Migration to S/4 HANA is significant undertaking that involves migrating not only to a new ERP suite but also to a new database which will require data cleansing. Successful migrations require careful advance planning and consideration of the appropriate migration strategy. It can take months to years to complete the migration.
As a result, many SAP customers were already at various stages of evaluating, planning for or implementing S/4 HANA prior to the global business disruption caused by COVID-19. According to a survey conducted by Americas’ SAP Users’ Group (ASUG) at the beginning of this year, all responding organizations have either already started or are planning to start future SAP S/4HANA implementation projects.
On February 4, 2020, SAP extended the deadline until the end of 2027, with an option for customers to extend maintenance through 2030 at a premium of two percentage points on their existing maintenance base. The extension provides much needed breathing room for SAP customers and, together with COVID-19, may cause companies that are not far along in their implementation efforts to defer or slow down migration plans in an effort to conserve cash or attend to other priorities.
While each customer will need to assess the best course of action based on its particular circumstances, it would be wise to take into account the following considerations:
- Resiliency: COVID-19 highlights the need to reduce reliance on human and other resources that are susceptible to unavailability or disruption during pandemics, natural disasters and the like. Migration to S/4 HANA provides an opportunity for SAP customers to reduce the level of customization and complexity in their current ERP solution, thus reducing the need for company-specific resources to maintain and support the application. For customers with on-premises delivery models for their legacy SAP ERP software, migrating to S/4 HANA also provides an opportunity to move ERP into the cloud, either by subscribing to S/4 HANA Cloud1 or hosting it with a leading cloud platform provider (e.g., AWS, Azure, Google). Cloud platforms of the leading providers are generally more automated and robust, and less human resource-dependent, than traditional on-premises solutions, thus providing a higher level of resiliency during a crisis.
- Digital Capabilities: The focus over the past decade on enhancing digital capabilities—particularly automation, data analytics, machine learning and artificial intelligence—will likely accelerate in a post-COVID-19 world. The importance of up-to-the minute enterprise data and an enhanced ability to mine and analyze it becomes even more important in the face of a major disruptor. S/4 HANA offers machine learning and predictive analysis to enable better performance and a simplified user experience. In addition, HANA is an “in-memory” platform with data stored in RAM at all times. As noted by Support Revolution, “analysing very large amounts of data quickly, for example scanning billions of records in seconds or less is easily possible within a SAP HANA database.”
- Resource Scarcity: Polling over 400 SAP consultants and end users, UK consultancy firm, Resulting IT, concluded that there will be a significant shortage of experienced SAP consultants to support S/4 HANA migrations. Stuart Browne, a Managing Director of Resulting IT, referred to the situation as an “apocalypse,” stating: “We already knew that S/4 Hana would create a spike in demand for SAP skills—but what this research shows is just how significant that impact is going to be. The hole that two generations of outsourcing have left in local labour pools, combined with a retiring workforce, overlaid with a gold rush to S/4 Hana means that SAP skills are close to a breaking point.” The shortage of qualified SAP resources may become even more acute—and thus significantly drive up implementation costs—as the 2027 deadline approaches. The shortage may be alleviated somewhat in the short term as some businesses push the pause button on their S/4 HANA migrations due to COVID-19 and the extended deadline from SAP. If so, this will present an opportunity for customers to take advantage of an easing in demand to aggressively move forward with implementations.
- Financial Considerations: The capital investment in migrating to S/4 HANA is significant. This cost is mitigated to some extent, however, by the following: (1) adopting a “greenfield” implementation that reduces the level of customization and complexity of the ERP solution should reduce ongoing applications maintenance and support costs; (2) deploying a cloud-based solution for S/4 HANA has the potential to reduce operating expenses and convert fixed costs of on-premises solutions to variable cloud pricing based on actual resource utilization; (3) the advanced digital capabilities of S/4 HANA may enable companies to achieve greater efficiencies and monetize their data; (4) SAP offers credits for converting existing investments in legacy licenses to S/4 HANA; and (5) converting to S/4 HANA removes the future risk of unanticipated costs and liability associated with “indirect access” to SAP ERP software, as named user licenses are not required for S/4 HANA.
From a commercial and contracting standpoint, S/4 HANA migrations involve 3 main components:
- Licensing: Customers will need to license the desired S/4 HANA suite of products from SAP and/or enter into subscriptions for S/4 HANA Cloud from SAP. As noted above, SAP offers conversion credits that will provide some level of protection of a customer’s investment in legacy SAP software. With guidance from experienced advisors, customers should become familiar with SAP’s conversion policies and carefully plan how to maximize negotiating leverage to secure favorable conversion credits and discounts from SAP.
- Systems Integration: Customers will need to select and contract with a systems integrator with substantial experience in S/4 HANA implementations. To achieve the most favorable outcome from a pricing, capabilities and accountability standpoint, customers should run a competitive procurement process that includes a number of the leading SAP systems integrators guided by experienced advisors. Particular attention should be paid to the availability and qualifications of supplier personnel assigned to the project, with commitments from the supplier to retain resources on the project through completion of their responsibilities.
- Hosting: Except to the extent packaged as part of a subscription to S/4 HANA Cloud or in the event a customer chooses to host S/4 HANA internally, customers will need to have in place an agreement with a third party service provider for the hosting of S/4 HANA. As customers increasingly move applications into the cloud, we expect that many will chose to enter into cloud hosting agreements with SAP or with leading cloud providers.
SAP’s extension of mainstream maintenance on Business Suite 7 through 2027 is welcome relief to SAP customers as they grapple with the impact of COVID-19 on their business. Among other things, it provides customers with additional “think time” to develop a comprehensive strategy for licensing and implementing S/4 HANA that properly addresses technical, commercial and change management considerations. Given the long lead time to implement S/4 HANA and SAP resource scarcity concerns, customers should consider moving forward aggressively with S/4 HANA migration planning and implementation as they emerge from the current crisis.
For more information, please reach out to your regular Pillsbury contact or the authors of this client alert.
Pillsbury’s experienced multidisciplinary COVID-19 Task Force is closely monitoring the global threat of COVID-19 and providing real-time advice across industry sectors, drawing on the firm’s capabilities in crisis management, employment law, insurance recovery, real estate, supply chain management, cybersecurity, corporate and contracts law and other areas to provide critical guidance to clients in an urgent and quickly evolving situation. For more thought leadership on this rapidly developing topic, please visit our COVID-19 (Coronavirus) Resource Center.
1 The subscription version of S/4 HANA Cloud hosted by SAP has a more limited feature set, and a more limited number of settings, than the licensed version of S/4 HANA.