S/4HANA – What CIOs and IT Procurement Teams Should Be Doing Now

John_20150825_SAP_S4HANAEarlier this year SAP announced S/4HANA, short for SAP Business Suite 4 SAP HANA, as its next generation business suite. SAP is positioning this as a new product with a complete new line of code, similar to the transition from SAP R/2 to SAP R/3. So customers will need to pay for this new software license as opposed to receiving a software update as part of maintenance and support. With S/4HANA, SAP is further staking its claim to a larger percentage of the CIO’s budgets.

SAP has positioned itself for growth with S/4HANA as the applications and extensions are meant to be much simpler and provide greater value to customers. These improvements are designed to generate new or increased revenue streams for SAP in the following ways:

  • New cloud or on premise software license fees
  • Displacing traditional RDBMS databases and associated revenue streams as S/4HANA will only operate on the SAP HANA platform
  • SAP premium services, such as SAP Rapid Deployment solutions, delivered with prepackaged integrations taking a significant bite out of traditional SI services

SAP’s gamble on S/4HANA is a risky one. SAP might be biting the hand that feeds it if it encroaches too much on the profits of its SAP eco-system partners. It is also worth taking a look at the strategy generated headwinds SAP will likely face.

  • S/4HANA invites new competition for on premise. Positioning S/4HANA as a new product, customers seeking an on premise solution could treat the migration to a new platform as a sourcing event and bring multiple players back onto the field. If SAP allowed customers to upgrade as part of maintenance they would secure the revenue stream for years to come. But a sourcing event opens up the possibility of SAP completely losing the business as CIOs may potentially either deem the single vendor strategy too risky for the enterprise, or find greater value in a competitor solution.
  • Former System Integrator advocates become non-partisan. The SAP consulting gravy train has been slowing down over the last few years as the late adopters have started down the enterprise ERP implementation journey. With SAP’s newly introduced Activate methodology slated to replace ASAP, SAP will be providing preconfigured best practices and guided configuration that will reduce the need for expensive experts from a system integrator. SAP’s public cloud offering further reduces opportunities for hosting and AMS support. System integrators will likely take a wait and see approach to S/4HANA before developing a legion of configurators and Fiori experts. Eager to keep the current revenue streams alive, system integrators are likely to advise clients to sustain current operations for the time being and avoid the risk of new software.
  • The database provider blockade. Look for database providers like Oracle to counter with a strategy of providing clients with price concessions on extended maintenance of databases licensed for running SAP applications, making it difficult for CIOs to turn down in the short term and curtailing SAP’s ability to press for migration to S/4HANA. How aggressive will Oracle get to lock down long term customer commitments to Oracle databases running SAP applications?
  • Negative press generated by indirect access claims. SAP’s indirect access audits are increasingly being used as a ploy to increase revenue. Customers that have been approached by the SAP indirect access assault team are sure to walk away with a bad taste in their mouths regarding SAP as a long term partner, thereby stoking desires to consider alternative solutions when possible.

SAP clearly understands these headwinds and will be providing customers with a long runway to make the S/4HANA decision. SAP’s recent notification to the existing customer base that maintenance on the existing ECC / Business Suite code set will stay in place for another 10 years is evidence that SAP is not willing to push the growth strategy too hard too soon.

SAP has also put in place a long term business capability based strategy to incentivize migration to the S/4HANA platform. SAP has indicated that some of the major enhancements that will be introduced in the S/4HANA platform will not be incorporated into ECC or Business Suite, thereby creating a pressure point for moving to S/4HANA as these new business capabilities become standard practice within specific industries.

UpperEdge recommends the following near term actions for CIOs and IT procurement teams looking to build leverage for future negotiations with SAP:

1. Communicate your disappointment to SAP regarding the decision to not have maintenance fees supplement the purchase of S/4HANA. After all, maintenance fees were a primary source of funding the development of this new product technology. Follow that up with an explanation that a sourcing event in the next 3-5 years will be the likely course of action where SAP will face open competition as a replacement.

2. Utilize the leverage generated by potential migration. If the upgrade to S/4HANA is not in the enterprise roadmap in the near future, use the leverage produced by the potential migration to secure long term maintenance price concessions from your current SAP database providers.

3. Press your current system integrators to define how their practices will respond to the S/4HANA product line. More specifically, inquire about the following:

  • What supplemental additions will they be making to the SAP Activate methodology?  What will differentiate their firm in the ability to leverage the SAP premium services?
  • With public and private cloud offerings, system integrators have the ability to provide ready to operate assets vs. pieces and parts that need to be adapted.  Under what conditions for licenses will your firm provides these additional assets?
  • What are your business network differentiators?  Describe your relationships with business networks, industry standard settings, channel access, and control enablers.  How will you bring them to bear on this engagement?
  • What have you incorporated into your methodology to assure lowest total cost of ownership independent of staying with your firm for AMS support?

4. Get negotiation support. Contact UpperEdge regarding holistic and proactive negotiation strategies that factor in the strength of your SAP relationship, the impact of a compliance issue by way of indirect access, the market competitiveness of your existing commercial terms and the breadth of your go-forward SAP product demand profile. Doing so will keep the power of the contract on your side.

SAP has launched a long term strategy to migrate its customer base to the S/4HANA platform. SAP’s strategy is calculated and well thought-out. Our clients are being advised to launch a long term strategy of their own to create the maximum buy side leverage with SAP over the next 4-5 years.

If you found this article insightful, please share with someone else who might find it useful. If you would benefit from additional leverage in your negotiations with SAP please contact UpperEdge or email John Belden, [email protected] or the co-author Jeff Lazarto, [email protected]  for any questions and concerns on how we can help.