sap s/4hana: changing perceptions — from upgrade to

Authors:

Danielle Hernandez Philip Carter

May 2020

Sponsored by

IDC White Paper

IDC #EUR146188020

SAP S/4HANA: CHANGING PERCEPTIONS — FROM UPGRADE TO CRUCIAL BUSINESS ENABLER

SAP S/4HANA: Changing Perceptions — From Upgrade to Crucial Business Enabler Introduction: Understanding the S/4HANA Timeline

SAP's launch of the HANA product in 2011 was an inflection point in the company's history — signaling SAP's entry into the data management market segment with its in-memory database offering. More importantly, under the leadership of then CEO Bill McDermott, SAP subsequently rearchitected its ERP suite of products to run on the HANA in-memory database and developed its S/4HANA offering, which it then announced to market in 2015.

Around the same time, SAP issued a deadline for its customers to move to S/4HANA by 2025 — giving organizations a decade to start planning their respective migrations. The announcement stated that SAP would be terminating support for the previous version of its ERP offering (generally referred to as the Business Suite) on any other database (aside from HANA).

Many customers expressed concerns about the deadline, as this migration represents not only a technical upgrade but also significant changes to their broader IT environments at the database and infrastructure level. In response, SAP's new CEOs Christian Klein and Jennifer Morgan announced an extension of the deadline to 2027. The figure below charts the S/4HANA timeline from the launch in 2015 to the present, with key milestones on the journey.

This paper aims to shed some light on the business value that ERP modernization can deliver to digital executives and the broader organization. In it, we showcase the results of a global study on S/4HANA migrations that IDC has carried out in conjunction with Fujitsu, where we surveyed 700 digital and IT executives from organizations that are SAP customers, as well as a series of in-depth

IDC #EUR146188020 Page | 2

SAP S/4HANA: Changing Perceptions — From Upgrade to Crucial Business Enabler

interviews with organizations that have either actively deployed S/4HANA (or are planning to do so in the short term). The objective is to provide the key insights and best practices derived from this research to help organizations to:

Understand the importance of modernizing their core IT environments (and in particular the ERP system) to develop an agile backbone for digital business

Develop consensus among key stakeholders

Build a road map to help align the key stakeholders across the organization for ERP modernization

Setting the Context: Every Single Dollar Counts

When the first digital disruptors appeared on the horizon, most companies attempted to deal with the new kind of competition by creating isolated digital initiatives to test next-gen technologies such as AI, IoT, and blockchain. IDC refers to these siloed digital projects as islands of innovation.

In 2020 organizations will spend $1.5 trillion on digital transformation, but only 26% of these companies will deliver the ROI.

These islands of innovation were important during the era of experimentation, as organizations were trying to understand the potential business value that could be unleashed by digital technologies. But these projects never scaled as they were rolled out in total disconnection from the core IT. Therefore, most firms got trapped in a "PoC jail," as they were generating several proofs of concept that never got into the commercial stage.

The financial impact of the PoC jail is massive. IDC's research shows that in 2020 companies will spend $1.5 trillion on digital transformation globally, though only 26% of these will deliver the ROI associated with their investments. Today, after years of investing billions of dollars in digital projects, the difficult questions on the returns are being asked at the top level of organizations around the world. In fact, IDC's research shows that 92% of CEOs globally are under pressure to execute a successful digital transformation.

Source: IDC Survey on SAP S/4HANA Migration, sponsored by Fujitsu, February 2020

It is clear that the era of experimentation is over — during the new decade business leaders are focused on digital execution to finally deliver financial outcomes from digital investments. Every single dollar counts.

It is in this setting that the global ERP software leader, SAP, issued a deadline of 2027 by which its customers will need to have migrated to S/4HANA (its next-generation ERP) or run out of support.

