Budgets in IT general do not grow at a rate that can sustain stellar financial performance across the IT industry.
However, Gartner’s latest spending forecast has reported that worldwide software spending projected to grow 8.5% in 2019. It will grow another 8.2% in 2020 to total $466 billion. According to Gartner, organisations are expected to increase spending on enterprise application software in 2019, with more of the budget shifting to software as a service (SaaS).
Among the IT firms hoping to capitalise on this shift is SAP, with S/4Hana, the company’s updated ERP system that runs off an in-memory database.
Those organisations still running SAP’s older ERP Central Component (ECC) system are only guaranteed support until 2025; after this data, SAP has not made a firm commitment to carry on support.
Does SAP see Hana as a cash cow?
Looking at the transcript of SAP’s Q4 2018 earnings call, posted on the Seeking Alpha financial blogging site at the end of January 2019, “Hana” is referenced 29 times. “It’s a Hana world,” CEO Bill McDermott, proclaimed. When asked about the company’s plans for growth, McDermott claimed that Hana is the ultimate platform for a modern enterprise. “You think about what we can do with Hana as database-as-a-service, you think about Leonardo with predictive AI and deep machine learning and IoT, we’re going to double down on these thing.”
Putting it more bluntly, the SAP CFO, Luka Mucic, said: “The S/4Hana upgrade cycle drives potential for substantial further renovation of a company’s IT architecture and gives us multiple cross-selling opportunities.”
However, as Computer Weekly recently reported, a new study from Resulting IT, questioned whether IT decision makers can build a compelling business case to do the upgrade from ECC. Computer Weekly spoke to former Gartner analyst Derek Prior, who co-authored the report.
Prior argued that while SAP S/4Hana has lots of nice stuff, he said: “It is different to ECC. You spent decades bedding in ECC, then it all changes with S/4 Hana, which is quite different.”
Complexity and risk of an ERP migration
S/4Hana is not simply an upgrade to the latest version of SAP. It is entirely different, and has new functionality that may not map easily onto how the business currently operates with ECC. The majority of people who took part in the Resulting IT study are most likely to choose a brownfield deployment than redevelop everything they have built into ECC from scratch. Resulting IT believes that with an estimated 42,000 SAP customers on ECC, upgrading to S/4Hana is going to cost £100bn globally in terms of IT consulting.
This translates into a huge expenditure for organisations. In the case of a brownfield deployment, the potential benefits of upgrading to S/4Hana are minimal – organisations will essentially spend a lot of money and may well experience major disruptions by embarking on a new ERP project that effectively delivers more-or-less what they already run on ECC.
Support beyond 2025
Clearly SAP wants people to buy into S/4Hana, and may well incentivise organisations to purchase it. However, organisations should not be held to ransom by their IT supplier. There is no good reason to spend money unless there is a compelling business case. A vague reference to digital transformation and AI-empowered business processes sounds good on paper. However, organisations will need to construct a watertight business case for upgrading from ECC to S/4Hana.
Just as in legacy banking systems, by using a third party for support, ECC customers can still take advantage of emerging technology and undergo their digital transformations. If a stable ECC can be maintained and supported, organisations can then focus on adding functionality around this, without the need to migrate to S/4Hana. New products and services can be developed entirely separate to the existing ERP, while still keeping ECC, supported by a third party, as the system of record. The core ERP metamorphosizes into a legacy system.
As SAP’s recent Q4 2018 results show, the IT industry relies almost entirely on organisations upgrading. Often these upgrades either add little value, or, as in the case of S/4Hana, customers end up not using the new functionality. So, given that IT budgets are tight, upgrade if there is a compelling. If there isn’t, now is the time to add SAP ECC to the legacy IT estate.