There’s a giant sucking sound emanating from most large enterprise IT departments. It’s called SAP and as I write in this column, the devilishly complex ERP product cum application platform has a life of its own that resists all attempts at efficiency, simplification and IT budget cutting. SAP is the enterprise equivalent of an out-of-control defense contract with C-level business managers channelling Congress and the Pentagon by endlessly shoveling money at overdue and over-budget projects. This harsh characterization may seem unfair to those that haven’t read the a new book by Vinnie Mirchandani. SAP Nation catalogs the real and hidden costs of using SAP through painstaking research into dozens of SAP customers and a detailed cost model exposing the many, often hidden costs of deploying and operating the platform. Mirchandani is perhaps uniquely qualified to assess the state of enterprise application software, is a long-time observer of SAP, its ecosystem and users having served as both a customer of and consultant on SAP. A former IT analyst and outsourcing executive, he now runs his own consulting practice specializing in IT deal negotiation, RFPs and due diligence.
As part of his study of SAP implementation strategies and best practices, Mirchandani developed a comprehensive financial model and cost accounting that includes purchasing, configuring, operating and supporting SAP and its users — expenses that cross company and organizational boundaries including costs for internal IT staff, outsourcing and consulting firms, the hardware used to run SAP and related applications, along with software and support licenses. Mirchandani estimates the total spent in what he calls the SAP Economy totals $1 trillion since the end of the great recession, or about $200 billion per year. It’s a big number, particularly when you consider that the aggregate profits of the S&P 500 are about $250 billion (chart 9). Granted, the sum is spread across over a quarter million companies that Mirchandani calculates use one or more SAP product, but that still comes to almost $800,000 per year, two-thirds of which is spent on labor, not software or infrastructure, for the average SAP customer.
What’s wrong with SaaS?
Almost every key business application, including that bastion of fortress Microsoft, Office, has been disrupted by the cloud with the rental economics of SaaS proving to be irresistible for many organizations. However as I point out in the column, SAP is so entrenched in critical, revenue-producing business processes and IT infrastructure that the product and ecosystem have heretofore proven immune to the radical changes roiling the rest of the software industry. Indeed, SaaS has moved far past beyond consumer file sharing and collaboration services, spawning multi-billion dollar companies like Salesforce that cater to core business processes using cloud economics to lower IT CapEx and OpEx. Even as complex systems like CRM, HR and legal document analysis move to the cloud, SAP blithely rolls on soaking up a disproportionate amount of IT’s budget on pricey outsourcing and consulting contracts and immense, gold-plated on-premise systems.
One reason there isn’t a comprehensive, all-in-one cloud-based alternative to the full SAP suite is that the concept of vertically and tightly integrated software goes against the cloud ethos of lean, focused services extensible and integrable using published APIs that users can lash together to create software tailored for their specific needs. The cloud zeitgeist is about mashups, not suites. Most cloud early adopters have embraced the use of open APIs and data connectors to lash together multiple SaaS offerings within a comprehensive service-oriented architecture. But as Mirchandani points out, “Contrast that with the view many SAP customers have that they bought the ERP suite to get out of the integration role.”
It’s not as if SAP couldn’t do an Adobe-like pivot and field a compelling SaaS suite since it’s got plenty of cash. Writes Mirchandani,
“In 2013, SAP reported over $3 billion in R&D expenditure. That was almost four times larger than the combined R&D spend of the seven leading SaaS providers — Salesforce, Workday, NetSuite, RightNow, ServiceNow, SuccessFactors and Taleo. (RightNow and Taleo are now part of Oracle, and SuccessFactors part of SAP.)”
It’s that the company isn’t particularly interested in the model since it caters to its largest customers; big enterprises that SAP executives believe aren’t keen on the idea of moving the infrastructure and data for key business processes into the cloud. As my original column concludes, large enterprises find it dauntingly complex and risky to redesign these mission critical apps around cloud services, hence the SAP gravy train will continue until more of them decide to redesign IT systems and services from scratch.
For the rest, those thousands of smaller SAP users, doing a full cost analysis of their SAP-related spending will prove both enlightening and alarming. If Mirchandani’s model is remotely accurate, such a TCO assessment could provide enough shock value to overcome IT inertia and seriously investigate cloud-based alternatives for ERP and other key business processes. It’s time for more businesses to extend SaaS from the front to back office.