For customers, this migration represents a massive investment, and many have questions about the potential ROI, particularly because many CIOs have got their fingers burnt with huge ERP

9 out of 10 CEOs are under

pressure to execute a successful digital transformation

IDC #EUR146188020 Page | 3


implementations and upgrades only to find themselves behind schedule, well over budget, and using only small portions of the ERP functionality. A customer of SAP we interviewed said that S/4HANA migration is very difficult to justify because it has a great impact on the margin. Other customers see the need to modernize their back-office applications and connect them to innovation initiatives. From their point of view "this is the only way to increase top- and bottom-line growth" in the digital economy.

Executing digital at scale requires a digital business platform — where the core IT is radically modernized into an intelligent core.

The Secret to Monetize Digital Investments: Core IT Modernization

The traditional enterprise IT environment confined to the four walls of one organization is a thing of the past — because digital business models require collaboration and co-creation with an ecosystem of customers, suppliers, and partners. This means that the technology architecture of the future is an integrated platform where data flows seamlessly across every single digital app, system, and enterprise application.

Therefore, executing digital at scale requires a new type of technology architecture: a digital business platform. In this model, the core IT becomes an "intelligent core" that is fed by data "pipelines" from internal and external sources to enable real-time interaction with the ecosystem.

Companies that have a digital business platform are 40% more likely to generate an ROI from digital investments.

The Business Technology Platform

IDC's research shows a correlation between deploying a modern technology architecture and delivering ROI from digital investments. In fact, companies that have deployed a digital business platform are 40% more likely to generate ROI from their digital investments.

IDC #EUR146188020 Page | 4


From Nirvana to Reality: The Journey Toward the Digital Business Platform

The digital business platform is the ultimate state of maturity for enterprise technology architectures. Most organizations, however, have legacy systems and technology debt, so they tend to go through a journey where they start by deploying isolated digital projects, or islands of innovation, in total disconnect from their outdated core IT — 34% of organizations in the world are at this stage.

34% of organizations globally are at the islands of innovation stage.

To get to some level of alignment, some organizations have integrated all the activity around digital innovation. In this model, companies create two separate technology environments — one focused on enterprise IT and the other on the external engagement. IDC refers to this as the "side-car model" and 51% of companies globally are at this stage.

35% of organizations globally have a side-car approach to their technology architecture strategy.

The side-car model generates an architectural disconnect, which leads to a divided operational model with conflicting objectives and metrics. The digital platform is an initiative driven by agile teams where DevOps is a common practice and the traditional IT teams are seen as an operational bottleneck. Becoming a digital business requires all of IT and the business to be focused on the future together. So, organizations must work their way toward the final stage: the digital business platform. But only 15% of firms globally have achieved that level of architectural maturity.

IDC #EUR146188020 Page | 5


Only 15% of organizations globally have a digital business platform.

What sets the digital business platform apart from the two previous stages is a modern core IT. IDC refers to this modern core IT as the intelligent core, which is seamlessly connected with all the digital initiatives rolled out at the edges of the technology architecture. This model requires an aggressive modernization of the infrastructure, middleware, and mission-critical applications, such as enterprise resource planning (ERP) software. These elements are infused with intelligence and shifted toward a hybrid-multicloud delivery model.

Developing an intelligent core is the difference between delivering an ROI from digital investments and being stuck in the PoC jail.

Developing an intelligent core is the difference between delivering an ROI from digital investments and being stuck in the PoC jail, thereby wasting millions of dollars in pilot projects that never scale. But building an intelligent core is a massive challenge for most CIOs. Due to the emphasis placed on the front office in the past 10 years, the core IT and the mission-critical applications it contains have been neglected. Nevertheless, this is changing, and our survey results show that over 60% of organizations indicate that core IT modernization is either a high or essential priority for their digital strategy.

IDC #EUR146188020 Page | 6


Over 60% of organizations indicate that core IT modernization is either a high or essential priority for their digital strategy.

Source: IDC EMEA, SAP S/4HANA Migration, Fujitsu, February 2020

iERP: The Cornerstone of the Intelligent Core

By 2027, 60% of organizations will modernize their core IT, leveraging cloud to drive a productivity increase of 25%.

