SAP is experiencing a two-speed transformation. While pure cloud offerings like Ariba’s procurement platform are driving the German company's business, the migration of classic enterprise resource planning (ERP) applications is lagging behind. What exactly is stopping customers from lifting these systems into the cloud?
The overriding importance of cloud-first is beyond question for most CIOs. But, while companies in the U.S. and Asia have consistently adopted the strategy, the move is happening much more slowly in Europe. ERP, in particular, is rather low on the priority lists for many CIOs, which is surprising given that these solutions map a company’s core business and have a relatively long development and customizing history behind them. The truth is, most companies have a hard time recognizing enough added value to justify a rapid move to the cloud.
Finding Value in Cloud Migration
But what explains this reluctance? It cannot be due to a lack of value propositions. For reasons of space, only five value propositions are mentioned here:
Cost reduction through flexible, demand-oriented capacity booking
Capital protected from expensive infrastructure investments (which is helpful especially when expanding SAP HANA landscapes)
Shorter time-to-market (especially for complex environments)
Higher standardization using platform solutions
Better business decisions leveraging advanced analytics tools
How can it be that all these arguments do not hold water in the context of core business solutions? Or at best, when we are talking about standard or commodity solutions?
Lack of Economic Incentives
More than ever, the decision for or against the cloud is based first and foremost on purely economic considerations. The deteriorating global economy is forcing companies to put the cost-benefit analyses of potential migration projects at the center of the decision-making process. This means many ERP projects do not have too good a chance – especially if they involve applications with a large number of company-specific adaptations and are strongly interconnected in the IT landscape. A cloud migration then quickly turns into a large-scale project with developers and consultants who must bring highly specific skills with them.
The planning of such an IaaS migration takes an average of eight to nine months, with implementation lasting a good 12-17 months. There is a whole range of migration tools and services. But only about half of companies consider the available support effective enough. The rest would like more and, above all, better help. Experience in designing customer processes and know-how in SAP's proprietary programming language ABAB is in demand. Inevitably, this mix of requirements leads to rates that are among the highest in the market, especially in the case of legacy landscapes that are about to be replaced in the medium term.
Feasibility concepts also show the financial savings of cloud operations are not large enough to recoup the costs in the short term. The reason for this lies in the nature of the applications: The most important task of business software such as SAP ECC or S/4HANA is to map a company’s supply chain processes in a stable manner. However, most of these processes work around the clock with fixed user numbers and a correspondingly consistent transaction volume. In this context, the need for productive computing, storage and network resources is subject to rather smaller fluctuations. And the need to flexibly book or cancel large quantities of IT services in the shortest possible time is correspondingly low.
In the domain of business solutions, the purely cost-oriented economic value proposition of cloud computing thus largely comes to nothing. The necessary volatility is lacking to exploit the flexibility of the cloud. The crux of the matter, then, is that cloud customers pay a basic price for the assurance of flexibility. In real operations, many then find that the fluctuations in their resource requirements are not large enough to be able to sufficiently exploit the price advantages of going to the cloud. This differs from value props that promise modernization and innovation gains.
The Cost-Benefit Analysis of Going to the Cloud
Often enough, total costs of operating in the cloud can be higher than before the cloud conversion. And that is not all. Other costs can rise when cloud computing obscures potential synergies. In larger companies, there is always the danger that individual business units act independently of each other and push their applications into the cloud on their own. Especially in the private cloud, the incentive to act in this way is powerful, as moving the applications seems comparatively easy. However, many realize afterward that even this convenience comes at a price. If similar orders are no longer bundled, it can result in batch sizes that are too small to benefit sufficiently from the discount scale of the cloud provider.
Additional risks arise in provider management and control. Some organizations feel they have lost control over their IT environments through outsourcing, especially to the public cloud, and that regulatory requirements have not been implemented comprehensively enough by IaaS providers. And beyond this, highly endowed experts are needed who can monitor and manage cloud utilization in line with capacity. Innovation management is also becoming the focus of attention, especially with regard to legacy applications. According to our observations, three out of four companies want to use the native cloud functions of their IaaS providers to build new functions around their core SAP ERP.
Against the backdrop of increasing uncertainty in the global economy, it is likely that economic considerations will continue to act as a major brake on business solution migration. As a result, many ERP systems continue to be among the applications that are left behind in the move to the cloud. Overall, it can be said that the willingness to carry out major transformations is waning. The need for extensive change and risk management deters many companies. Even SAP's offer to introduce a lean contract structure with SAP RISE and accelerate the migration falls on fertile ground only some of the time.
Private Cloud Hosting Is Gaining in Popularity for Core Business Applications
In contrast, private cloud models are proving to be a viable alternative. Software-defined data centers (SDDC) with all their automation options (above all, the virtualization of the network layer) are also available in the private cloud. The fact that it then takes several days in practice (and not just a few seconds as in the public cloud) until additional capacities are activated is not really a problem in the ERP environment. Moreover, an important additional benefit of the private cloud is that it can be combined with edge computing. For production companies, this makes it possible to lift supply chain processes that have extremely high latency requirements into the cloud.
The majority of companies, therefore, are taking a multi-track approach to rely on an economically, technologically and geographically suitable mix of private, hybrid and public cloud solutions. While the public cloud is mainly used for highly dynamic application scenarios, large marketing campaigns or performance-hungry engineering projects, for example, private cloud hosting is gaining in importance for core business applications. The central driver here is not so much the applications as the desire to outsource the operation of their own data centers. With each expiring infrastructure contract, the share of systems of record that are transferred to private cloud hosting grows. In the large customer segment, this already concerns one-fifth of the applications. By 2025, this figure will likely double.
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About the author
As ISG-partner, Anna Medkouri is responsible for ISG's insurance business in Europe, the Middle East and Africa. Her work focuses on digital and IT strategy, IT portfolio management, application strategy and transformation, cloud adoption and development of target operating models.