Users slam SAP's public cloud and S/4HANA migration strategy

SAP is angering users in its German-speaking heartland as its push to migrate vital ERP systems to the cloud is hampered by confusion over the tools used to develop and manage systems in the new environment.

European manufacturing has long been a stronghold for SAP as industrial giants like Airbus, EADS, Siemens and Volkswagen Group all rely on the ERP specialist. Since the company began its overt push to accelerate users' cloud adoption in response to a 23 percent fall in its valuation in October 2020, vital questions remain unanswered, users argue.

Two years after the launch of RISE with SAP – its lift-shift-and-transform commercial offer with bundled SI, hyperscale and consultancy deals – the vendor's powerful German-speaking user group DSAG, which represents users in Germany, Austria and Switzerland, issued a strongly worded statement demanding the same features for the on-prem version of the latest S/4HANA in-memory ERP platform that SAP releases in the cloud – so users could secure returns on the investments they have already made in customizing on-prem systems.

The Register caught up with DSAG board member Sebastian Westphal to hammer out the details.

To get one thing clear, many large customers do not have a move to the public cloud in their plans at all, he told us.

"SAP should listen because not all the big customers will move to the public cloud because they don't have the kind of standardization that SAP tends to offer there," he said.

Westphal said there was an issue with CEO Christian Klein's communication in public because it creates the perception that the public cloud was the only option for customers.

"If you listen to Christian Klein, and many official announcements from the SAP management, it's always public cloud. I know that's the project they would like to see because we all know what big software companies are planning to do when they have the majority of the customers on a public cloud platform, especially in terms of licences and pricing," he said.

However, the public messaging failed to account for the investment customers adopting S/4HANA on-prem had made to customize it to their processes in the last eight years since its launch.

"If you're a customer that moved to S/4HANA, on-prem or in the private cloud, a couple of years ago you're likely to have spent millions on it, and now you're listening to SAP, it sounds like, well, you're lucky that you move to S/4HANA because you can use it until 2040. But all innovations and all new enhancements and processes will be launched in public cloud edition. And that's not acceptable because we went to S/4HANA to get all the innovations until 2040. It's fine if they released on the public cloud on a weekly or monthly basis – much faster than on-prem – but we need them for on-premises and private cloud edition as well," he said.

S/4HANA integration with Microsoft Teams and OpenAI were two examples of innovations set to be offered only in the public cloud, Westphal said, with no equivalent announcement for on-premises or private cloud versions.

"That's our core concern because otherwise, you cut off a lot of the customers, especially the large companies, from innovations," he said.

More broadly, users were concerned how SAP's three or four-stage environment for releasing software transfers to the cloud. Established for decades in ECC – the version before S/4HANA – it governs how software is developed and released, and is particularly important for regulated industries and others requiring tightly controlled governance.

"When we're looking into the cloud, it's just not there," Westphal said.

"There is a gap between the classic products… and especially [Business Technology Platform, SAP's cloud-based development environment] and its services where we see just two environments… and that's a gap that we can't bridge because there's just one layer missing. And that's something SAP needs to [address] urgently because otherwise, hybrid scenarios won't work properly."

Although SAP had introduced a solution for the public cloud, users were struggling to see how it would work across hybrid public-private cloud or public cloud-to-on-prem implementations, he said.

Users also lacked clarity on the future of Solution Manager, or SolMan, a tool IT departments have relied on to manage their SAP implementations for more than 20 years. Like ECC, the current road for Solution Manager is to support until 2027, with extended support available until 2030.

"When we look at the platform, there is a lot of functionality missing, especially when we're talking about the whole management processes, from requirement to deployment. That's a core issue because if SAP is not delivering this quickly, we will not be able to continue our IT processes and governance [required as] part of our annual audit. There is no alternative unless we try to use third-party products," Westphal said.

The remainder of 2023 is set to be critical for SAP's relationship with its customers. October is set to see the last release of S/4HANA that users migrating from ECC will be able to adopt before mainstream support runs out – allowing a two-year implementation window. Users will be keen to see the features available in the core product and what customization they might have to recreate in the new product.

SAP would prefer users to adopt standardized processes. In late 2020, Oliver Betz, SVP head of product management for SAP S/4HANA, told UK users they had to agree on standardized processes to move to S/4HANA in the cloud. "You cannot have these modifications that you had in the on-premises world; that's not how the cloud works," he said.

But Westphal argued that large international businesses had such entrenched processes that they would either avoid moving to the cloud or try replicating them in the cloud using SAP's development environment. Last year SAP relaunched its developer platform, Embedded Steampunk or SAP S/4HANA Cloud ABAP Environment, as ABAP Cloud. Customers must start with a "clean core," adding any modifications as "extensions" in the new environment.

