LOS ALTOS -- Tucked down a side street in a quiet corner of the Peninsula is an inconspicuous office brimming with all the essentials of a Silicon Valley startup -- a stocked fridge, espresso machine, beanbag chairs, dry erase boards scrawled with ideas and the constant bustle of engineers hashing out ideas to push the limits of tech innovation.

But this isn't a startup. It's an experiment by one of the world's biggest high-tech companies, SAP. The German giant opened this AppHaus, as it's called, in February 2011 in hopes that an infusion of young developers and a dose of the valley's entrepreneurial gusto will reinvigorate the 40-year-old company.

Facing competition from startups with enough brains and boldness to be dangerous, SAP is out to prove that the granddad of business software won't be left behind in a technology landscape upended by cloud computing. The company's plan is this: spend huge amounts of money to buy the best cloud companies in the valley, and infuse a little Silicon Valley startup culture into SAP in the bargain.

The bread and butter of SAP's business has long been desktop software for mega-corporations like airlines and oil companies. But this is the age of mobile-first and cloud technology, and SAP says it sees the writing on the wall -- innovate or get out of the way.


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"You've got to make sure that ... a startup that's in a garage isn't going to topple your business 10 years from now," Sanjay Poonen, president of technology and innovation solutions, said recently at SAP's Palo Alto office. "The threat could come from anywhere in the world, but given the Silicon Valley's reputation for being an innovator, it will likely come from here."

But SAP's plan also sets up a terrific culture clash, experts say, as white-haired executives are asked to dabble in experimental technology and adopt the same brazen attitude and frenzied schedule as valley engineers many years their junior.

"It's like your grandmother wearing mini skirts," said Steve Blank, a startup expert and consulting professor at Stanford and UC Berkeley.

The AppHaus is half a world away in both culture and distance from SAP headquarters, located in the sleepy town of Walldorf, Germany, about 60 miles outside Frankfurt. There, the corner offices and locked doors maintain an atmosphere more typical of a global business empire. But Walldorf is SAP's old-world European roots; Silicon Valley is its testing ground for new ideas.

In the past few years, SAP has splashed out about $10 billion for cloud technology, scooped up a couple prominent Bay Area companies, built the AppHaus in Los Altos to experiment with mobile apps and recruited young entrepreneurs with Stanford degrees.

At the AppHaus, you can let your hair down and maybe even crack open a beer. The office is pet-friendly and developers sit in small circles on the floor with laptops while jazz plays in the background. The creative workspace and development hub became the model for six more SAP AppHauses around the world.

AppHaus developers, some from within SAP and others hired from the outside, are asked to design, develop and launch new software applications in less than three months -- a challenge they usually meet, they say, because they can work more quickly in the AppHaus, free from corporate constraints.

"Here, we're really focused," said Faheem Ahmed, a vice president at the AppHaus whose business card reads Entrepreneur in Residence. "It's the idea of being at a startup where you are responsible. If you don't clean the whiteboard, it doesn't get cleaned. You come here in the middle of the night, people are here."

The AppHaus has released eight apps that give fashion advice, share photos, help disabled children and reward loyal sports fans with better seats at their team's games. For the first time, SAP is making technology not for Fortune 500 companies, but for moms, teens and 49ers fans.

The apps have done well -- Recalls Plus, which warns parents about recalled children's items, was a top seller on Apple (AAPL) and earned praise from the White House -- but they will never replace SAP's cash cow of business software. The apps are about shock value; about SAP proving it can be hip and cool.

"This is changing perceptions about SAP," said Sam Yen, SAP senior vice president and design expert who heads the AppHaus. The company's Palo Alto office has established startup forums, business incubators and innovation labs to develop new ideas -- and venture capital groups to fund them. It has invited local startups and developers from outside of the company to collaborate.

Barbara Holzapfel, managing director of SAP technology labs in North America, said these projects are part of SAP's larger efforts to establish itself as much as a Silicon Valley company as a German company by building relationships with local business leaders, startups, entrepreneurs and universities.

"Here, new business models pop up every day," Holzapfel said. "New technology gets invented everyday. How do we tap into that?"

Stanford professor Blank said SAP is making all the right moves by hiring new blood and taking cues from startups: "To survive in the 21st century, they will have to figure out how to continuously innovate."

But, he cautioned, SAP ought not to measure itself by the number of beanbags and energy drinks it stockpiles: "You want SAP not acting like a startup, but like Apple."

Some in the San Francisco startup world have doubts that a 60,000-employee company could ever act like a startup. Startups are risky and chaotic; they demand 80-hour workweeks and lack stability, said Jim Kean, CEO of WellnessFX, a Web-based health care diagnostics startup with about 20 employees.

"Big companies just can't be that nimble," Kean said. "Anytime you put that much together, inherently your clock speed slows down. That's just the law of nature."

SAP was slow to act on cloud technology, analysts agree, and had to make up ground by buying up the competition -- a criticism SAP's Poonen hotly denies. SAP last year paid $7.7 billion for SuccessFactors and Ariba, leading Bay Area cloud companies. They won't name names, but SAP executives say they're eyeing more acquisitions in the Bay Area.

"This is where things are happening, where things are new," said Sven Denecken, SAP cloud expert in Walldorf. "Let's get closer to where the young talents are."

Analysts caution that SAP still has plenty of competition, including San Francisco-based Salesforce.com and Pleasanton-based Workday. Redwood City-based Oracle (ORCL), SAP's longtime rival, is also making advances in cloud.

For at least the next two years, cloud is really anyone's game, said Rebecca Wettemann, vice president of research at Nucleus Research and a leading SAP expert. But if SAP keeps shaking things up with its startup-like innovation and makes good use of acquisitions, "there wouldn't be a reason to doubt SAP's opportunities or ability," to take the cloud market, she said.

SAP will close its Los Altos AppHaus this summer. It was never meant to be permanent, the company says. Developers will return to SAP and continue trying to spread the startup way of life. Yen said they've proven that breaking tradition can be a good thing, but he expects some push back from the corner offices. The beanbag chairs may have to stay behind.

"It's a 40-year-old company, it's been doing things a certain way for a long time," Yen said. "They could learn a few things, like being more open, breaking down the cubicles."

Contact Heather Somerville at 925-977-8418. Follow her at Twitter.com/heathersomervil.