Customers Call for Cloud and On-Premise Equality

Concern Raised About How Much Trust SAP Will Retain With Their User Community

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Key Takeaways

⇨ Monitor future SAP ERP product announcements closely

⇨ Assess and reevaluate existing ERP plans

⇨ Plan for a cloud-based future

During SAP’s 2023 Q2 earnings call, CEO Christian Klein made several statements about how innovations in generative AI and sustainability to be exclusively available in the cloud. Klein also indicated that these new offerings would only be available to RISE with SAP and GROW with SAP customers. While no specific information was provided in the earnings call, it was indicated that these would be available in a “premium edition” costing 30% more than the base offerings.

Customer Reactions

Although SAP is still to provide details on the new generative AI and sustainability-focused offerings, customer groups have started to react. Some have expressed concerns that Klein’s statements effectively cut-off on-premise customers from innovation, while others state that these statements “shatter the relationship of trust” between SAP and its customers.

The basis of this concern is that many regard Klein’s statements as a departure from SAP’s prior position. In the past, SAP has announced that it does not plan to limit enhancements to cloud-based solutions. However, Klein’s statements indicate a shift in SAP’s stance, which raises questions about future enhancements in general. While these specific announcements may only be about generative AI and sustainability functionality, some consider this as the first step down the path of cloud-only enhancements.

Some customers who have made significant investments in transitioning to SAP S/4HANA may feel they are being left behind, while others may feel that the costs incurred with deploying SAP S/4HANA on-premise or in an infrastructure-as-a-service environment have been wasted. These customers are calling on SAP to provide detailed guidance on which enhancements can be expected in on-premise environments in the future.

Before the release of SAP S/4HANA, there were approximately 45,000 customers running enterprise-grade ERP systems from SAP. Since SAP S/4HANA was released, between 21,000 and 23,000 organizations have licensed the product, with around 50% being new to enterprise ERP at SAP. This means that while SAP’s overall enterprise ERP customer base has grown to 56 or 57 thousand, only about 12,000 existing customers have moved to SAP S/4HANA. As a result, between 30 and 35 thousand ERP customers have not yet licensed SAP S/4HANA.

Of those who have deployed SAP S/4HANA, only around a quarter are running SAP S/4HANA Cloud. These are the only customers who can potentially leverage SAP’s planned generative AI or sustainability enhancements without having to complete a transition process. But this represents only 6,000 customers or about 10% of the overall enterprise ERP customer base. This means a significant number of customers will need to move from their existing environments to SAP S/4HANA Cloud if they are to access these capabilities.

While transitioning to RISE with SAP S/4HANA Cloud may be a choice for some organizations, for others, this is not a viable alternative. Some have already made significant financial investments and do not have the capacity for other changes. Others may be restricted from moving because of the industry they are in. And while SAP S/4HANA Cloud, private edition is the same software as an on-premise deployment, there are some modules that are not yet supported in cloud environments. Until that changes, customers using those modules would be unable to move to the cloud.

Supporting Generative AI

While many of the concerns raised are valid, the statement has been made that, “no technological reasons can be found for the decision to put new innovations in the cloud.” This is somewhat presumptive. Without any concrete information about the premium editions of RISE with SAP and GROW with SAP and their capabilities, it is premature to draw any conclusions. But there are indications that this approach may be the only way in which SAP can provide access to generative AI capabilities within SAP S/4HANA Cloud.

Existing generative AI solutions, such as those offered by OpenAI, Google, or Microsoft, are only achievable using cloud environments. Large Language Models (LLM) are based on massive data sets and require a huge amount of processing power to train and use. Both the data storage and the processing capacity needed are unavailable in on-premise environments, and it is unlikely that organizations would invest in hardware that can run their entire enterprise ERP environment many times over just to leverage generative AI capabilities within that solution.

Also, while SAP has maintained that they do not plan to create their own LLM but use their experience with business processes to provide additional insight within their solutions, they will still require large cloud-based models. Connecting these models to data sets in the cloud, particularly those in an SAP-managed environment like SAP S/4HANA Cloud, will be complex for GDPR and compliance reasons, but possible. Connecting these models to on-premise environments over the internet is not feasible, especially if these environments are highly customized.

Moreover, AI is not new to SAP’s offerings. SAP has been using AI such as data analysis capabilities using rule-based systems, machine learning and deep learning, and now includes contextual AI built into many SAP solutions today. Based on SAP’s announcements at Sapphire, none of these innovations are going away and more will be added. The innovations that Klein mentioned are specifically related to generative AI, which requires a very different computing model.

What makes this scenario more complex is how Klein has positioned this message. While it has been clear for years that SAP wants customers to move to the cloud, statements that specifically exclude on-premise customers will likely disenfranchise large portions of the customer base. However, this may just be a more public statement about what SAP is already doing on the licensing front. Conversations with partners and customers suggest that SAP has significantly raised the cost of purchasing SAP S/4HANA perpetual licenses over the past year as a way of forcing customers to move to RISE with SAP.

What Does This Mean for SAPinsiders?

In SAPinsider’s 2023 Deployment Approaches to SAP S/4HANA report, more than half the respondents indicated their organizations do not plan on transitioning to SAP S/4HANA before 2025, with a quarter indicating that the move may not come until or after 2027. There are multiple reasons for organizations not moving to SAP S/4HANA, the biggest being the complexity of the existing implementation, the duration of the project, and the value of SAP S/4HANA. These concerns may have been exacerbated by SAP’s recent announcements. However, considering everything happening, what should SAPinsiders do to prepare for the future?

  • Monitor future SAP ERP product announcements closely. At this point, there is no specific information available about what RISE with SAP premium edition is or might be. However, customers must pay attention to SAP’s future announcements about cloud ERP plans, as these could have a direct and immediate impact. SAPinsider will continue to cover these announcements and provide information about what they mean for SAP customers.
  • Assess and reevaluate existing ERP plans. Organizations that have already moved to SAP S/4HANA may have believed their future was already set. This may not be the case if they are looking to leverage generative AI on the data in their SAP ERP systems in the future, as a move to RISE with SAP will likely be required to make it possible. Others who are still running older SAP ERP systems will need to determine whether their existing plans are adequate or if moving to RISE with SAP is required. In either case, waiting to see what SAP is doing with future innovations and taking the time to reevaluate ERP plans will be extremely important.
  • Plan for a cloud-based future. Even though moving to a cloud ERP system may not be viable for some organizations, this appears to be the future for most ERP vendors. SAP has maintained that they will continue to support SAP S/4HANA until 2040 but acquiring a perpetual license has become increasingly difficult and expensive. The end goal of these actions is to move customers to the cloud. No matter the stage an organization is in today, the future will involve cloud ERP. Every SAP customer must be ready for this when it happens.

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