cost of service before expenses for stock-based compensation and acquisitionrelated charges) was 15% lower than for the previous year, and that reduction was greater than the reduction in service revenue, to which the service cost corresponds. The major cost-reduction factors were fewer third-party services and improved utilization of the Company’s own capacity, as well as currency effects.

To provide the resources for innovation in the future, SAP increased its development headcount by 11% in 2003. To control costs, less third-party developer effort was bought in and more developers were hired in countries where labor costs are lower. Associated with the 11% development headcount gain was a 9% increase in research and development expenses. Pro-forma research and development expenses (that is, research and development expenses before expenses for stock-based compensation and acquisition-related charges) increased only 6% to €951 million because the expenses for stock-based compensation were higher than in 2002.

Sales and marketing expenses decreased 13% to €1,411 million. Pro-forma sales and marketing expenses (that is, sales and marketing expenses before expenses for stock-based compensation and acquisition-related charges) decreased 15% to €1,381 million. Major factors contributing to the decrease included reduced labor costs and travel expenses, and efficiency gains in the sales organization. Currency effects also reduced the reported figure.

General and administration expenses decreased 11% to €354 million. Pro-forma general and administration expenses (that is, general and administration expenses before expenses for stock-based compensation and acquisition-related charges) decreased 12% to €339 million. Here again, factors contributing to the decrease included reduced labor costs, fewer bought-in services, and currency effects.