SAP strategy: Why customers need an innovation plan

At the UK and Ireland SAP User Group’s (UKISUG) annual Connect conference in Birmingham last month, SAP tried to rebuild trust after the furore over its Rise strategy.

SAP recently changed its plans regarding how its S/4Hana ERP customers receive new functionality. Such updates were previously included as part of the company’s annual software maintenance fee, whereby customers would receive bug fixes and additional functionality that had been developed for the product.

However, in a prepared speech for the company’s second-quarter filing, SAP CEO Christian Klein revealed changes in how the company would deliver innovation going forward. Essentially, new innovations like generative AI and sustainability now appear to be restricted to those customers who run SAP Rise, the company’s cloud version of S/4Hana.

“SAP’s newest innovations and capabilities will only be delivered in SAP public cloud and SAP private cloud using Rise with SAP as the enabler. This is how we will deliver these innovations with speed, agility, quality and efficiency,” said Klein.

The company’s new UK and Ireland head, Ryan Poggi, spoke to Connect 2023 delegates about the “elephant in the room”, concerning SAP’s cloud-first innovation strategy. In effect, SAP needs to ensure that its customers who are not on Rise are not being left behind.

Speaking to Computer Weekly during the Connect 2023 conference, Paul Cooper, chair of UKISUG, discussed viewing SAP’s change in strategy through an investor’s lens. He said it shows SAP’s intentions to move its customers to recurring software subscription licensing, a model pioneered by rivals like Salesfoce.

However, Cooper said this view had to be contrasted against the power of SAP’s customers, who are passionate about SAP. At the user group event, customers were networking and collaborating and sharing their experiences of SAP deployment. “Perhaps SAP needs to bring an investor to see this,” he added.

Less predictability, less innovation

According to the user group, SAP is losing the trust of its customers.

Conor Riordan, vice-chair of UKISUG, said: “For a lot of customers, trust is about trying to navigate their own internal business plans over the next two, three, four years, knowing they have the predictability of SAP.”

However, SAP’s new Rise strategy appears to leave customers with less predictability, in terms of whether they will obtain innovation as part of their annual software maintenance fee. As an example he said: “You don’t know if you want to make an investment decision on sustainability.”

Of course, there are opportunities for third-party developers to build functionality that mirrors the innovations that are only available to Rise customers, but this adds complexity and leads to uncertainty. 

SAP’s cloud-first innovation strategy also raises the question of exactly what customers receive when they fork out 22% of the original contract value for SAP software maintenance. This is something third-party software maintenance companies like Rimini Street have been quick to capitalise on.

According to Scott Hays, senior director for portfolio marketing at Rimini Street, SAP offers two main cloud products: Business Technology Platform, a hosted platform that enables its customers to customise their S/4Hana ERP deployments; and Rise, which appears to be positioned as multi-tenanted version of S/4Hana software as a service (SaaS) targeting smaller organisations that do not require customisation.

Customers that do not want to buy into the Rise option still need to pay an annual software maintenance fee. “You’re paying 22% on maintenance, and it’s not just break-fix; it’s actually innovation. You’re paying for a year’s worth of innovation,” said Hays.

Many of SAP’s larger customers run the software on-premise or in a hosted public cloud environment. For instance, during the Connect 2023 conference, pharmaceutical giant AstraZeneca discussed its long-term relationship with SAP and its Axial strategy, which involves consolidating several SAP systems onto S/4Hana.

Russell Smith, vice-president of ERP transformation technology at AstraZeneca, said: “We are not a Rise customer. For regulated industries, SAP is not ready for us yet.”

Luiz Mariotto, group vice-president of SAP product management at Rimini Street, said: “More than 90% of our clients are still running on-premise SAP. Half of them are running on ECC [Enterprise Core Components], which SAP will continue to support until 2027, or possibly 2030. The other half are running S/4Hana.” These, he said, are SAP’s loyal customers which have adopted the latest SAP ERP system. “They trusted SAP and made investments to move to S/4Hana.”

Given that only SAP customers on Rise will have the ability to get its latest value-added features such as generative AI and sustainability, organisations running S/4Hana on-premise or in a non-SAP public cloud will miss out.

Mariotto pointed out that the hyperscalers have all partnered with SAP, offering large enterprises a way to run their own instance of S/4Hana on public cloud infrastructure. This, he said, is the route many of SAP’s largest customers have taken. “This has been what many big SAP customers have been doing over the past five years. They invested a lot in customising the S4/Hana system.”

But running S/4Hana on a non-SAP public cloud means customers will not be able to buy the innovations SAP is offering to Rise customers. According to Mariotti, those businesses that bought into S/4Hana and deployed either on-premise or in a hyperscaler’s public cloud were reassured they would get the support they needed. But SAP’s latest move means they will not be getting the innovation they have previously been accustomed to.

Going back to the original premise that SAP’s product strategy appears to be focused on delivering shareholder value at the expense of customers, UKISUG’s Cooper noted that the flexibility of a SaaS model like Rise is that it allows for scaling down as well as up. “If SAP has made you a better business and more agile, you may need less people, or the business may divest,” he said.

Cooper said SAP needs to offer flexibility as well as a software licensing model that meets the evolving needs of its customers while it tries to continue to hit the quarterly targets that investors are expecting. “Clearly, there’s always going to be tension,” he added.


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