SAP S/4 HANA is where SAP is placing its big growth bet for the next few years. On paper, it's a sound strategy. Back in the day, SAP saw but could not believe that emerging cloud technologies represented a fundamental shift in the same way that mainframe gave way to client/server, a wave that SAP arguably invented and upon which it certainly capitalized. Here is the problem.
Setting the scene
Salesforce crippled SAP's CRM market, Workday continues to eat its HR lunch. SAP has to protect its core financials (which Workday and Oracle would love to attack in earnest) while providing customers with reasons to invest in the slew of SAP acquired products. Couple that with the sure knowledge that cloud technologies are not (yet) capable of reliably handling complex high-speed transactions, and it's no surprise that customer S/4 HANA 'journies' are...tortuous.
SAP had to make the business case for S/4 if it was to deliver value back to customers. So far, that has resulted in reported sales of 12,500 out of an immediate addressable market of some 35-36,000 but including 40% net-new, giving SAP plenty of sales runway. However, there are precious few go-lives at scale to show for the reported sales. There are a variety of metrics upon which to base an opinion about SAP's success so far. What's clear is that many customers are choosing to wait.
At the risk of falling into a vendor's marketing beliefs, there are plenty of customers on the S/4 journey - 60% if you believe the SAP marketing - but there are also plenty who are taking the long and winding route rather than committing now to the S/4 upgrade.
Caveat and qualification
For this story, I wanted to solicit the views of customers who may have made that 'hold' or defer the decision to understand why customers are hanging back. Saying the business case doesn't stand up is a reasonable but incomplete argument. I, therefore, asked Rimini Street to find me customers willing to talk on this topic.
Caveat time: all the customers I spoke with are long time customers with an average of 12 years of SAP experience. All are on ECC EHP7 or 8, so they're all reasonably current.
They all decided to go with Rimini Street, primarily to lower their cost of servicing and supporting their SAP landscapes. None of them took this decision lightly or with the potential of an S/4 transition or as a means to gain leverage with SAP. In all cases, the companies remain willing to consider an S/4 transition, but that is unlikely in the next two to three years.
For reference, all customer calls were conversations lasting between 45-75 minutes and conducted over a three week period. A fourth customer call had to be deferred but will be included in the library of stories once calendars are aligned.
Reasons are legion
For reasons that will become immediately obvious, all three customers referenced in this story asked to remain anonymous. Here's how one very long time SAP customer put it:
Sometime around 2012, SAP changed. It became a selling organization, constantly pushing us to buy more. It didn't feel like there was a lot of core innovation going on and the sales tactics became increasingly aggressive. We looked at the extent of shelfware and wanted SAP to give us relief for that in our maintenance bill. They point blank refused and would not budge. Eventually, we had enough, took out third party support and found our relationship with SAP got worse. At one point we needed a piece of their software to remain compliant in a particular country and they refused to sell to us unless we went back on maintenance. We found a workaround.
Another firm operating in a distressed market where they dominate said that SAP refused to help at a time when they had to make cost cuts.
Every part of our business was (and remains) under financial scrutiny. We just weren't getting the help we needed from SAP to help us reduce our estate costs. They reckoned that moving to S/4 would help but our estimates showed that the cost represented about 50% of what we paid for the original SAP implementation - and for what? We couldn't go to our board with those sort of numbers.
In another case, the firm said that its SAP landscape was so stable that it had not raised a single ticket with SAP in the previous year. While it appreciated the need to keep up to date, it saw no reason to re-up its maintenance contract when it fell due. At the same time, it was looking at the broader industry it serves and realized that hard times were a-coming (think automotive) and determined that its requirements are best served by holding back on any decision to move to S/4.
I was curious to understand why each of these companies has some plan to get to S/4 but are willing to stand back. This planning perspective is especially pertinent at a time when many are warning of consultant shortages in the SAP ecosystem, which, in turn, almost certainly means price hikes. Reasons given were varied, some of which are apparent from the above quotes. Others were more detailed.
We've looked at S/4 and can see that it's not feature complete. So we need to wait. We are looking at our landscape and running a project to determine how many of the customizations we can eliminate before going to S/4. That will take us about two years and I am not hopeful we will get much above 65% done. We have to get and keep top level commitment because people will not want to give up what they know so easily.
