SAP approach of cloud-only innovation causes a stir

Innovations to be cloud only

Klein made it clear during an earnings call with investors in July that S/4HANA Cloud was the only way users can implement new capabilities for AI and sustainability, including generative AI and its green ledger, which SAP introduced at Sapphire in May. These will only be offered to customers through its Rise with SAP and Grow with SAP programs, designed to help customers migrate to the cloud.

The capabilities will not be available for customers that have SAP ECC or S/4HANA systems that are on premises or hosted and customized by cloud hyperscalers.

"Today, businesses are facing volatile macroeconomic environments and markets that favor flexibility," said Eric van Rossum, chief solutions and marketing officer for cloud ERP at SAP, in a statement. "To stay ahead, customers need to be in the cloud. That's the only way to deliver innovation with speed and agility."

Some customers have expressed unhappiness with the cloud innovation policy. The German-speaking SAP users' group, DSAG, issued a statement that implored SAP to commit to offering new innovations for legacy on-premises systems as well as cloud.

"From DSAG's point of view, this is a 180-degree turnaround from previous statements. SAP had previously claimed that improvements would not be limited to cloud-based offerings. The statement is a heavy blow. It amounts to a paradigm shift," according to the statement attributed to DSAG CEO Jens Hungershausen.

Self-inflicted wounds for SAP, but how serious?

The approach to offer AI and sustainability innovation only in S/4HANA cloud systems appears to be a self-inflicted wound, but there is likely more to the story, according to Joshua Greenbaum, principal at Enterprise Applications Consulting.

SAP's cloud innovation policy may not be as settled as company statements indicate now, and there are still ways that SAP customers can implement new AI and sustainability capabilities without necessarily moving to S/4HANA public cloud, he said.

For example, SAP Sustainability Control Tower can have any ERP system as an input.

"If you're an S/4HANA private cloud customer and you want to use Sustainability Control Tower, at a minimum you could spin up a separate S/4HANA public cloud instance of sustainability cockpit and use that with all your systems -- on premises, cloud -- regardless of whether they're branded SAP or not," Greenbaum said.

Still, he added, "that doesn't necessarily mitigate DSAG's legitimate annoyance at the idea that there was a continuous path to innovation from S/4HANA private cloud, and SAP will have to sort through how they want to deal with that."

The situation is somewhat ironic because SAP has long given customers a wide range of cloud deployment options, Greenbaum said.

"SAP gave a lot of choice because their legacy customers are very complex," he said. "But that bit back on them because offering that degree of choice gets confusing when the market uses simplistic terms that are not clearly defined at the outset."

It was also a mistake to talk about these moves on an earnings call to investors, as that community is only focused on cloud adoption numbers, not customer success, he said.

"Investors don't care at all about customer success. They're looking for license wins and raw numbers about deal size and deal quantity and don't care whether any of those deals are successful," Greenbaum said. "That's a huge gap in the whole concept of value, and it says a lot about why customers are being left in the lurch. That's how you get these reactions."

Innovations will come at a premium

It also remains to be seen if users that do adopt S/4HANA Cloud will be willing to pay a 30% premium for AI and sustainability capabilities.

SAP may be able to charge to premium for some operational areas where it doesn't have much competition, said Vinnie Mirchandani, analyst and founder of Deal Architect, an enterprise industry focused blog.

Most customers are savvy enough and know generative AI is going through a hype cycle. But there may be ML and other AI applications beyond [generative AI] that use unique industry-specific data that may justify a premium.

"It will depend on specific use cases whether the payback is truly compelling," Mirchandani said. "Most customers are savvy enough and know generative AI is going through a hype cycle. But there may be ML and other AI applications beyond [generative AI] that use unique industry-specific data that may justify a premium."

But others see this as an affront to SAP customers. Martin Biggs, vice president and managing director for EMEA and strategic markets at Spinnaker Support, called the cloud innovation policy an "outrageous" decision that flies in the face of the investments that SAP customers have already made in migrating to on-premises or hosted S/4HANA systems.

Spinnaker Support is based in Denver and provides third-party support and managed services for SAP, Oracle and Microsoft systems.

SAP customers that invested hugely in complex migrations to S/4HANA in on-premises or hosted environments in the last few years are essentially being told they need to do it all over again, Biggs said.

"Effectively, organizations have been pushed onto S/4HANA and now they've been told it is a dead environment, and they will need to go through another significant migration project involving significant levels of cost," he said.

Pressure tactics to motivate cloud migrations

The innovations approach is a way for SAP to pressure more customers to move to S/4HANA cloud, said Seth Ravin, CEO and president at Rimini Street, which offers managed services, including third-party support for SAP, Oracle and Salesforce systems, and is based in Las Vegas.

"They're trying to squeeze enough pressure, and it's the stick because they don't see enough people moving," Ravin said. "When your customer base gets so large, the tail starts to wag the dog. You can put out whatever release retirement date you want, but if they don't move, then you have to blink."

SAP has already moved the end-of-support cutoff date for legacy systems because customers aren't moving and don't have a compelling technical or business reason to do so, he said.

"Are they going to cut off support for 20,000 customers and walk away?" Ravin said. "I don't think so. This is a game of who blinks first, and they've tried to signal to the market that this is serious and they're firm."

*Correction: The original article incorrectly stated that SAP was increasing customer support and maintenance costs by 30%. Instead, as of Jan. 1, 2024, SAP plans to adjust maintenance fees for existing SAP Standard Support, SAP Enterprise Support and SAP Product Support for Large Enterprises contracts based on the customers’ respective Consumer Price Index.

Jim O'Donnell is a senior news writer who covers ERP and other enterprise applications for TechTarget Editorial.