SAP customers need to rein in the ever-expanding costs of maintaining their investments – and there are a range of ways they can do so, according to Vinnie Mirchandani, as Freya Purnell discovered.
A conundrum in the SAP ecosystem prompted Vinnie Mirchandani to write his new book, SAP Nation: a runaway software economy.
Mirchandani is CEO of advisory firm Deal Architect, author of The New Polymath and a former Gartner analyst and PwC Consulting partner. He has worked in and around SAP for 25 years.
“In my mind, the ecosystem was about $100 billion, and I kept thinking, post-recession, it had to decline because people weren’t buying as much, and all the cloud economics suggested that the ecosystem should be shrinking. [But] what I was hearing from at least a few customers was that their budgets weren’t going down,” says Marchandani.
Mirchandani began to develop a model of the SAP economy, including labour costs, both internally at customer firms and externally from outsourcers or staffing firms; costs for SAP software, and other supporting software (covering database, testing, BPM, training and integration); infrastructure (including hardware/hosting/virtualisation); and telecommunications.
One of the challenges of creating such a model was how little information was available on how much customers were spending, and how fragmented the information was. Mirchandani’s investigations were lengthy, and drew on the observations and suggestions of other IT industry analysts to arrive at his final numbers. (He also sought to validate the model with SAP’s corporate strategy group, which challenged some of the figures relating to customer staffing costs.)
When the model was complete, he was surprised by the results, placing the total SAP economy at around $300 billion a year – or a run rate of more than $1 trillion since the US recession.
“When you compare how nicely IT costs via software-as-a-service (SaaS) applications, cloud infrastructure and mobile broadband have dropped in the last few years, you have to ask why those in the SAP economy have not followed that trend. Likewise, when you see all the front-office technology opportunities – in product- and customer-facing areas – you wonder how many are being crowded out by the SAP back office,” Mirchandani wrote in SAP Nation.
Understanding how SAP customers feeling about this and how they are responding became the driver for the book.
Mirchandani found 30 SAP customers – including HP, AstraZeneca, Delta Airlines, Microsoft, Schneider Electric, Burberry and John Deere – who were willing to speak on the record about how they were optimising their SAP spend, and grouped them into four categories:
- Pragmatists, and
These customers deployed a range of strategies to try and limit their ongoing spend and maximise the value of their existing investment, or indeed, increase that investment in new areas. Sometimes that means moving away from SAP altogether, sayr Mirchandani.
“Under $3 to $4 billion [in SAP spend], it’s not easy, but they can make the decision to move away from SAP, and they are starting to with things like third party maintenance. The larger customers are in the second and third category, who are diversified, saying they will ringfence SAP and start doing Salesforce or Oracle around SAP, or I will just have SAP at corporate headquarters, but when it comes to a plant in China or Eastern Europe, I am going to put in something lighter,” Mirchandani says.
“Or they are changing their outsourcing models, staying with SAP but having 60 per cent outsourced, so they are doing different things to try and optimise. Then at the other extreme, there are a handful who are saying I am going to replace Oracle and put in SAP HANA, and everything is fine.”
Among the strategies Mirchandani outlined in case studies were:
- Replacing SAP with another ERP system altogether (Inteva, Middlesbrough Council).
- Avoiding upgrades to a more recent version of SAP simply to maintain support, by moving to a third-party support provider (Color Spot Nurseries, United Biscuits, Embraer).
- Ringfencing an SAP core system with cloud solutions such as Salesforce.com, Fieldglass, Workday and Docusign (HP).
- Changing the composition of support and delivery roles for SAP, infrastructure operations, application development and maintenance, and cloud and mobile IT, from 70 per cent outsourced to 30 per cent (AstraZeneca).
- Using SAP at headquarters, and rolling out NetSuite for international operations (ABS-CBN).
- Implementing best of breed sales, inventory, operations, and planning tools on top of SAP-based ERP feeder systems, instead of SAP’s own Advanced Planning and Optimisation solutions, to gain benefits in lower cost and faster deployment (Schneider Electric).
- Leveraging SAP’s back office system for the financial operations of the company, integrated with front-end Student Information Systems and Salesforce systems, and then expanding the initial SAP footprint to include three more acquisitions (DeVry Education Group).
- Planning to replace a heavily customised SAP instance with a greenfield implementation in order to reduce manual intervention in order processing, improve customer care and leverage SAP UX developments such as Fiori and Personas (Digital Globe).
- Tightly aligning with SAP by running a single instance of SAP Business Suite, jointly developing a POS app, using HANA to blend transactional, customer, POS and social media data, and making plans to swap its Oracle database and put Business Suite on HANA (Burberry).
- Becoming the first implementation of Business Suite on HANA, and using the in-memory capabilities to inform predictive maintenance (John Deere).
- Migrating three competing ERP solutions onto a single instance of SAP (Endo).
Overall, Mirchandani found there was an air of dissatisfaction amongst customers around their relationship with SAP.
“It was tough to find customers who would actually say ‘We are happy with our investment’. They just feel trapped because they’re spending so much money, and they say that the only time they get SAP’s attention is if they have more revenue to give them,” he says. “I don’t think [SAP] has been listening enough to their customers.”
Alongside the customer case studies, Mirchandani has, in SAP Nation, outlined the major factors both internal and external to SAP that have influenced the development of the ecosystem, which for SAP-watchers makes for interesting reading on its own.
How can customers optimise their SAP investment?
Having talked through in detail how some of the world’s biggest SAP customers are getting the most from their SAP system, Mirchandani has some advice on how it can be done.
“The good news is there are so many areas to optimise that even if they start slowly, there can be 5, 10, 15 per cent improvements [in costs] in the first year. Those that made radical changes generated improvements of 60-70 per cent, so there is good reason to take a good hard look at the whole environment,” he says.
With 25 different cost elements in the SAP economy model, for each customer, there could be elements that may be more or less beneficial in terms of rationalisation.
“For some customers, it could just be reducing the consultant travel on their projects. That single cost in my model was $6 billion a year. So if you have a project where your consultants are flying every week, that may be one area to look at, and you could probably reduce it by $50,000 to $100,000 a year,” Mirchandani says.
“If you have a very centralised implementation, you’ve got to take a look at your telecommunication costs – that will be something you can negotiate down by 30-40 per cent. If you are using offshore support, there is different things you can do to negotiate that down. Everything you touch in the SAP ecosystem you can cut by 10, 15, 40, 60 per cent, so the opportunities are there.
“Customers just need to wake up and say, we have tolerated it for too long. This is non-strategic stuff, this is back-office IT. People need money for innovation projects, there are so many competing alternatives. If you want to buy any kind of competitive advantage, we really should be taking a hard look at why we are spending so much.”
SAP Nation by Vinnie Mirchandani is available from Amazon. This article was first published in Inside SAP Summer 14/15.