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FORTUNE — SAP may be the world’s largest enterprise software maker, but it suffers from a reputation of being slow and bureaucratic. That’s why last year new management was brought in to help simplify the business and spur a culture of innovation. Co-chief executive officers Jim Hagemann Snabe and Bill McDermott have pledged to accelerate product releases and cut internal red tape. But their efforts haven’t paid off for investors quite yet. Last Thursday the German company announced its operating profit rose 26% in the first quarter, failing to meet analysts’ estimates and sending SAP’s (SAP) stock down. At the same time, the company reiterated its forecast for full-year revenue to rise by 10% to 14%. I caught up with co-CEO Snabe at SAP’s Palo Alto offices to find out how a focus on new technologies could help the company grow.
Fortune: You talk about three categories of innovation at SAP. What are they?
Snabe: There’s mobile, where we see tremendous opportunity in bringing business content to mobile devices. The second category is cloud computing – the idea that you don’t have to deal with the complexity of IT. We came up with an enterprise approach that lets you run your whole business in the cloud. This puts the bar very high on topics like security and reliability – some people would argue that we were late in this market but we wanted to solve these fundamental problems. The third category is memory computing. This is a technologically-driven innovation which challenges the assumption that data needs to be stored on disk. We are moving all data into the main memory of the computer.
On the mobile end, what has the [$5.8 billion] acquisition of Sybase resulted in? When will we see the fruits of the acquisition?
You’ll see two categories of technology. One is the infrastructure itself — the mobile middleware which enables you to connect to data and processes. The second piece is applications built for the mobile device. I committed to delivering 40 applications from SAP by end of the year, but we actually believe that many of them will come from an ecosystem like what you see from Apple, where a lot of the applications are not built by Apple (AAPL), they are facilitated by Apple and built by someone else. So the platform that we will deliver includes a software development kit so that companies can build their own mobile applications. In three weeks we’re taking that platform and pre-connecting it to the SAP world. The SDK will allow others to build on top of that. My expectation is that in a couple of years there will be thousands of mobile applications on SAP.
What have you done to instill more of a culture of innovation and get new products out the door faster at SAP?
It’s one thing to articulate an innovation strategy but you need to deliver on it. Three years ago I started looking at how we innovate software and found that SAP was very traditional in our approach. We would specify a new piece of software, then program it, then test it then launch it for the first customers. That process takes 15 months. But then I looked at the mobile world, where new things come out in weeks, not months. So we did a couple of things to change this. First, we made smaller teams that don’t have to ask management for decisions. Second, we put them in the room with the customer from the beginning, not at the end. And we switched to an iterative approach where every four weeks we produce working software. This is a methodology known in the industry as Scrum, but it’s typically used by small companies. We have 14,000 developers.
What kind of results have you seen from these changes?
We’re about halfway through the transition. Our innovation cycles are down to six to nine months instead of 15 months. We see better products built by smaller teams than in the past. And customers are totally excited that we invite them in to be part of the process. We spent a couple of years getting to where we are now. We can do another two years of fine-tuning.
What is the hardest part of making this transition to a more nimble and quick company?
It always takes more effort to change a bigger company than a smaller company. In our case we are helped by the fact that we are unleashing a potential for innovation that was always there. But [employees] were somehow limited by ourselves because we were too bureaucratic and too structured. So we are taking structures away. We are empowering people. I was surprised by how fast employees, customers and partners gave us positive feedback on this new direction. The first phase was articulating the strategy. But the real moment for us was proving that we can execute the strategy.
When we said we want to not only extend the core business, but go into these three areas, it was important for us that within 12 months we would show progress and we did that. In mobile we bought Sybase. In [cloud] we delivered Business ByDesign at the end of July and we’re now two versions later. In memory computing we delivered [real time analytic software] HANA at the end of November. That’s what’s been building this momentum. The hardest part was just to get it started. There were a lot of assumptions that SAP was large, and complex, and German.
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