SAP’s Cloud-First Strategy and What it Means for You

SAP’s Cloud-First Strategy and What it Means for You

There has been a definitive shift in the strategic direction for SAP. Christian Klein has stated that some future SAP innovations would only be available in the cloud, under the Rise with SAP or Grow with SAP programs.

Why is this significant?

SAP has always committed to providing ongoing innovations for their customers who are on their flagship SAP S/4HANA systems, with on-premise or in the cloud. As recently as 2020, SAP extended support for the S/4HANA platform until 2040, with emphasis on a commitment to all its customers, not just those in the cloud. Alongside this approach, SAP has been pushing existing ECC6 customers to upgrade their systems to SAP S/4HANA.

Until January 2021, this would have been on an on-premise style perpetual licensing model, with an optional hyperscaler. Only with the advent of Rise in 2021 have subscription platform-as-a-service offerings been available as part of an upgrade path from ECC6. Even now, there is no upgrade path from an on-premise ECC6 system to a public cloud SAP SaaS S/4HANA system.

Let’s double-click on that point a little. Between 2015 and 2021, all customers who wanted to upgrade their ECC6 system to an SAP S/4HANA platform would have done so using the traditional licensing methods. All these customers, having just completed a costly and sometimes painful upgrade, are now faced with a choice: implement a new project to migrate to the Rise platform, or miss out on new innovations.

Another sting in the tail

And there is another sting in the tail. In parallel, SAP has announced a 5% increase in support fees, effective 2024… for on-premise customers only.

Analysts are pointing to these developments as proof that SAP are following an extremely aggressive “cloud-first” strategy. Understandably, this has many of the SAP user groups around the world, a little hot under the collar. The German speaking SAP user group, DSAG, have responded immediately. Their chairman, Jens Hungershausen, commented in a statement:

“Those who have relied on S/4HANA on-premise so far will be left behind by SAP’s new strategy. From DSAG’s perspective, this is a 180-degree turnaround from previous statements. SAP had previously claimed it did not want to limit enhancements to cloud-based offerings. The statement is a major blow. It amounts to a paradigm shift.”

The UK and Ireland SAP User Group (UKISUG) were just as forthright in their response, deriding the fact that cloud customers gain automatic access to services such as BTP, whereas on-premise customers have to pay additionally, meaning a double bite maintenance costs for on-premise customers for the same innovations.

So, did Christian Klein and SAP underestimate the backlash it received from its key user groups? This can’t be said with any clarity, as the SAP cloud-first strategy announced in July has also come shortly after a statement from DSAG imploring SAP not to forget its on-premise customer base, which makes up around 90% of DSAG organisations. In April 2023, the DSAG statement released by board member Sebastian Westphal, read:

“With investments already made in S/4HANA transformations, which quickly resulted in single, double, or even triple-digit million budgets, the anchor release 2023 must above all not mean that innovations and enhancements will only take place in the public cloud.”

And yet that is exactly what has happened. SAP appear to be pinning all their hopes on a mass move to the cloud in the industry, but many analysts including Gartner, think that this is a false hope. Some point to large scale manufacturing industries and suggest that many of these clients will never move to the cloud due to data protection reasons.

Cloud developments or customisations?

Most organisations who have invested heavily in on-premise applications in SAP, have customised these applications to suit their business processes.

This always was the standard approach for ERP implementations – stick to standard where possible but develop where localisations are required. Until now.

With the advent of cloud development tools and suites such as SAP Business Technology Platform (BTP), SAP has centralised the repository for such customisations. This is excellent news for many customers new to the ERP landscape and starting out on their Rise with SAP or Grow with SAP journeys, allowing them easy access to thousands of standardised services in the cloud, thus allowing them to keep their core application clean. However, this is not such good news for on-premise customers who already have customised their existing applications.

SAP clients are now faced with the unpalatable prospect of paying additional annual subscriptions to pay for cloud services which they had already built independently (and free of additional licensing) in their on-premise environments.

The growth of the public cloud

If you attend an SAP conference or listen to an earnings call or official statement out of SAP headquarters in Walldorf, the main message coming through loud and clear is the promotion of the public cloud for S/4HANA. This message is so pervasive that many SAP consultants believe that the public cloud is the only offering for Rise with SAP.

However, the private cloud edition of S/4HANA is an option delivered by Rise with SAP (not so Grow with SAP, which only offers the SaaS public cloud), and the private tenant nature of its services allows customers the flexibility that they previously enjoyed with on-premise solutions (albeit with the caveat that SAP recommends, not mandates, that all customisations are carried out in a cloud application such as BTP). The concern now though, is that SAP is thrusting so much attention and investment dollars into the public cloud offering and all its associated services in BTP, that even private cloud customers will be left behind. The deployment of innovations on to the public cloud as a first step towards extending to on-premise and private cloud customers would be an acceptable one, but SAP has made it clear that the second step is not a natural conclusion to the first. In fact, many SAP innovations are already deployed in, or planned for deployment in the public cloud offering only. For example, solution orders in SD, S/4HANA integration with Microsoft Teams, and OpenAI are offered only in the public cloud.

A further concern with the growing dominance of the public cloud in SAP’s strategy is the path for transport releases through the environments. The traditional on-premise architecture of at least three clients (development, quality and production) has been a well-established principle for decades now and is a central component to good governance in regulated industries. This architecture is not compatible with cloud architecture, including BTP, which relies on a two-tier structure. This presents a challenge for private cloud consumers, who are encouraged to use BTP as their development tool.

Where now for SAP and its customers?

Customers of SAP, it is clear, are uneasy. SAP forged ahead with S/4HANA back in 2015 and have since offered some market leading tools to upgrade from ECC6. It is their stated goal to continue to help their customers upgrade through, what they term as, a business transformation as a service (BTAS). However, all the while an upgrade from ECC6 to public cloud remains an elusive offering, customers will be more and more inclined to sit tight. Why make the multi-million dollar investment to upgrade to a private cloud system which does not, on its own, offer innovations? This may be a simplified view of the situation, but the innovation restriction announcement from SAP will have done nothing to turbo charge the upgrade market.

For SAP, the path forward is clear. It has laid out its stall in the cloud market and is heavily investing in its Rise with SAP and Grow with SAP offerings. Sadly, it seems that the on-premise customers who built the success of SAP as a company, are now of declining importance. As Christian Klein himself said, “BTP is one of the biggest growth assets we have in the years to come.”
Challenges exist before the road to the cloud for SAP becomes smoother. They will need to address the rumblings of discontent amongst their on-premise customer base, as well as offering a clearer definition of the private cloud offering, particularly regarding extensibility/integration tool suites such as BTP. Are SAP up to the challenge? They have faced challenges in the past and retained their market leader placing but given that the likes of Oracle and Infor are snapping at their heels, they may need to dial back on the use of the stick for their on-premise base and rely a little more on the carrot.

Author: Jon Simmonds, IT Director, Architecture