The problem is customers would then have to pay again for customizations they had already built on-prem, Westphal claimed.

"From a commercial perspective, it's not acceptable that SAP is now charging for every bit and piece and we have 25 or so contracts for one process. If it's purchased-to-pay, it's one process. It's one commercial model... for the customers, [the commercial model] is a big deal," he said.

Maybe the concerns could be disregarded as the outpourings of disgruntled users, but last year Jens Hungershausen, chairman of DSAG, praised the vendor for having a good working relationship with them.

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Meanwhile, consultants, third-party vendors, and analysts share similar criticisms to those of DSAG.

Christian Hestermann, Gartner senior director and analyst, told The Register that while it was hard to rule out all customers eventually moving to the cloud, many companies with complex environments struggled to see the benefit in the transition.

"The idea that everybody will be moving there, more sooner than later: that is certainly wrong," he said.

SAP is pushing the cloud because investors like the predictability of the revenue model. But subscription licenses can support on-prem deployments so that is not the only reason.

Technically, having more customers in the cloud means that vendors have to support fewer versions of the software so it reduces their costs. Thirdly, it also helpes with "lock-in" and control. If a user owns a perpetual license, they can simply stop paying support fees and support it themselves, but for software-as-a-service in the cloud, they cannot, Hestermann said.

He also said Gartner has heard customers voice concerns about the multi-stage environments for releasing software in the cloud, but that might be something users have to become accustomed to.

"The cloud is still fairly new compared to 30 years or so with SAP's multi-stage environment on-prem. There are some teething pains and some lessons to be learned in the IT departments of the end users. It requires a new set of skills and a different way of thinking. And the same is true for the vendors," he said.

He also saw customers having to pay again for customizations they build on-prem, only to deploy them in the cloud.

"All of that flows into the higher commercial [value] for the vendors. Imagine you bought an apartment 20 years ago and paid it off. Now the same seller comes around and says, 'You know tomorrow, you're going to start paying rent again.' Is that attractive? Maybe not. And then they say, 'By the way, if I decide to increase the rent, you'll have to pay me otherwise I'll put you under the bridge. And by the way, you will no longer be allowed to change the setup of your apartment and the furniture: we will provide that for you. And every four weeks we will replace your sofa and your TV because there's a new model, if you like it or not, if you need it, I don't care. You get the new model and you pay me more rent for it.' That's sort of the basic model: you're renting a completely furnished apartment and your landlord controls every aspect of it," Hestermann said.

To extend Hestermann's metaphor, it's practically impossible to move out because very few customers are going to consider a root-and-branch transition to another vendor. "There is no alternative, let's face it. SAP has achieved a market position there which is admirable on the one side, but it creates a lot of dependency on the customer side," he said.

While DSAG and other users groups around the world have traditionally had a strong relationship with the vendor, there is a feeling that SAP is "listening less and less and has done so over the past couple of years," Hestermann said.

And yet SAP is not in a strong position as far as its desire to appease investors goes. Not only is it struggling to get customers onto the cloud, it is struggling to the them off versions of its core ERP system older than S/4HANA. Figures from Gartner show that as of Q4 2022, only 32 percent of ECC customers had licensed S/4HANA in any way, and only 23 per cent had gone live with implementation of some components.

"In my mind, this can be called a major disaster in terms of adoption. That seems to trigger a lot of 'despair' on the SAP side, and it tries to push even harder, and their customers are pushing back. They just sit back and say, 'You know what? I will not follow your guidance. I have different plans.' Would they go to the cloud? Well, they don't even go to the latest version of the software, even if they can use it on premises. They are even less willing to follow that push towards any sort of a public cloud deployment beyond cloud hosting," Hestermann said.

Bernd Engist, CTO of third-party software vendor Avantra, agreed that some SAP users, especially in the manufacturing sector, would be almost certain never to move to the public cloud.

"Some clients will never move to the public cloud for data protection reasons. And with manufacturing clients, automotive for example, there is a need for systems to be close to the production plant; there is a fear of latency. The number of businesses who want to stay on-prem is higher than SAP want people to believe," he said.

While SAP CTO Jürgen Müller was given the opportunity to respond to users' concerns at the DSAG conference last week, one consultant listening said he would only talk at a high level and gave the impression he was "finger pointing" at customers for not having started or completed their S/4HANA migrations.

SAP has declined the opportunity to respond to the points raised in this article, at least to The Register.

DSAG's Westphal said that while users expect more announcements from SAP throughout 2023, at the moment, there is "no clear statement, especially not from top management" on the issues they raised. The lack of clarity is angering customers who fear investments in SAP systems they made in the past "may not pay off in the long term." ®