In July 2022, I published my review of SAP's S/4HANA public cloud strategy (The state of SAP S/4HANA Cloud - an opinionated review of SAP's public cloud ERP solution).
Needless to say, SAP leadership had opinions about my opinions. One of my core views on enterprise software is: take a position, but rethink as new information - and customer references - come in. Has my view on S/4HANA public cloud changed? (Note: SAP now officially calls this SAP S/4HANA Cloud, public edition).
I understand why SAP emphasizes customer choice for S/4HANA environments, and why so many customers choose S/4 private cloud, RISE or not. However:
- I don't believe the S/4HANA private cloud is the end state. I want to see how customers move towards a "clean core" within that context (Bristol Myers Squibb has a noteworthy story on this topic).
- With deeper industry functionality and more customer references at large enterprise scale, I believe more customers will perceive S/4HANA public cloud as a viable alternative to the private cloud. So, I look for progress here - and news of classic large enterprise customers moving in the S/4HANA public cloud direction.
- I'd like to see SAP leadership talk more openly about the future of public cloud ERP, even if their quarterly focus prioritizes S/4HANA moves in any environment (the investor markets can't be ignored, I get that - they place a high value right now on subscription revenues, e.g. RISE, private cloud included). Historically, SAP has not been aggressive about using the term multi-tenancy. The term itself isn't important - it may even be overhyped/outdated. But: the economies of scale behind this type of architecture - and how it enables everything from absorbing updates to layering in AI and cloud services - cannot be ignored. Vendors that downplay these concepts tend to wind up in proprietary private clouds they rationalize with mind-numbing slide decks. Digging out of that takes a long time.
SAP's Thomas Saueressig - is public cloud the future of ERP?
I was genuinely surprised when, the day after my critique came out, I saw this headline in Techtarget: Saueressig: SAP's future is multi-tenant SaaS ERP. As Saueressig told Techtarget:
For line-of-business applications, we clearly see that our customers have embraced a public cloud SaaS solution. That's not a debate. The only differentiator, which we absolutely see, is the notion of the core ERP, if you think about finance and manufacturing, which are in S/4HANA core. The reality is some large enterprises with decades of implementation and continuous evolvement of the product and modifications will eventually be in a fully SaaS ERP, but that moment will be when they are able to do standardization and change the business processes, and that may be very long out for some.
Getting scooped on a story of this substance is never fun, but hey - David Essex and Jim O'Donnell are good at what they do. When I talked with Thomas Saueressig last month, I opened up the question again. Saueressig, who is a Member of the Executive Board of SAP SE for SAP Product Engineering, doubled down on these views. Some long-time ERP experts question the value prop of SaaS ERP. But SAP leadership has learned the advantages firsthand. Saueressig cited an important new example - the ease of SaaS ERP integration with Microsoft services, including Teams:
If you think about user centricity, we need to include new aspects like collaboration. In his keynote at Microsoft Ignite, Satya Nadella showed the S/4HANA cloud application, where we actually did the integration with Microsoft Teams, and not just a simple integration. It was really natively integrated - based on the work we did on the technology side with APIs, and then all of the front-end work.
Then Saueressig issued a caution that is a big theme of this piece: comparing different ERP architectures is, in itself, a limited view. The heck with product categories - it's time to break down process walls. ERP and supply chain networks is one process wall that needs to come down, and fast. Saueressig calls this characteristic "network-aware":
We really have to tie this together, because collaboration will be one of these key aspects... We truly believe we need to connect all of our customers and trading partners together as a network - it's a very big thing. [For more on SAP's business networks pursuits, see my review, Is the SAP Business Network ready for prime time? An SAP Spend Connect Live review]
But when it comes to integrating cloud services and absorbing new innovation, SAP has learned that not all architectures are created equal:
Last but not least, the business of the future should support sustainable outcomes. And that's why this will be embedded in software. That's something where in the [S/4HANA] public cloud, we've advanced what we've shown with the Microsoft Teams integration. We can deliver that every single day, and with releases as often as we like, actually, to really bring this functionality.
Releasing new stuff faster? That's a public cloud ERP edge:
What we would love to see is that our end users see that change, and that we really can drive the consumption of new innovations, like our new Horizons, which we now have for S/4 public cloud in GA. That speed of innovation is something which is just unmatched in the SaaS world. That's the reason why I truly believe that the public cloud is such an important, dominant way forward in this regard for what we want to do. [Author's note: Horizon is SAP Fiori's "personalized software experiences" visual UI theme].
