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The risk of upgrading to S/4 Hana

S/4 Hana has been touted as the evolution of SAP's long-standing ERP suite, but with just six years to upgrade, how can businesses avoid an expensive SAP flop?

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Lidl’s decision to stop an SAP Hana implementation on the grounds of escalating costs may be an early sign of the issues upgrading to S/4 Hana will involve.

While very little has been revealed about why Lidl decided to scrap SAP, what has become apparent from the reports on the retailer’s project is that it pulled the plug due to rising costs.

When Computer Weekly started seeing SAP project failures in the late 1990s, cost of implementation was one of the contributing factors. The problem was that SAP was sold as a set of pre-packaged business processes, encapsulating business processes from some of the world’s largest companies, but often these did not match how companies trying to implement SAP saw their business processes. This meant they often required customisation.

Two decades on, experts are in agreement that customising SAP should be avoided because cost and complexity will quickly escalate. This is as true today for companies embarking on an SAP S/4 Hana implementation as it was when they first implemented SAP R/3 in the 1990s.

In 2025, SAP will officially end support for ECC6, the core enterprise resource planning (ERP) Central Component of its product. From SAP’s perspective, this gives businesses less than six years to implement S/4 Hana.

Businesses running SAP systems implemented over the past two decades have a difficult decision to make about how their existing SAP custom code should be redeveloped for S/4 Hana.

There is an ongoing debate over how existing systems can be reworked for S/4 Hana, but the general consensus is that S/4 Hana means implementing an entirely new ERP system.

Identifying existing business processes

As such, businesses need to figure out what their existing business processes are, how much is encoded in SAP, how much of the customisation in the original implementation is now part of standard S/4 Hana, and whether it is really a business imperative to implement the old customised code in the new platform. This is especially true if a business process that was first encoded two decades ago is no longer being used, or has been adapted but the custom code has not been updated.

According to the Optimising business processes for success whitepaper from analyst IDC: “Poorly coordinated processes that don’t map to business needs and that undermine production systems when deployed are not merely costly – they can stymie effective corporate positioning and responsiveness to rapidly changing competitive pressures and global demands.”

In the whitepaper, IDC recommended establishing strategies that encompass cultural change, organisational structures (by leveraging existing centres of excellence, project or programme management offices, or DevOps – or by forming them), processes for business process quality, and evaluation and adoption of appropriate automation solutions to help create relevant, adaptive and business-centric applications.

Delivering on business demands

According to SAP consultant Panaya, to gain the most value from an SAP S/4 Hana investment, the IT department will need to deliver on business demands as quickly as possible without business disruption. With several project paths to take – migration, implementation, greenfield, etc – IT teams are embarking on 12- to 18-month projects, the company wrote in a recent whitepaper.

The technical upgrade for SAP S/4 Hana can be as quick as three months. However, to meet new SAP S/4 Hana standards, Panaya said the remaining nine to 15 months should be focused on business process changes, customisation and quality assurance.

In fact, SAP S/4 Hana introduces many changes to areas such as technology, business processes and user interfaces. According to Panaya, these changes will affect both how IT teams work and how they customise the SAP system.

As operating models and IT processes change, Panaya warned that change requests, requirements, and test and release management processes could be a difficult transition for enterprise IT.

“For many organisations, implementing these changes in a waterfall delivery mode will take too long, affecting solution ROI [return on investment]. These changes will need to be implemented incrementally, delivering on different change requests in each cycle using DevOps and continuous delivery,” the Panaya whitepaper said.

Taking responsibility

Stuart Browne, managing director of independent SAP consulting firm Resulting, said a common problem he encounters is that businesses often wrongly assume it’s the systems integrator that has responsibility for getting the ERP implementation right, when it is ultimately the customer’s responsibility.

Browne said that one of the technical challenges for businesses is that S/4Hana is not yet complete. “It is an unfinished product and doesn’t simplify the SAP product suite. Adopting S/4 Hana now does simplify some functionality, but not all of it.”

Since it is still a work in progress, Browne said there was a lack of tools and people with the right skills to implement S/4 Hana. This is compounded by the fact that the people who understand the existing ECC6 SAP ERP implementation and have 20 or so years of experience with it are heading towards retirement.

“There is an ageing, affluent workforce approaching retirement. Everyone tends to be in their mid-40s to mid-50s.” He said younger people are generally doing “cooler things” rather than implementing SAP, and there is 8% wage inflation in India, which means outsourcing SAP skills is expensive.

Read more about SAP S/4 Hana projects

Deferring the upgrade

Rimini is one of the companies that has built a business around supporting older SAP systems. The idea behind taking a third-party maintenance contract is that it enables the business to lower its ongoing maintenance fee while it delays migrating to the newest product, in this case SAP S/4 Hana.

Hari Candadai, group vice-president of product marketing and strategy at Rimini Street, said it was “very telling” that Lidl had to reassess and customise so many processes to make the new SAP system work for its business.

“The key takeaway is that every enterprise customer considering a major SAP platform move, including a potential reimplementation to S/4 Hana from their existing SAP system, needs to understand it is anything but simple,” said Candadai. “Get this wrong, and it will severely impact your bottom line. The real question is, ‘What was the purported ROI in the first place to even consider ripping and replacing your back office systems of record?’.”

Since support for ECC6 will continue until 2025, businesses do not necessarily have to buy into S/4 Hana right now, especially if they feel it is not yet a complete product.

Six years is a long time, and since SAP S/4 Hana is regarded as a major implementation, Browne said there was an opportunity for businesses to reassess how the core ERP should operate within the company and look at the feasibility of deploying alternatives such as NetSuite or Microsoft Dynamics.

There is also the question of what IT architecture will be needed in 2025 to support what the business hopes to do at that time. For instance, while S/4 Hana does provide application programming interfaces (APIs), Browne claimed these were too restrictive, especially if the company wants to open up its application programming interfaces and participate in an API economy, where companies transact using a cloud-native approach based on lightweight microservices.

And while SAP may well have been sold in the past as a way to encapsulate world-class business processes, traditional businesses risk being disrupted because an ERP invented in the 1990s is no match for the innovative supply chains of the 21st century.

Read more on Enterprise resource planning (ERP) software

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