Value Driven with IT

SAP TCO Study:SAP’s Partner Managed Cloud (PMC)

REALTECH Consulting GmbH

Matthias Schmitt

13.02.2015

Executive Summary

PMC Savings explained in detail

Evaluation parameters, approach & assumptions

Content

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Overview: SAP’s Partner Managed Cloud

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Subscription delivery of traditional SAP solutions

SAP’s Partner Managed Cloud (PMC) is a subscription delivery of traditional SAP solutions through a partner’s private hosted cloud, in the form of packaged and managed services.

• Strategic: Increased flexibility and agility inresponsiveness to business changes and changing requirements

• Financial: Faster time to value and an overall 30% lower TCO over 5 years, plus conversion of CAPEX into OPEX that delivers an optimized cash flow

• Operational: Better utilization of information systems with increased focus on high value IT initiatives, instead of lower value system maintenance

The customer enjoys a fully outsourced solution with the following key benefits:

SAP provides:

Term license for SAP solutions to provide a solution as a services offering for customers

SAP and partner align on customer(s) solution and territory

Partner provides:

Packaged solution as a service with migration, implementation and support

T&Cs and pricing for the offering with a Sales team to position

Subscription licensing based on the term license (OpEx)

Developed IP and services that can be reused or tailored for an industry or solution

Summary of TCO Savings & Impact Areas

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Partner Managed Cloud enables savings of 30% over a 5-year TCO lifecycle

Primary drivers for the TCO reduction are the combined result of key SAP’s Partner Managed Cloud (PMC) components:

Economies of scale from Cloud-based infrastructure

• Scalability – increase/decrease system usage on demand without wasted or underutilized systems for backup, dev, and QA

• Flexibility –business process changes can quickly be reflected in IT infrastructure

• Speed – Fast deployment and provisioning speeds time to value and lowers wait time, improving productivity

Lower costs from application management services

• Pooled Resources – Expertise is spread across multiple customers, thereby making it cheaper on a per customer basis than if customers staffed dedicated SAP resources

• Automation / Standardization – Combines automated processes for provisioning, management and monitoring with virtualization across customers, along with standardized packages for implementation, upgrades, and patches

Hardware/SoftwareInvestment

Implementation

Hardware/SoftwareOngoing Cost

Operations

Continuous Improvement Projects

Upgrade Projects

SAP TCO Stack elements from bottom to topin chronological order of the TCO lifecycle

12%

10%

11%

32%

18%

17%

7%

20%

22%

11%

11%

30%

PMC Savings

On-Premise PMC

Based on REALTECH’s TCO benchmarking data for over 4,200 SAP customer deployments, see savings detail section and methodology appendix for additional details

Timing of PMC Financial Impacts

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Cost Impact Timing & Cash Flow Optimization with Partner Managed Cloud

The 30% savings in TCO accumulates over the course of 5 years, as shown in the chart on the right.

• Since PMC extends the benefit of infrastructure hosting to software licenses as well, the upfront capital costs are nearly eliminated

• When compared to traditional on-premise deployment options, PMC cost savings are mostly front-loaded, with 51% of the savings realized in the first year, and the remaining savings realized over the remaining years

On top of the overall 30% TCO reduction, more even distribution of payments with PMC helps to optimize overall cash flow

• On-premise deployments require more up-front cash outlay (31% of total) while PMC has a more evenly distributed cash flow impact of (approximately 20% per year)

• The impact from PMC on cash flow optimization is therefore greater than on-premise, since the large initial outlays associated with on-premise deployments are less “discounted” from a time-value of money perspective, and are therefore more expensive

Based on REALTECH’s TCO benchmarking data for over 4,200 SAP customer deployments, see savings detail section and methodology appendix for additional details

49%60%

66% 68% 70%

0%

20%

40%

60%

80%

100%

Year 1 Year 2 Year 3 Year 4 Year 5

PMC Expenses as a % of OnPremise (cumulated)

Year 1 Year 2 Year 3 Year 4 Year 5

OnPremise PMC

Comparative Distribution of Cash Flows Over Time

Executive Summary

PMC Savings explained in detail

Evaluation parameters, approach & assumptions

Content

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High Level Overview of Key Benefit Areas

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30% Cost Reduction along with optimization of Cash Flow

SAP TCO modelPMC triggered

savings

Level 1 Weight*

Hardware/Software Investment 12% 100%

Implementation 10% 32%

Hardware/Software Ongoing Cost 11% -79%

Operations 32% 31%

Continuous Improvement Projects 18% 37%

Upgrade Projects 17% 39%

Consolidated (Overall savings) 30%

* Weight = Share of cost for operation On-Premise

The PMC TCO impacts are greatest in the following areas:

• Upfront hardware & software investment is almost completely eliminated, going from 12% of TCO down to 0%. PMC extends OpEx subscription for hardware –inherent in outsourced infrastructure hosting – by adding in OpEx subscription pricing for SAP software as well.