Public cloud ERP at enterprise scale - what next?
Does that mean these types of integrations are impossible in other environments? Of course not. ERP is not a one-size-fits-all conversation; SAP's leadership emphasizes their support for customer choice in these environments. But what does S/4HANA Cloud public edition need to achieve next? My answer: public customer references, with large enterprise performance and scale.
Yes, S/4HANA public cloud has plenty of net-new and subsidiary use cases on record. Now it must prove out scale, in classic ERP industries. Saueressig brought up a customer mentioned in the 3Q earnings call this year: Schneider Electric.
Schneider Electric will run more than 50% of their revenue with S/4 public cloud. We're talking about more than 197 manufacturing plants and 97 distribution centers. So not just finance. All the heavy processes you can imagine from a company like Schneider. They want to use the application as a forcing function for the business transformation they want to do, and really scale it across the world. That's a great testimony that we really can serve small and medium-sized customers, but also the top end, with large enterprises for public edition.
You've written about our private cloud and public cloud journey. I think this is really a process that has happened over the last couple of years at SAP, where we realized that we need to distinguish those two a little bit more.
Gilg has a strong view on public cloud ERP, balanced against customer choice:
Personally, I have a very strong bias towards what we call the public cloud, or the SaaS version, because I truly believe that is the future, [but] the private cloud plays a very important role for us. Especially if you look into our install base, which is very unique, I would say, for SAP - customers that have been with us for decades.
All on-premise ERP vendors learned the hard way: custom code cuts both ways. Gilg:
What [customers] have done with ECC installations inside has made it extremely sticky, so that's good for us. On the other one hand, it's also become very difficult to now move to something that is more standard and vanilla.
Therefore, I think we have done the right thing, in offering a private cloud option for those customers to ease the transition, and help them to get into the cloud, capturing some of the benefits they hope for moving to the cloud. But also, let them still be in control of their solutions.
SaaS ERP shouldn't be about about vanilla standardization - it should be about platforms
Gilg wasn't done talking about the public cloud:
I really do want to re-emphasize that if you don't mind. Because for me, there is obviously a huge market there. When you talk to net-new-name customers, fast growth customers - even the large ones in pockets - this is what they want, I think, even in core operations in ERP. They see the benefits of a SaaS model.
Why is that?
This is rooted in the fact that we do everything for the customer. We run the upgrades, which is the biggest pain, probably, in the SAP world, for our customers. In S/4 [public cloud], we do that for them; we give them the innovation. They can stay current - actually, they have to stay current. And, you know, they appreciate that.
In this past, I felt SAP misstepped in their cloud ERP messaging in two ways: too much talk of "standardization" and "vanilla," but not emphasis on how a platform like SAP BTP overcomes some of that SaaS limitation with extensibility. That type of extensibility helps control technical debt, and doesn't isolate customers on older releases. Gilg brought that up:
It helps them, on the one hand side, to standardize. For us, it also means we can focus more on what we want to deliver as the foundation. And for me, ERP becomes more of a platform, or public cloud ERP becomes more of a platform. It is much more about the ecosystem, and even customers themselves, to extend that platform through very intelligent mechanisms for extensibility.
One of the biggest debates in cloud ERP: how much do you rebuild all the on-prem industry functionality? Gilg says you only do it selectively, because the platform enables what customers need to build:
We will not be able to rebuild everything we had in the on-premise world. And we don't want to... We have access to some usage data on-premise, from those customers that are willing to share that with us.
What did Gilg's team learn from that usage data? What you might expect: a large software footprint like SAP ECC has a core that most customers use. Beyond that, the usage becomes more niche, across a huge customer base:
We cannot bring all this into the public cloud. We need to really focus on: what are the things that can find mass adoption? Everything that is more specific or niche, I think we need to do so through the ecosystem, but we need to do it in a way that is really seamless for the customer to consume. That's why I think extensibility is such a big topic, and has been this year.
My take - the SaaS ERP debate is over, but new challenges emerge
For me, the debate over the benefits of public cloud ERP is pretty much over. That doesn't mean every customer will adopt - some customers in some industries have legit reasons for air-gapped systems. Others have focused their transformation elsewhere - for now. Why is the ERP architectural debate over? Because ERP vendor execs have learned the benefits firsthand - while struggling to get their on-prem customers what they need next.
