Search This Blog


Wednesday, December 17, 2014

The SAP Money Pit: Plenty of Waste in Need of SaaS Efficiencies - Forbes

There’s a giant sucking sound emanating from most large enterprise IT departments. It’s called SAP. The devilishly complex ERP product cum application platform has a life of its own that resists all attempts at efficiency, simplification and IT budget cutting. SAP is the enterprise equivalent of an out-of-control defense contract with C-level business managers playing the part of U.S. Defense Secretary, endlessly shoveling money at overdue and over-budget projects. This characterization may seem harsh until you read the book SAP Nation by Vinnie Mirchandani, which catalogs the real and hidden costs of using SAP. Mirchandani, a former IT analyst and outsourcing executive is a long-time observer of SAP, its ecosystem and users who now runs his own consulting practice specializing in IT deal negotiation, RFPs and due diligence.
According to a comprehensive financial model and cost analysis that includes purchasing, configuring, operating and supporting SAP and its users — costs that a span internal IT staff, outsourcing and consulting firms, the hardware used to run SAP and associated apps and software and support licenses — Mirchandani estimates the total spent in what he calls the SAP Economy comes to $1 trillion since the end of the great recession, or about $200 billion per year. It’s a big number, particularly when you consider that the aggregate profits of the S&P 500 are about $250 billion (chart 9). Granted, the sum is spread across over a quarter million companies companies that Mirchandani calculates use one or more SAP product, but that still comes to almost $800,000 per year, two-thirds of which is spent on labor, not software or infrastructure, for the average SAP customer.
Of course, the expenses go towards automating a company’s most important business processes, but the book makes a compelling case that SAP’s customers aren’t getting their money’s worth because, like any large bureaucracy, which indeed is what SAP has become within most enterprises, much of this money is wasted. Mirchandani writes:
“What’s striking is SAP’s own charges to customers, while very high-margin, are only a tenth of the run rate. The rest is outsourcer/offshore firm fees, consultant travel expenses, customer staff, hosting/other infrastructure, MPLS/WAN charges, other software costs — many not very efficiently applied.”

Why not use SaaS?
SAP is so entrenched in critical, revenue-producing business processes and IT infrastructure that the product and ecosystem have so far been immune to the radical changes wrought by cloud infrastructure and software services that are upending many other IT systems and dramatically lowering IT capital and operating expenses. While other applications, including complex systems like CRM, HR and legal document analysis move to the cloud, SAP blithely rolls on sucking up a disproportionate amount of IT’s budget spent of pricey outsourcing and consulting contracts and immense, gold-plated on-premise systems. Indeed, SAP’s imperviousness to outside cloud influences is a key reason Mirchandani wrote the book:
“When you compare how nicely IT costs via software-as-a-service (SaaS) applications, cloud infrastructures and mobile broadband have dropped in the last few years, you have to ask why those in the SAP economy have not followed that trend. Likewise, when you see all the front-office technology opportunities — in product and customer-facing areas — you wonder how many are being crowded out by the SAP back office.”
One theory is that they account for most of its revenue SAP caters to its largest customers with the most complex needs and doesn’t believe they want or trust multi-tenant cloud delivery for mission critical services. As Mirchandani points out, SAP co-founder Hasso Plattner is on the record saying, “large companies do not want to share [computing space] with competitors, they want to be within a firewall. Ask any of the large SaaS [software as a service] suppliers – when they get a huge customer, they get a private system.” That may be true, but what about the other 259,000 SAP customers? There are SaaS ERP offerings like NetSuite and Infor that cater to SMEs, but so far adoption has been limited with NetSuite estimated to have about 20,000 customers.
SAP: The Microsoft Office of Backend Software
There are plenty of SaaS products that address specific enterprise software functions, however the big challenge for SAP’s SaaS challengers is that none match its breadth in covering the full range of business applications. Instead, each focuses on a particular niche, whether HR, CRM, IT service management, etc. Writes Mirchandani, “The recent wave of cloud challengers — Workday,, NetSuite, ServiceNow, Plex Systems, Kenandy, Kinaxis and others — are merely nibbling around the edges of SAP. Few have launched a full frontal assault.” Indeed, Mirchandani writes that “several SAP customers have called and pleaded with these cloud players to expand their functional footprint.”

One reason there isn’t a comprehensive, all-in-one cloud-based alternative to the full SAP suite is that the concept of vertically and tightly integrated software goes against the cloud ethos of lean, focused services extensible and integrable using published APIs that users can lash together to create software tailored for their specific needs. The cloud zeitgeist is about mashups, not suites.  Indeed, this is just the sort of software foundation that is building and there are already four major cloud ERP providers that work with the Salesforce1 platform.
Yet change in enterprise IT is never easy, particularly when it involves core application architecture and infrastructure, whether network routing and switching systems or enterprise application platforms like SAP. As Mirchandani puts it, “Surrounded by SaaS customers who are seeing painless and multiple release upgrades a year, SAP’s customers are frozen in place petrified by the cost and risk of upgrades in their settings.” The largest of these customers are probably stuck writing checks to SAP and its partners unless, like post-split HP, they redesign IT from scratch, taking a blank slate approach to the entire organization, service catalog and implementation details (at HP’s recent earnings call, CEO Meg Whitman said HP’s split provides “an opportunity to create an IT infrastructure for each company that isn’t based on our legacy IT system and isn’t based on a manufacturing system which for so many years it has been.”). 
For the thousands of smaller SAP users, doing a full cost analysis of their SAP-related spending will prove both enlightening and alarming. If Mirchandani’s model is remotely accurate, such a TCO assessment could provide enough shock value to overcome IT inertia and seriously investigate cloud-based alternatives for ERP and other key business processes. It’s time for more businesses to extend SaaS from the front to back office.

No comments:

Post a Comment

wibiya widget

Disqus for Surut Shah

Web Analytics