ERP applications are a key element of the intelligent core, as they support the finance and operations processes, and therefore have a huge impact on the business productivity of an organization. Market dynamics, such as the deadline imposed by SAP, are accelerating the discussion around core IT modernization, despite the long history of failed and stalled ERP implementations.

According to IDC's research, the ERP industry is growing at a record pace. Most growth is happening because legacy on-prem ERP solutions are being replaced by more sophisticated cloud-based iERP applications.

IDC #EUR146188020 Page | 7


These market trends are pushing organizations to modernize not just ERP but all core IT. IDC predicts that by 2027, 60% of organizations will modernize their core IT, leveraging cloud to drive a productivity increase of 25%. As the market leader in this space, SAP is at the forefront of most ERP modernization efforts — and more specifically the migration to S/4HANA.

Note: 2018, share (%), revenue ($M), and growth (%)

Source: IDC, 2020

IDC #EUR146188020 Page | 8


End Goal: iERP

Intelligent enterprise resource planning software or iERP applications leverage machine learning (ML) and advanced analytics on curated data sets to simplify and automate complex business processes. iERP is the backbone of digital operations. The image below showcases the three dimensions of iERP.

Taking the biggest possible share of the opportunities that arise in the digital economy requires digital operations supported by iERP applications that can analyze vast amounts of real-time data to transform them into insights and actions. This has the potential to drastically improve the value delivered to clients, translating into significant improvements in profitability.

Financial Impact of ERP Modernization: Metal Products Distributor Case Study

This company is one of the largest distributors of steel and metal products globally with presence in 13 countries and more than 120,000 customers. Its role in the value chain is that of a middleman between its customers (construction companies) and their suppliers (manufacturers of metal products).

Problem

Six years ago, it realized that its competitive environment was changing as digital disruptors, such as Amazon, emerged on the horizon. These newcomers provided the option to buy similar products online for a lower price.

Solution

Instead of going to a price war, it decided to transform its business to a platform-enabled, ecosystem-centric, and data-driven revenue model.

IDC #EUR146188020 Page | 9


The Role of iERP

The biggest challenge for this business transformation is the volatility in the global commodities market, as it generates massive fluctuations in the price of its inventory. Its profitability depends almost entirely on the capacity to buy when the prices are low and sell when they are up. Let's see the role that the three dimensions of intelligent ERP had in this business model transformation.

In this case, a large proportion of top- and bottom-line growth is due to the adoption of iERP systems that deliver automatic recommendations across the commercial and logistics teams to buy and/or sell metal products. These recommendations must be informed by real-time data from the ecosystem, with a focus on the following elements:

Price fluctuation in the metal commodities market Pick in the demand Real-time stock quantities Price and product comparisons Order intervals per customer

Outcome

In the first quarter of 2019 the organization announced that the proportion of sales generated through digital channels increased to 27%. The organization expects that by 2022, more than 60% of its revenue will come from the services offered via its digital platform.

IDC #EUR146188020 Page | 10


Current ERP Status: Burning Platform

Only 18% of organizations have an all-encompassing ERP suite with embedded next-gen technologies.

The example of the metal distributor represents a digitally advanced organization, but this is not the case in most companies. As stated above, the focus for investment in the past 10 years has been customer-facing applications, and back-office systems like ERP have been neglected. In fact, only 24.8% of the organizations surveyed have an all-encompassing ERP suite with embedded next-gen technologies such as machine learning and Internet of Things (IoT). During the in-depth interviews on the S/4HANA migrations, many IT professionals said their ERP environment is a "burning platform."

Our research shows that SAP has overestimated the maturity of its customers when placing the deadline for S/4HANA migration. It seems this has been partly acknowledged by SAP's executives, as it extended the deadline to 2027 — but for customers, seven years is still a short time. Most IT teams are still focused on standardizing and consolidating multiple instances and versions of their SAP applications, so larger-scale transformations are not a priority. The platform owner of the SAP environment at a beer manufacturing firm told us that "at the moment the focus is patching and getting back to standard, and S/4HANA migration is very far out on the horizon."