I've never had a problem with SAP insisting on customer choice. But: I wanted to see a much clearer acknowledgment of where ERP workloads are headed. To be fair, I think SAP was held back for years, due to too much messaging focus on running applications in-memory (HANA), whereas that is not a serious differentiator in today's market (most modern ERP solutions run on some type of high-performance database now). What I'm hearing from SAP leadership now is decidedly different. The messaging may not be perfect, but as Gilg vowed, SAP is making the right private and public distinctions, and not holding back on the direction. That transparency serves customers well, no matter what choice they make.
I still want to document large-enterprise-scale case studies on the S/4HANA Cloud public edition. When Schneider Electric is further down the road, I'll be looking to scoop the TechTarget team on that one. I also want to learn more about how SAP's private cloud S/4HANA customers are moving to a so-called "clean core." Because the market has changed - you aren't going to see many massive ERP projects in 2023. Companies want to do these moves gradually - in areas that deliver business impact. Frankly, that's not how ERP was designed.
Which brings me to ASUG CEO Geoff Scott. When I asked him to weigh in on what SAP customers need from SAP with cloud ERP, Scott didn't mess about with private and public cloud distinctions. He went straight to cost/benefits:
For those who have not yet moved to S/4, and are looking down at a date that's becoming closer and closer by the day, they want to understand how to move to S/4 in the most efficient way possible, for the least amount of capital investment, or OpEx investment, whichever you want, that drives the biggest outcome.
Customer proof points are essential:
They want the ability to see that through examples from others, to be able to lean on each other for support, to be able to be reassured that you, too, will ultimately succeed - to know where not to fall into the traps and holes that others have fallen into. [Note: see Scott's most recent diginomica piece, How do companies balance cloud migrations and core ERP upgrades? Fresh data reveals transformation plans and obstacles].
But Scott quickly shifted off of ERP entirely:
How do you best leverage innovation in a manageable, measurable way that drives business improvement? I think we still are operating in a very turbulent environment. Supply chains, while better at the end of 2022, still have a lot of risk in them. I think for most organizations, we have yet to get to the point of a resilient supply chain.
As for the global backdrop behind our projects, Scott didn't mince words:
We potentially have gotten over the hurdle of the pandemic, only to be faced with a series of other hurdles. Recession, global instability, a significant war occurring in another country that will have long-lasting implications to all of us, not just because of the destruction sown, but of the rebuilding effort that's going to ensue. And what does that mean? I think there's a lot of instability in the world right now, and we need to have resiliency across multiple dimensions.
Are we in danger of falling down a cloud ERP rabbit hole, when the world requires a broader, more integrated response? I've argued that SAP fell behind its biggest competitors in large enterprise, multi-tenant ERP. But if global circumstances change, so must your assessment. Does SAP's push with sustainability functionality - and enabling supplier networks - change the equation here?
Today's cloud software market is about customers stacking up wins - not putting all their chips on the table for a multi-year project. Saueressig noted the importance of ERP "modularity." The "quick wins" issue came up in the Techtarget article also, with Saueressig sharing how SAP maintained internal cloud momentum by building several hundred apps on BTP along the way. That story needs more airtime.
Recently, a CEO of another global ERP vendor talked to me about their digital networks strategy, which enables customers on older releases to gradually move workloads to cloud services. The on-prem general ledger might remain, but the overall on-prem ERP footprint shrinks. Is SAP thinking similarly? Should they? To some extent, this already happens with moves to SuccessFactors or SAP CX. But in the future, could these moves be services or process-based? Oh, and if you're going to sell the ERP platform game, you should be vocal about how customers are connecting third party tools in - sometimes from your partners, and even from your competitors. SAP doesn't have that part of the messaging nailed down yet.
Now that SAP is getting its cloud ERP story on track, do we need a whole new narrative? The unpredictable market Geoff Scott just described - well, cloud ERP isn't going to be enough. I think SAP truly gets that; they haven't been carrying on about business networks for no reason (though they should be talking about supply chain visibility/resiliency, not "business networks," but that's an argument SAP has already acted upon).
The good news for SAP? I don't think any large enterprise ERP vendors have figured out how to translate the resilience Scott is calling for into a true ERP platform. For the record, I believe S/4HANA public cloud is better positioned to serve such a future than the other versions of S/4, but I don't think we can frame this as an ERP conversation anymore - not if we expect to solve customers' biggest problems. The world has moved on.
Updated, 7:30am UK time, December 17, with a number of very small tweaks for readability, and one adjustment to my description of multi-tenancy.