• In contrast, ongoing cost for hardware and software (where the license payments have been moved to as operation cost) increases from an 11% to a 20% share. This is below 100% increase (79% cost increase) due to better allocation and provisioning of hardware and licenses.

• Implementation as well as later continuous improvement projects and upgrades benefit from the cloud operation model with savings in the range of 37-39%.

• In both private and public, the cloud operation model provides flexibility and speed in resource provisioning which is needed to enable application implementation or change processes.

Whether it’s the initial technical implementation, a test system needed to check out an application change, fast replication of test data, or additional machines needed during an upgrade process, in all these cases, the rapid deployment of resources speeds up project execution, enables early testing, and saves costs in FTE time waiting for machinery to be available.

• Savings in Operations (especially application management and support) are cut by 31%. Not only does the cloud computing model provide resources faster, it makes provisioning easier via automation of IT processes. Virtualization is a large part of this saving effect as well as centralized management resources and talent pooling. The key to success are automation and software defined landscape management.

Detailed Savings in SAP PMC Deployments

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Initial investments & implementation cost savings

SAP TCO model Level 1 SAP TCO Model Level 2 PMC savings PMC Effects Explained

Hardware/Software Investment

Technical Infrastructure 100%

No upfront investment needed for applications.System Software 100%

Application Software 100%

Implementation

Technical Setup & Process Design

90%Technical implementation of hardware and software is virtually eliminated as cloud deployment uses pre-defined infrastructure and pre-installed software.

Organizational Change 0% No effect, organizational change management is still needed.

Business Setup 0% No effect, business process design is also still needed.

Project Management 20%

More flexibility when additional resources are needed, and lower project overhead (technical implementation, etc.), can help projects stay on-time and on-budget and reduce effort needed. Also having one provider knowing the business of the customer and offering long term consulting rates which are better than the market.

Testing 35%Provisioning of test systems and test data is easier to accomplish with additional resources and on-demand infrastructure that scales up and down as needed.

Training 35%Training systems are cheaper to provide. Refreshes can be done easier, faster, more often in the cloud operating model.

Detailed Savings in SAP PMC Deployments

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Ongoing investments, operations, and upgrade projects costs savings

SAP TCO model Level 1 SAP TCO Model Level 2 PMC savings PMC Effects Explained

Hardware/Software Ongoing Cost

Technical Infrastructure 2%

Changes in the infrastructure are much easier to provide. Increases and decreases in infrastructure needs can be managed more effectively; over-provisioning of resources to meet max capacity vs. low utilization of overall capacity during times of normal demand is no longer an issue.Also IT providers have better purchase conditions than SME companies.

System Software -106% System software (database) and application software ongoing costs increase since there are continuous payments made in a subscription model. These increases in ongoing costs can largely offset the upfront investment savings but the positive cash flow implications are an added benefit.Application Software -95%

Operations

System Operations 55% The huge impact on operations is caused by the efficiency of the cloud computing operations model. Virtualized environments, automated processes, and centralized resources enable high level of costs savings. Talent pooling and SAP expertise availability enable more customers to be supported by less FTEs, resulting in a net savings across customer implementations.

Application Operations 24%

Continuous Improvement Projects

Continuous Business Improvement

34%When PMC is used, you just add another resource that you need. The simple expansion and scaling of SAP instances, in the case of higher demand due to an increasing number of users or new functions, is based on the ability to expand the capacity of cloud infrastructures. The provisioning and management of SAP training and test systems can be simplified and accelerated using cloning and recovery functions. Also the lead time for setting up new SAP systems decreases. According to the fact that the service are coming from one service provider there are lower consulting rates and the service provider knows the SAP landscape.

Continuous Technical Improvement

90%

Rollouts 40%

Upgrade ProjectsApplication Upgrade 36%

System Upgrade 55%

Executive Summary

PMC Savings explained in detail

Evaluation parameters, approach & assumptions

Content

10

Customer Profile For The TCO Comparison

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Key facts about the TCO comparison:

• Basis for the comparison is the a manufacturing company with about $1.5B in revenue, based in the United States with a production plant in Asia and sales offices round the world.

• The SAP software to be licensed includes core ERP, BW and CRM.

• The user community is about 1,500 named users, split into the different license categories as shown in the chart to the right.

• All systems are run in the usual 3-stage-model with development, quality assurance and production for each application (ERP, BW, CRM).

