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SAP's cloud drive hits speed bumps with American users

ERP giant losing points on execution and flexibility

SAP's drive to move customers to cloud-hosted and SaaS systems is not being matched by its flexibility and operational sophistication, the user group representing the Americas has told The Register.

After a week in which SAP announced a slew of new features – with a heavy emphasis on generative AI, Americas SAP User Group (ASUG) chairman Geoff Scott told us customers are more enthusiastic about the transition of vital and complex enterprise applications to the cloud than their European counterparts, but did not see commensurate flexibility in commercial arrangements from SAP.

"SAP has always been a very customer-focused organization; we all recognize that. But financial execution models are also in play," he said.

SAP is used by many of Europe's largest manufacturers and other global businesses after carving out its dominance in ERP software over the past 50 years. It counts Airbus, VW Group, and Siemens among its based of clients. At the beginning of 2021, it relaunched an initiative to move customers to the cloud under the moniker RISE with SAP.

A response to a market guidance reset and the resulting 23 percent share price hit, the commercial package promises customers a "one-hand-to-shake" deal with consultancies, hyperscalers and SAP in the mission to lift, shift, and transform on-prem systems to the cloud and/or software-as-a-service.

The trend continued last week when, among a flurry of cloud and AI-related announcements, SAP promised to improve its cloud offer with updates to SAP Integration Suite to bring together SAP and non-SAP systems on-premises and in the cloud.

But not everyone has been happy with SAP's vision for the cloud in its vast ERP user base. In April, The Register reported how users in SAP's German-speaking heartlands had misgivings about the vendor's assumptions that the cloud was the ultimate destination for their systems while also calling for greater innovation in on-prem systems running the latest S/4HANA software in which they had heavily invested.

ASUG's Scott said SAP users in North America were more likely to embrace SAP's cloud strategy. At the same time, they were adjusting to the new commercial relationships represented by RISE with SAP and its execution in terms of the operational management of software.

"The challenge that many customers are experiencing – and I think it's a challenge SAP is getting better at every day – is SAP historically has been a manufacturer of its software, not an operator of it," he said.

"Most of the customer base is very savvy operators of SAP software, not good creators of it. Where I see customers tending to vibrate the most is they're used to having control over some aspects [of their software]. When you go to a RISE deal, you kind of give some of that away and you expect that SAP is going to be able to do this at a level of sophistication, at least equal to yours or better. [Customers] are sometimes finding... that's not the case."

At the same time, the commercial aspects of how SAP was getting customers into the cloud was presenting them with challenges, he said. Firstly, in terms of budgeting, it was an adjustment. While on-prem, customers had been used to buying perpetual licenses and the capital costs of hardware, which created a "fixed dollar figure", the migration to subscription and consumption-based pricing meant that predictability had gone away, Scott said.

"It's kind of like electricity, right? You hope you get it right, but you pay by the consumption model. Most manufacturing plants, for example, have been at this for a long time, and they know how to budget electricity. But most of our customer base is learning this for the first time [with software]."

It was also a concept creating difficulties when businesses try to downsize. Organizations sometimes struggle to reduce the amount of software they use after signing up to subscription deals, either because line-of-business owners refuse to give up seats on the software they'd been promised, or because of inflexibility from the vendor.

The other problem can be execution. While the cloud promises ultimate flexibility, the dream has not always become a reality when users had to depend on a vendor to create complex environments at short notice. "A user might need to get an environment up and running and need it in a week. And SAP says, 'We're busy. How about three weeks?' Once it's up and running, it's running well and stable. But the process of getting software configured, getting environments up or turning them down when you need to: that's an issue," Scott said.

SAP generated €30.8 billion globally in 2022 while cloud revenue, including support, was less than half that, at €12.6 billion, although it grew at around 33 percent on the previous year.

The company has more or less staked its future on getting customers to the cloud through RISE with SAP. Scott Russell, SAP executive board member for customer success, even went so far as telling investors the company's large customer base had "already made the decision to move to the cloud," in stark contrast with the German-speaking user group and Gartner, which both said many customers remain to be convinced. There is a concern among customers who have already invested in the transition to S/4HANA on-prem that the massive investment might not see returns as SAP focuses innovation on the cloud versions of its software.

Andy Steer, VP and CTO of SAP consultancy, support and SI firm NTT DATA Business Solutions, said it was a question of interpretation and emphasis.

"Very few IT senior executives I meet are prepared to say they are immune to the cloud. There is a general acceptance of that journey and a general understanding of the benefit they perceive cloud technology can bring to them in relation to enterprise applications like SAP. But the question is the pace of change and practicality. There is a feeling among customers that if the cloud is not right for me now, it will be right for me at some point."

The question for SAP is timing. Will investors have the patience to allow customers to move to the cloud at a pace which suits their complex technical, business, and governance requirements when facing notoriously long and difficult ERP projects? SAP has been offered the opportunity to respond to the specific points raised in this article. ®

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