Source: IDC Survey on SAP S/4HANA Migration, sponsored by Fujitsu, February 2020 (interim)

Only half of organizations are considering S/4HANA migration.

As shown in the chart above, 49.6% of survey respondents aren't even considering S/4HANA migration at this stage, and only 8.6% of respondents that are committed to migrating to S/4HANA are live with some of the software packages.

IDC #EUR146188020 Page | 11



The lack of success of ERP implementations over the past few years plays a big role in the overall market sentiment on S/4HANA migrations. Many IT teams are concerned about this project because ERP projects are "always over budget and over time," according to the enterprise architect of a global telco. Some of these ERP initiatives were abandoned mid-project or even ended in litigation. Due to these issues, CIOs are hesitant to make major changes to functioning, albeit woefully outdated, ERP systems.

The transition to iERP is a great opportunity for CIOs to increase their relevance across their organizations.

The reality is that irrespective of the software vendor that organizations choose as a partner, core IT modernization is critical to become a digital business. Furthermore, this transition is a great opportunity for CIOs to increase their relevance by delivering value to the entire C-suite of executives — what IDC calls the digital dream team.

Building the Intelligent Core: A Mission for the Digital Dream Team

The technology architecture has traditionally been a domain for the IT department exclusively. But, as organizations try to compete in the digital economy, technology is increasingly underpinning most business activities. Therefore, building the intelligent core is a mission for the entire C-suite, or what IDC calls the digital dream team.

Source: IDC, 2020

IDC #EUR146188020 Page | 12


Increasingly business leaders are becoming a lot more tech savvy as they look to help accelerate the journey toward digital business models. But it is critical for organizations to drive alignment across all the technologies, the people, and the budgets that drive the execution of the digital strategy. In this environment, CIOs have emerged as the orchestrator of these elements, but they can only do this by leveraging the business know-how from the digital dream team.

IDC's research shows that 73% of CIOs believe they can be the orchestrator of budgets, stakeholders, and technologies that drive the digital strategy in their organization.

As stated, ERP modernization is a key element of the journey toward building the intelligent core. The shift toward iERP is increasingly a collaborative venture between the IT, finance, and operations teams. Many organizations have created an ERP modernization board with a mix of IT and line-of-business leaders. The image below showcases the ERP modernization board at a global manufacturing organization. As can be seen, ERP modernizations are no longer an IT project.

The transition toward iERP is driven by a multidisciplinary team.

Source: IDC, 2020

The survey results confirm that the transition toward iERP is driven by a multidisciplinary team that involves stakeholders from IT, finance, and operations. Nonetheless, the chart below shows the predominant role of the CIO as the orchestrator of back-office systems transformation.


IDC #EUR146188020 Page | 13


iERP as the Foundation of Integrated, Intelligent, and Automated Business Processes

Focus on reducing the number of steps and documents required to achieve an outcome, while increasing security and compliance.

Building the intelligent core is critical, but moving toward the business processes of the future requires more than simply investing in iERP applications to digitalize existing processes. Organizations must reinvent the entire business process by reducing the number of steps and documents required to achieve an outcome, while increasing security and regulatory compliance. Subsequently, operating models, organizational structures, and data models should then be adjusted to match the reinvented business processes. This transition often requires a mix of experienced people that understand the business and new joiners that bring digital skills such as data science and user interface designers.

In this sense, the data-driven business processes are enabled by technology, but powered by people. Success in this journey requires a laser focus on business outcomes, as well as collaboration among multidisciplinary teams, where the members work together, disaggregate, or become passive when their skills are no longer needed in that squad.

iERP has the potential to empower people to drive innovation, as it automates repetitive tasks, enabling them to invest time in ideating, incubating, and implementing new use cases. In this context, digital businesses require a reinvention of core business processes, where they become integrated, intelligent, and automated.