• The comparison focuses on the TCO for a traditional in-house operations model (on-premise) vs. the PMC approach:

• On-premise: Data center (Wintel or Unix, DB Oracle) on premise, IT and application management in-house

• PMC: Data center, IT and applications operations out of a managed private cloud, technology and application all SAP (including HANA)

• SLAs as described on the right apply for both scenarios, on-premise or PMC, in the same way

SLA for Production Systems

Incident & Problem Management

Application Support Office times USA

System Support 7*24h

Availability 99,70%

RTO (recovery time objective) 8h

RPO (recovery point objective) 1h

Dialog response time ERP 90% < 1 second

SAP Landscape

Named users (total) 1,500

SAP Licenses:Professional / limited prof. / ESS

800 / 200 / 500

Storage used 18 TB

SAPS 80,000

System Landscape

SAP Systems (all in 3 stage mode, DEV – QA – PROD)

ERP fully used (not HR), 1,000 users, 600 active users per day

BW Reporting via Bex and HTTP, 500 users, 100 active per day

CRM Globally used, 300 users, 200 active per day

A Manufacturing Company Choosing Between On-Premise and PMC with HANA

SAP TCO Model OverviewThe SAP TCO model covers the whole SAP lifecycle

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Important components of the SAP TCO model:

The basis of this study is the SAP TCO model. This model covers the total cost of the entire lifecycle of SAP software. The study covers CAPEX (investment cost) as well as OPEX (operational cost) elements.

Hardware/Software investment covers all costs to set up a technical environment to run SAP on.

Implementation covers the initial application customization and setup.

Hardware/Software ongoing cost covers all HW/SW related cost, which occur continuously over time. In the PMC model this is the continuous payments for licenses In the case of on-premise, the maintenance payments for HW and SW.

Operations covers the usual day-to-day work to keep things running. It includes job management, system surveillance, etc.

Continuous Improvement Projects cover all kind of changes, triggered by changing needs of users or the business.

Upgrade Projects cover all SAP triggered changes by new software releases but also similar activities by database vendors, OS vendors, etc.

This study does not include end user operations, WAN or workplace-PC related cost.

The study is based on an installation lifecycle calculation of 5 years.

The model is detailed hierarchically by a total of 3 levels (on the right only levels 1 and 2 are shown), each enabling a more detailed view on the subject.

Methodology & AssumptionsScope and benchmark base

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WHAT’S IN – WHAT’S OUT

• The SAP TCO model includes all elements necessary to run SAP in the enterprise but excludes end user equipment and WAN network elements to reach them.

• The study also excludes initial business process (re)design efforts when implementing SAP for the first time. Those efforts are largely driven by the status and demand of an enterprise but not by the hardware, software or infrastructure used. However the cost for actually making the setup of system and applications is covered.

• Using cloud or outsourcing will effect the management structure. New roles for governance and a demand management are needed. On the other hand the need for management of internal employees and all the HR administration will decrease. So REALTECH considers this as cost neutral.

• There is an additional saving’s potential triggered by HANA when migrating the BW functionality back into ERP. In order to provide a fair comparison, the study considers BW to be implemented and used for both scenarios.

• SAP maintenance is assumed as the standard 22% for SAP Enterprise Support.

• The comparison works for SAP landscapes which are around the size of the profile on slide 11 (up to 2 times more users or one third of the users), but not for SAP landscapes which are much bigger. SAPS or storage can grow or shrink by even a factor of 3.5.

SAVINGS AS PERCENTAGES

• REALTECH shows savings as precise percentages (e.g. 22% savings on implementing SAP) rather than as a range (15%-30%).

• The REALTECH TCO model enables calculation of the typical savings for the specific defined profile, which is diluted by showing ranges. Of course, a new SAP customer might end up with slightly different percentages, since the real world implementation will not exactly match the prototyped profile.

THE COMPARISON BASE

• PMC is compared against the typical scenario of systems in use today: various Linux, Windows-based and Unix implementations. Most of them are already using virtualization like AIX or VMware.

• Data for the comparison base comes from the REALTECH Benchmarkbase. The Benchmarkbase holds real life usage, quality and cost data of more than 4,200 SAP environments. It includes a broad variety of industries and geographies. It generally reflects the current dissemination of SAP’s products in use.

• The comparison group does not include any on-premise mainframe-based installations. From a CAPEX point of view this would lead to tremendous savings when switching from mainframe to cloud. This is a reasonable step but rather rare. Therefore, the focus of this study is on mainstream effects, not on special or uncommon scenarios.

Overview about Customers in the REALTECH Benchmark BaseNearly all SAP Products, Industries and Sizes

59%17%

6%

5%

3%

3% 3%3% 1% 1%

SAP Products - Share

ERP

BI

HR (alone)

IS

PI (XI)

CRM

Portal

SCM / APO

SRM

Others

48%

18%

15%

9%

4%6%

Industries - Share

Manufacturing

Services / IT

Finance

Utilities

Retail

Others

0%

5%

10%

15%

20%

25%

< 0.5 < 1 < 2 < 5 < 10 < 25 < 50 > 50

Revenue by Reference Companies

Revenue in billion €

14

REALTECH‘s database has got more than 4,200 systems. Here is a breakdown:

SAP HANACloud

SAP MobileSAP Solution Manager

Technologie

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