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Options for deferring or upgrading to S/4 Hana

Businesses on SAP ERP Core Component software will need to consider what they plan to do after 2025. We investigate the options open to them

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A survey for the UK and Ireland SAP User Group recently found that just 12% of the group’s members have fully implemented S/4 Hana.

As Computer Weekly recently reported, adoption among user group members of the full SAP in-memory enterprise resource planning (ERP) product has more than doubled since 2017. But while there appears to be some momentum in businesses moving to S/4 Hana, progress is quite slow.

According to a transcript of SAP’s earnings call for its third quarter 2018, the company’s management team stated there were 5,000 live customers on Hana. This represents a relatively small proportion of its customer base, given that SAP has publicly stated it is committed to supporting the previous ECC 6 (ERP Core Component) software until 2025.

There are no clear details how long SAP will continue to support ECC 6 after this date, which has made 2025 something of a deadline for organisations planning to upgrade their SAP ERP system by migrating to S/4 Hana.

In an advisory for Berenberg, titled Business model transition accelerating, analyst Gal Munda, says: “The adoption of S/4 Hana has been extremely strong; however, the number of go-live projects is still less than 20% of sold licences. If implementation projects do not start next year, the licences could be seen as obsolete.”

There are several drivers for companies to upgrade their SAP ECC implementation to S/4 Hana. SAP has said it will support the legacy SAP ERP until 2025, but this is by no means a hard stop date, according to Nancy Callahan, global vice-president of strategy and growth at SAP Digital Business Services (DBS).

Rather than being regarded as an end-of-support date, SAP has made a public commitment to support the legacy product until 2025. Mark Smith, CEO of third-party support firm Support Revolution, expects many businesses will stick with ECC 6 beyond this date, but there is a caveat. “I expect people will continue to use ECC 6 after 2025, but it will become increasingly difficult to get older licences,” he says.

Read more about upgrading from ECC 6 to S/4 Hana

What is clear is that the legacy ERP is unlikely to be supported indefinitely after 2025, and SAP is putting in a place a set of tools to help businesses migrate. “SAP Digital Business Services exists to ensure our customers are successful to digital enterprise,” says Callahan.

“Moving 20- to 30-year-old software to a modern platform will ultimately be a benefit to the business. Plan now before you come under time pressure. When there isn’t pressure or risk of disruption, we want to encourage customers to do [the upgrade to S/4 Hana] because it is in the best interest of their business,” she says.

Drop SAP support

Companies have over six years to migrate from ECC 6 to S/4 Hana, before the 2025 support commitment date set by SAP. The market for third-party support is growing and IT leaders committed to the migration can make considerable savings by dumping SAP’s maintenance for support from a third-party provider.

Assuming an annual maintenance fee of between 22% and 25% of the original contract value, for every £1m spent on an SAP ERP system, a customer can be expected to pay between £220,000 and £250,000 per year on SAP maintenance. Over the six years to 2025, this could add up to anywhere between £1.3m and £1.5m in fees on a £1m contract.

Third-party support firm Spinnaker Support claims it is 62% cheaper than SAP. For every £1m spent on the original SAP contract, this means a customer would pay £83,600 to £95,000 per year for third-party support.

For a £1m contract, the savings over six years could be as much as £500,000 when third-party support is used; a £10m contract would result in savings of up to £5m. The larger the original implementation, the greater the savings. These savings could be used to fund other IT projects or be offset against the implementation costs of S/4 Hana.

“Altogether, we’ve saved companies $3bn in support,” says Dean Alms, vice-president of global product strategy at Rimini Street, which also provides third-party support. “It is not just the cost of the support, but also everything else that goes with an SAP contract, like the need to be on the SAP upgrade train. The vast majority of savings are about avoiding upgrades.”

Negotiate with SAP

Businesses need to assess whether they really want to migrate to S/4 Hana. Gartner research director Bill Ryan says: “Many people say that’s where SAP is going; it is a move of inertia rather than a viable business case.”

Besides the 2025 support date, CIOs should also assess how much of S/4 Hana their organisations can take advantage of. The primary benefit is that the ERP now uses Hana, an in-memory database, providing real-time business insights.

