S/4HANA was once the future for SAP – but now it's in the clouds

Midway through upgrade projects, users are struggling to understand the change of heart

In 2020, global ERP giant SAP offered to provide "clarity and choice" on the future of its core platform, vital to the operations of a huge number of large organizations when it extended support for flagship product S/4HANA until 2040.

Thomas Saueressig, who leads product engineering, said the in-memory ERP platform, first introduced in 2015, would be "the architecture and platform of the future for our customers." But recent statements from CEO Christian Klein have made that future much less clear, and customers feel let down by the apparent volte-face.

"When SAP extended support for S/4HANA there wasn't a differentiation between cloud or on-prem. The message was that S/4HANA is the next thing for the customers to go to," Jens Hungershausen, chairman of the board at SAP German-speaking user group DSAG, told The Register.

Klein told investors last month that there was a difference. "Our new innovations will not be available for on-premise or hosted on-premise ERP customers on hyperscalers," he said.

To organizations that might have invested tens or hundreds of millions of euros, pounds or dollars in an ERP upgrade based on SAP's earlier statements, this is a big problem.

Hungershausen said: "If you started a project – your transition to S/4HANA – and from the outset you decided to stay on-prem, that might be an ongoing project right now, and you realize that's no longer the fast lane to innovations. If you made the decision to go to a hyperscaler by yourself, you're in the same position. In either case, from a technology perspective, you did everything right. But you're just not the on the right contract to participate in further innovations."

Last week, DSAG, which represents many large organizations in Europe's largest economy, issued a strongly worded statement saying that SAP's change in policy was damaging trust with users.

In response, SAP said that to stay ahead in the current economy, customers need to be in the cloud. "That's the only way to deliver innovation with speed and agility," a spokesperson said.

But Hungershausen said there were good reason for customers not to move to the cloud.

Making use of cloud technology for core systems might make perfect sense, but I don't think that the customer has to be pushed in this way.

"We're not against the cloud. We realize that there is a lot of technology in the cloud that has to be used and that some innovations are only being realized on cloud technology: that's perfectly fine. What we're discussing here is that if you have decided in the past that you're going to stay with your ERP core system, on-prem, then you want to also leverage cloud technologies [without moving core ERP]."

He said that in Europe there were regulations that made extensive use of cloud technology difficult, while other customers have decided to stay on-prem for their own reasons.

"Making use of cloud technology for core systems might make perfect sense, but I don't think that the customer has to be pushed in this way. You must make it attractive for them, and then the customer has to decide which way they want to go. SAP has a long history in being an on-premises company. They have to have to cope with a lot of legacy they have and that's the main difference to all of the other vendors out there who started their systems on a cloud basis.

"We get a lot of feedback from our members who say, 'Well, we followed SAP as an early adopter, and we did it in an on-prem landscape.' And now we get the announcement of being excluded from it and they're not happy about it."

Also angering users is the increase in support costs together with the problem that users effectively have to pay double to innovate with software they already own.

Because of the modularization of ERP, SAP is moving new functionality from the core product to its Business Technology Platform, a cloud-hosted development environment, which users pay for with a regular subscription. It has left customers unsure of what they are getting from the licences they own, which historically include product enhancements as part of the support fee.

Meanwhile, DSAG has questions about the RISE with SAP contract, the vendor's preferred model to get users to the cloud, which it introduced at the beginning of 2021. Within RISE, users have to pay 30 percent extra to get a premium contract in order to access innovation like AI or sustainability functionalities, which the user group is seeking to clarify.

SAP introduced RISE at least in part to move more customers onto subscription contracts as it appealed to investors following a 23 percent share price downgrade in autumn 2020.

But users have doubts about RISE because they are effectively cashing in their licences – assets they own and can choose what to do with in the future – for a subscription, which they will have to pay regularly without having control over.

Hungershausen said: "You're moving from an investment-based buying of licences to subscription-based licences and you don't have a real way to go back. The question of flexibility is part of the reasons why our members are looking at RISE and being a bit doubtful."

Christian Hestermann, Gartner senior director analyst, said the language SAP used in 2020 might give it some wriggle room. While it promised to support S/4HANA until 2040, it did not say that "all versions will receive all major innovations that SAP plans to build," he said.

"SAP can now say, 'Well, wait a minute, we never promised to publish each and every innovation that we will build over the years to all sorts of deployment models and all versions of S/4HANA.' Now, what is important is DSAG says that they feel betrayed," he said.

It is a feeling that might be shared by users of earlier versions of SAP's ERP system. Although mainstream support for ECC runs out in 2027, users feel they have already lost half the value of the agreements they signed to support the software.

To this day, I don't understand why customers did not oppose this more strongly

"The old promise has always been you are paying support to your ERP vendor, you get maintenance: support hotline and bug fixes. And you get access to enhancements packages," Hestermann said.

"For ECC, SAP stopped doing that in 2015 with the release of S/4HANA. So they basically took 50 percent of the promised value away from the customer. To this day, I don't understand why customers did not oppose this more strongly."

The problem for many users is that there is no realistic alternative. Small and mid-sized organizations might look at IFS, Infor, Microsoft Dynamics or others. But those above $10 billion turnover have limited options, Hestermann said.

"The air gets very thin. So for your core ERP, there is likely not a feasible alternative. Ripping and replacing is almost impossible."

But there are alternatives in the components around the core ERP system such as HR, CRM, supply chain, IoT, and generative AI.

"The drama for SAP is those would be growth opportunities. And they're missing these promising markets because customers feel that their vendor drives them mad in the core products," Hestermann said.

Another problem is that the costs of moving to a new core ERP system – even staying on its technology roadmap – can be phenomenal. "I've recently spoken to a well-known global company, and they are estimating it will cost them $500 million to move. That's half a billion. This is not building new plants or anything. This is just replacing a piece of software with the next version of the software. But the differences are not even dramatic in many areas, as this company found."

For this reason, users tend to cut back on ERP usage if they can and innovate around the edges. Some companies on ECC ignore what SAP wants them to do and go to third-party maintenance because SAP has already taken away half the value of maintenance. "A lot of companies are thinking, 'OK, so we invested 25 years in SAP, we always bought the newest software, we always kept it up to date. Now we should spend two or triple-digit millions to move to the next version only because the vendor says so? Nope, not with us.'"

In assuring investors that SAP is pushing hard to move customer to the cloud and subscription licenses, the German software giant has provoked a strong reaction from users.

But the relationship is a long one. The growth of SAP and the industrial base in its German-speaking heartlands have gone hand in hand for decades. Celebrating 50 years of the software company last year, DSAG's Hungershausen told The Register that the user group has a good relationship with the company. "We can't resolve all [issues] in a timely fashion, so we have to be a little bit patient, but basically, we are on good terms, and SAP listens to us," he said.

Last week, he confirmed that behind the sceneS DSAG was in talks with SAP over the issue of cloud-only innovation. But with the software giant having one eye on the promises it has made to investors, time will tell how much patience users and the vendor have to resolve their differences. ®

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