I asked how that might work:
The C-level team want justifications for what they consider large investments but they've realized technology is different from building a new plant or warehouse facility. We have developed an education program to get those people up to speed on digital technologies. We already have IoT and robotics projects so that helps. We hope this will make a big difference.
In this particular case, the firm operates in an industry that has seen very little real innovation in the last 50 years and where industry practices are deeply ingrained. However, the firm has recognized there are genuine opportunities to become more efficient and has invested in developing in-house expertise, particularly in automated build processes.
We don't have a choice, There are no packaged applications for what we want to do.
I was struck by the considered manner in which these customers evaluated their technology investments, providing reliable business reasons for the decisions they've taken.
It is hard to argue against macro-economic situations, even when you could say that 'fixing the roof when the sun is shining' is a better strategy than 'waiting for the rains to come.' In the one case where the global economy is not in their favor, the firm believes, and quite rightly, it has to see the extent to which current conditions impact the long haul before they can make a considered decision.
There is too much uncertainty for us right now. Even with our history and full supply line control, it's really hard.
There is hope
In two cases, it was interesting to discover that SAP's sales 'tone' has become considerably more conciliatory and far less combative. Both saw this warmer approach towards the end of last year when there was a change of leadership. While it is too early to judge the long-term, both are hopeful that SAP will end up providing the help they need. In that sense, it is perhaps indicative of the value these firms see coming from their long term investments in SAP that they've not discarded the idea of working with them again. Said one:
We are cautiously optimistic.
The other gave more detail.
We went through a period where SAP kept turning up and we kept saying no. I think they'd almost given up on us but we have put them into an RFP with Oracle and Workday which helped us decide on the current strategy. We have told them we will go back and have committed to getting back on maintenance once our current arrangement runs out. We will then embark on another RFP but right now it looks like an S/4 project will be preferred. They've come back with a better deal than the one we wanted a while back and which they rejected.
The problem of cost remains, Earlier we heard of estimated re-implementation costs of 50% of the original. In another case, the firm is thinking of 30%. Each of those projects will run many millions of dollars. Then there is the issue of third-party application support. The firm that is simplifying said:
We have hundreds of add-ons and we already know that some are not supported in the current S/4 release. We can reduce dependency - that's part of the project - but we need to know SAP will be there to support its partners. That's not clear today but we're betting SAP will solve this as their core matures.
With a potential investment running many millions of dollars, that's got to be the triumph of hope over today's reality. More to the point, SAP needs to hear these people, so it appreciates the extent to which there is both a willingness and hesitation in the marketplace.
Mindful of recent conversations with tools vendors and extension providers like Neptune, SNP, Avantra, and SNP, I wondered the extent to which customers are aware of the third-party solution providers who can help and add value without necessarily disturbing their estate. In all but one case, customers were not aware of any of these providers. I'm sure that's true of many others.
It should come as no surprise that customers who have moved to a third party maintenance provider wish to remain anonymous. SAP's past practices that fall squarely into the 'wallet fracking' camp are not easily sloughed off. It is encouraging that customers I spoke with are willing to consider there is a change of tone at SAP that at least gets them a fair hearing rather than outright rejection. That cuts both ways, and there will be customers whose experience with SAP is too painful.
While customers want to remain anonymous, they're no longer willing to be cowed into submission. They know that SAP can be pushed back and are eager to do so when SAP becomes unreasonable.
For its part, I firmly believe SAP is at a point where listening is not enough. Customers need to see SAP take action. Recent meetings with user group representatives have been fruitful, and there is an air of expectancy. However, it is critical that SAP actively supports its ecosystem of partners and SMEs so that the many white spaces SAP can't fill are adequately serviced. For example, a change in business model from that of third party apps reseller to true, supportive partner would represent a good start. As would carving out a sliver of SAP's burgeoning marketing budget to actively promote partners.
At the same time, SAP needs to recognize that third-party support is not going away and is an essential element it has to factor into its strategy. As I was completing this round of customer conversations, Rimini Street provided me with a copy of a recent Gartner report on legacy support that forecasts a rapid expansion in this segment through 2023.
What's your view? I'm sure we need more examples to establish patterns of thinking. But based on the many many conversations I've had with customers over the years, I'm satisfied these examples are broadly representative.
Finally, thanks to Rimini Street. They provided unfettered access and did not direct any of the questions that were asked.