Modern business processes, facilitating shop floor to top floor integration, enable constant optimization of the enterprise resources to deliver cost reduction. iERP has the potential to be the technology backbone of integrated, intelligent, and automated business processes by supporting the detection of opportunities for new revenue streams and simplifying interactions with customers and suppliers. The image below provides an overview of the moments of truth across the finance process, supported by iERP.

Source: IDC, 2020

IDC #EUR146188020 Page | 14


The following image provides an overview of the moments of truth across the operations process, supported by iERP.

Source: IDC, 2020

These processes are driven by the CFO and the COO respectively and orchestrated by the CIO. Therefore, the stakeholders are in charge of different angles in the transition toward iERP. They are measured by different KPIs, but the reality is that most of these metrics should lead (directly or indirectly) to an improvement of the value delivered to the ecosystem, and therefore an enhancement of the profitability of the business.

Source: IDC, 2020

Generating consensus is the biggest challenge in the ERP modernization process.

The in-depth interviews that we conducted as part of this study highlighted that generating consensus across several decision makers is the main challenge in the ERP modernization process. IDC believes that generating a road map to showcase the business value delivered by ERP modernization in the short, medium, and long term is a powerful tool to drive alignment across IT, finance, and operations, and one that will be critical for these types of projects.

IDC #EUR146188020 Page | 15


Value Delivered by ERP Modernization Across Short, Medium, and Long Term

Stage 1: Implementation

There are various ways to migrate to S/4HANA. The approach largely depends on the customer's starting point.

New implementation (greenfield). Organizations looking at a greenfield implementation are either new to SAP (never implemented before) or have probably been running SAP for quite a while, so for them this represents a fundamental change, both functional and technical. Hence, a new S/4HANA implementation gives them an opportunity to rationalize their multiple instances and versions of ERP into a coherent new whole, adopting new and proven business practices as they do so. This is a complex operation, but it offers significant improvements in business efficiency and flexibility in the future. As it is a fresh implementation of SAP S/4HANA, it involves creating an entirely new environment that requires an initial data load. In this scenario, the SAP S/4HANA system is implemented, and master and transactional data are migrated from the legacy system, so standard data migration tools and content have to be used.

System conversion (brownfield). Customers assessing this option are more likely to be recent adopters of SAP (in the past three to five years) and so can keep the structure they already have in place and upgrade it to run under S/4HANA. This involves a complete conversion of an existing SAP Business Suite system to SAP S/4HANA. This scenario is technically based on Software Update Manager (SUM) with Database Migration Option (DMO) in case the customer is not yet on SAP HANA as the underlying database.

Landscape transformation (bluefield). This is a consolidation of current regional SAP systems into one global SAP S/4HANA system. This tends to be the right option for very large corporations with highly complex structures. The migration requires some specialized tools (available from SAP and other tool vendors) to extract their current configuration — without the data — and move it over into S/4HANA, followed by selecting

IDC #EUR146188020 Page | 16


specific data for transition. This is clearly a huge endeavor, but one that enables the opportunity to reevaluate data and customization that have been carried along for years or even decades and restructure the business along the new S/4HANA architecture. In this scenario, organizations will either consolidate multiple systems or carve out selected entities (such as a company code) or processes into a single SAP S/4HANA system.


Stage 2: Integration for Agility

Once organizations have successfully implemented iERP (in this case S/4HANA), they can integrate these back-office systems with the front-office and the digital innovation initiatives that tend to be rolled out at the edges of the technology architecture. A lot of value can be derived by generating end-to-end visibility across the business. Most organizations have a highly fragmented enterprise application landscape, so integration will enable quick gains in terms of profitability through maximizing the utilization of assets and optimizing inventory and demand satisfaction.

IDC #EUR146188020 Page | 17


Stage 3: Innovation Based on Use Cases

Standardization across the ERP stack (and the entire technology architecture) is key to drive operational efficiencies. Nonetheless, the competitive advantage of organizations in the digital economy is increasingly technology based. Therefore, it is critical to single out the competitive differentiators of the value proposition and create extensions of the packaged software to build digital use cases that are unique to the company. The image below can be your starting point, as it provides an overview of the 10 use cases that account for most of the technology investments.

