There's a steady drumbeat of comment flowing our way about SAP and S/4HANA in particular. The latest conversation I've had was with Mark Chalfen, director of PwC, and the person who is the lead architect for its UK SAP S/4HANA practice. During this call, Mark confirmed many of the general areas we have covered in the last few months and expanded on others.
To kick-off, I wanted to get a sense of how things are going at the practice. Right now, PwC is gearing up for signing fresh contracts for projects starting early in the New Year. Mark said he's hip-deep in RFPs and has a string of orals underway. Since PwC tends to see the larger customers, I was interested in his take on what those large customers are thinking about, especially those that have not yet made the formal decision to make the jump to S/4. As you might expect, the picture is mixed. Some companies expect their business models to change or are rethinking what their business model will look like going forward.
In all the cases Mark mentioned (I am not permitted to name names at this stage), the emphasis is on making decisions for the long haul. For example, a global manufacturing firm has traditionally sold products and then enjoyed a long tail of regular maintenance revenue. That company is looking to see how it can take more of a services business orientation. Another company that manufactures railway equipment is taking a similar view, seeing the switch as a way to preserve and win additional business for the long term.
These are companies looking at their technology landscapes and realizing that the core was built for a different type of business. So while they may see their core systems as stable and reliable, they recognize the need to work from a different platform that gives them the speed and flexibility to develop and change business models. They know that the move to S/4 from ECC is a technical upgrade with no immediate benefit. For these large companies, the investment will be substantial. Still, when weighed against the long-term growth and strategy plans, it is a price worth paying because it gets them to a state where they can take advantage of functionality they cannot readily consume today.
When viewed through this lens, PwC describes a situation that makes sense when you consider that for manufacturing companies, SAP's core capabilities represent the gold standard and where a shift to a simplified architecture and operating model is essential to support that long-term view.
In other cases, large companies have discovered that their core business model is going away. In the case of a national postal service, the company knows it needs to move away from postal delivery as that world is being supplanted by digital. It knows it needs to be in the package delivery business. It sees competition that is making extraordinary headway in a market that it 'should' own but where its systems were not built with this type of service front and center.
In that and other cases we are seeing, the brand's value is not enough when a competitor can swoop in and make a much better offer. Then they discover their systems don't support the new model. But to make matters more complicated, the CIO doesn't necessarily have the budget flexibility to sign off on what would almost certainly be a greenfield implementation. He or she is looking at 2025 and thinking the cut off for ECC support is now 2027, so I can park that decision. In the meantime, the business sees a different imperative. Here, we're encouraging the business and IT to come together. That's not always the case.
In Mark's view, a significant number of SAP's large customers will start to make a move to S/4HANA, but they are doing so in a variety of ways. For example, I mentioned Adaire Fox-Martin's comment on the earnings call that the deals were smaller than was the case in the past. At the time, I presumed the larger-scale deals were no longer around and that was verified in a recent conversation with Geoff Scott, CEO ASUG. Mark says that's not quite the case in the deals he is pursuing and the implementations underway.
Mark says that in SAP's world, the large deals would look like S/4, SuccessFactors, Ariba, hybris but that the S/4 component would be comparatively small. In that context, Fox-Martin is right, but that's not to say S/4 itself is a small project. It is more likely that customers will pick off pieces and iteratively move to the full S/4 suite. He has however, seen situations where the customer decided to go (mostly) end-to-end in one country and then roll out into other countries rather than picking off functional needs for all countries. But those 'all you can eat' scenarios are rarer because the landscapes customers are using tend to be SAP, Workday, Salesforce.
What about the 30,000 of what SAP CFO Luka Mucic calls 'classic ECC customers.'
Let's think about those middle-sized enterprises. There's a lot of those. SAP wants to get those over to a subscription model, but how is that going to work? In the current world, those firms might look at a perpetual license at say €2 million and then €440,000 pa for maintenance, and that will be a typical five-year deal. SAP will sell them more stuff over that time, but let's hold with that for the moment. Right now, SAP wants to say that they'll take that upfront license cost away, and it will instead offer €800,000 pa for the next five years. Included in that, SAP will mop up some infrastructure costs, but my question is, what happens in years six and seven? They're still going to pay the €800,000 and rising. Now, their ERP is costly relative to the original investment unless they're getting significant incremental value and are growing at a pace that outpaces the relative cost of the software subscription.
This is a question that any decision-maker needs to think through carefully because, as we know, ERP applications are very sticky, often remaining for 10, 15, 20 years, or more. Do you want a commitment stretching into the future that not only tied you to a relatively large annual subscription but only tends to flex upwards?
Leaving those commercial issues aside for a moment, I asked Mark about the partner relationship element. As I've said before, my view is that SAP is missing an opportunity to bring partners to the table who can help SAP and the customer achieve the best outcome. Starting from the SAP perspective, Mark said that:
If you're talking about redesigning processes to achieve a specific outcome, then you need to understand the 'left to right' set of steps. SAP could be a good partner there, helping people understand the implications of what they want to do because it can be confusing when you first look at these digital and transformative projects. The answer isn't selling all the products under the sun that have an SAP badge, but put themselves in the client's shoes and go, okay, well, I'm being hosted by AWS so don't talk to me about HEC. I've got a brilliant Salesforce application. So don't try and sell me hybris. And then I'll build some trust and empathy with you. But if the answer is always in SAP products, clients will just get cut off because they see it as the sale rather than the advice and the direction. And they're no longer a strategic partner, they're strategic selling partner, and that's wholly transactional.
I think that's where SAP gets caught. They don't allow their salespeople to be open and leave things on the table that a salesperson might want. They've got to put themselves in the customer's shoes and think what's right for the customer, rather than what's right for SAP. If they can provide that evidence and build that trust. They'll be able to sell a lot more because there is that trust, and there is that empathy.
These are strong points that play to topics Christian Klein, CEO SAP, has stated, but again, we have heard this many times before and then find that the field's behavior is no different. They remain, as one wag put it - coin-operated. I sense that this time, customers' propensity to roll over to sales pressure is diminishing rapidly. There are too many alternative options and fresh competitors willing to step up to the table normally reserved for SAP. Back to the partnership issue.
As might be expected, Mark would like to see much more of a joint go to market with SAP and referenced some cases where that is happening to good effect. I cannot share those details as they are not public, but the general tenor sounds promising.
He rightly points out that firms like his have many years' experience advising customers and are better placed to act as the conduit between SAP and its customers. The SIs have kit bags of solutions they can apply that have significant SAP components but are not exclusive to SAP. While that may sound self-serving, his point is well made. My only niggle is the extent to which this is a repeat of what we've seen in the past where the SI has account control and dictates the pace at which customers move. I get the sense that's less so the case because it all comes back to what the SI is hearing from the consulting organizations advising clients about the next steps.
Out of this smorgasbord of experience, one thing is clear. The mood among customers has changed. The days when firms like SAP could turn up with toolkits that claimed to change the world are long gone. Customers may not have a clear idea of how they become digital; they may have ideas about where they want to be but are unclear how to get there. But they know the answer is not simply more software or a new license offering.