“There are a number of migration options, such as using credits on predecessor products, terminating shelfware or taking a contract conversion. Use this as a bucket of money to reduce the S/4 Hana bill of materials and to run the new and old environments in parallel. Then negotiate”
Bill Ryan, Gartner

Analyst house IDC explained the benefits in an SAP-sponsored whitepaper from 2013, when the idea of an in-memory database was starting to gain momentum as a technological shift that CIOs should be assessing.

At the time, Carl Olofson, a research vice-president at IDC, wrote. “Bringing together systems of record and systems of decision means that as business processes execute, business managers can make decisions based on the current state of the business and bring in a range of supporting facts that can make those decisions stronger.

“This requires that transactional and analytical data be managed together,” he says. “It also means queries, reports and visualisations for decision-makers must be generated not in days or hours, but in seconds. It means the system must support large amounts of supporting facts and be able to bring those facts to bear immediately upon demand.”

Ryan recommends organisations assess what they own, from an SAP perspective. “There are a number of migration options, such as using credits on predecessor products, terminating shelfware or taking a contract conversion. Use this as a bucket of money to reduce the S/4 Hana bill of materials and to run the new and old environments in parallel. Then negotiate.”

S/4 Hana is also sold as a cloud service. Gartner’s Achieving negotiation excellence with SAP SaaS contracts report notes that IT leaders who have responsibility for negotiating SAP software-as-a-service (SaaS) pricing and terms are often unaware of SAP’s contract structure.

SAP’s website provides pre-negotiated contracts. “SAP sales representatives, like many other SaaS providers, introduce its commercial terms just prior to signing and present its documentation as standard and non-negotiable. This is a misconception that leaves prospective customers at a disadvantage,” the report states.

Steps to S/4 Hana migration

The challenge for many SAP ERP users is that their organisations have been running the system for many years. Their SAP ERP system may well contain undocumented custom code, which means no one knows exactly how the software actually works.

As a starting point, Bogdan Nica, vice-president of product and services at Knoa, a company that has worked on a number of S/4 Hana upgrades, urges businesses to take a baseline of their current systems.

SAP’s Callahan says SAP provides a free cloud-based tool – Readiness Checker – which runs an inventory of the customisations in an existing SAP ERP system, enabling IT teams to understand which custom code can be carried forward. The tool also presents the software prerequisites needed by the business to enable it to get to a readiness state for migration to S/4 Hana.

To decide whether to carry forward custom code into the new system, Nica says Knoa can report on utilisation of any piece of SAP functionality. “We can tell which custom code is never utilised,” he says. “Given the age of some SAP ERP deployments, some parts of the system may no longer be required by the business.”

Again, by looking at how the system is being used, it is possible to identify software components that do not need to be reimplemented in S/4 Hana.

Callahan says SAP offers an innovation and optimisation pathfinder report to assess existing ECC implementations, enabling customers to understand the level of customisation in their existing system so they can make an informed decision on what customisations are being used.

Change management required

The decision to migrate away from a core business system should not be taken lightly, especially as the drivers for migration appear to be coming more from SAP than business users.

SAP sells the promise of a digital core, that can support real-time decisions linking back-end systems of record to front-end systems of experience. From an IT leadership perspective, real-time business processes leads to different working practices.

The decision to migrate away from a core business system should not be taken lightly, especially as the drivers for migration appear to be coming more from SAP than business users

Does the business have an appetite for this level of change? Whether it is linking billing and customer service, joined-up HR processes to real-time visibility across a supply chain or simply improving efficiency by reducing manual steps in a business process, change management will be a major aspect of any S/4 Hana project.

If they are not planning an immediate S/4 Hana migration, CIOs should assess their options relating to using a third-party support provider. There is a fear that they will be forced to pay back payments for the time they were not covered by an SAP maintenance contract.

However, as Ray Wang, CEO of Constellation Research, explains in a video covering third-party support, in most cases, business customers that return to their software provider for maintenance after a period of time with a third-party support provider will not face back payments to cover the time they were not paying support directly to the software provider.

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