Top 10 Largest Digital Use Cases by Spend

IDC #EUR146188020 Page | 18


Action Items to Consider for Successful ERP Modernization

As we move into the next decade, the role of technology to transform businesses will continue to expand exponentially. Creating an agile backbone for the digital business will be imperative to deliver scale and outcomes.

Below are the five action items that IDC recommends for the digital dream team to deliver sustainable business outcomes associated with all core modernization initiatives (and S/4HANA implementations specifically):

1. Build the core multidisciplinary teams. Build a cross-functional digital dream team towork through the implement-integrate-innovate road map.

2. Keep the balance right. When it comes to standardization versus flexibility of technologyarchitectures, every organization will need to manage this on a case-by-case basis. Thinkabout which use cases are the building blocks for your competitive advantage in themarket versus those that should be standardized for simplicity.

3. Shift your mindset. Implementing iERP requires a dramatic shift in the mindset fromtechnologies, projects, and resources to business outcomes, products, and talent. Thismeans that the language and approach need to evolve toward a use-case focus — toensure that business language is the common denominator for all stakeholders acrossthe digital dream team.

4. Establish what to measure early. Develop a set of new business metrics that will deliverdigital success from your core modernization.

5. Use the road map to drive alignment. Moving forward, the digital dream team will needto orchestrate stakeholders, budgets, and the underlying technology architectures usingthe digital road map framework outlined in this document.

IDC believes the next decade will be a defining one for businesses in general. The entire digital dream team have a major opportunity to create an entirely new version of what business value entails — one that incorporates financial outcomes but also business value for every stakeholder across the digital dream team.

IDC #EUR146188020 Page | 19


About the Analysts

Danielle Hernandez, Senior Research Analyst, IDC

Danielle Hernandez is the lead for IDC's European Digital Transformation (DX) Practice, where she covers a wide variety of topics relating to DX, focusing on assessing the digital impact of emerging technologies such as AI/cognitive and blockchain. She also supports IDC's regional and global consulting projects for key clients in the digital transformation space.

Philip Carter, Chief Analyst, Europe, IDC

Philip Carter is chief analyst for the European region. His focus is to drive innovation in new research topics and deliverables, promote collaboration and knowledge sharing, and increase customer satisfaction. Specifically, he identifies topics and themes to drive thought leadership, working with the broader team to continuously inject innovation into IDC's regional deliverables, events, and CxO Summits.

https://www.idc.com/getdoc.jsp?containerId=PRF004954

https://www.idc.com/getdoc.jsp?containerId=PRF002996

About IDC

International Data Corporation (IDC) is the premier global provider of market intelligence, advisory services, and events for the information technology, telecommunications, and consumer technology markets. IDC helps IT professionals, business executives, and the investment community make fact-based decisions on technology purchases and business strategy. More than 1,100 IDC analysts provide global, regional, and local expertise on technology and industry opportunities and trends in over 110 countries worldwide. For 50 years, IDC has provided strategic insights to help our clients achieve their key business objectives. IDC is a subsidiary of IDG, the world's leading technology media, research, and events company.

IDC UK

5th Floor, Ealing Cross, 85 Uxbridge Road London W5 5TH, United Kingdom 44.208.987.7100 Twitter: @IDC idc-community.com www.idc.com

Global Headquarters

5 Speen Street Framingham, MA 01701 USA P.508.872.8200 F.508.935.4015 www.idc.com

Copyright and Restrictions

Any IDC information or reference to IDC that is to be used in advertising, press releases, or promotional materials requires prior written approval from IDC. For permission requests contact the Custom Solutions information line at 508-988-7610 or [email protected]. Translation and/or localization of this document require an additional license from IDC. For more information on IDC visit www.idc.com. For more information on IDC Custom Solutions, visit http://www.idc.com/prodserv/custom_solutions/index.jsp.

Copyright 2020 IDC. Reproduction is forbidden unless authorized. All rights reserved.

sap s/4hana: changing perceptions — from upgrade to

Documents