- April 29, 2020
- Chip Hanna
- Reading Time: 7 minutes
Given the current situation, all organizations are searching for ways to improve their IT cost structure, especially those companies with a large SAP footprint managed and/or hosted by others. While some may look to take a direct and confrontational approach, there is more than one way to address your cost structure regardless of service type (i.e., AMS or hosting). Those approaches or levers can be distilled into three categories: Commercial, Operational, and Competitive. This blog will not only address traditional 3rd party AMS and hosting but will also touch on SAP’s offering in this space, HANA Enterprise Cloud.
SAP AMS Optimization
Commercial Levers:
In regard to SAP AMS, many organizations (or their vendors) do not want to take on the task of digging into their deal and seeking cost opportunities especially if the agreements were recently awarded or renewed, or where the vendor has been performing in a satisfactory manner. However, if your business is being materially impacted by current economic factors, there are steps that you can take commercially which are not necessarily disruptive but, in the short term, can uncover areas of immediate financial benefit.
- First, even if not contractually defined, customers can always benchmark the terms of their agreement. Leveraging the expertise of a third-party advisor who has significant market data can assist your efforts in finding hidden costs and improvement opportunities. These can take the form of benchmarking rates, ARC/RCC levels/floors, or productivity commitments.
- Second, given the unknown direction of the market and its uncertainty, now is the time to look at early renewals or renegotiation of expiring agreements to obtain more favorable financial terms.
- Finally, if you have other providers who are capable of delivering the same service and who also have more favorable financial terms, there is the opportunity to shift all or a portion of that business over and quickly realize the benefits. Given the ubiquity of SAP in the market and the plethora of providers, all of these commercial levers either singly or in combination can be used as a viable strategy to address your SAP AMS spend.
Operational Levers:
Beyond commercial levers, companies have operational levers to potentially improve their SAP AMS cost model in a way that is not disruptive but also can yield results now to improve your financial outlook.
- If your company has downsized or the revenue generation elements of your business have declined, there will likewise be a decrease in demand for AMS services. A simple example would be that if your employee base is reduced, there will obviously be fewer tickets opened related to SAP applications. That excess AMS capacity is a prime opportunity to capture cost, essentially “shrink to fit” to your new normal.
- Also, if your SAP AMS provider has historically delivered across all the SLA commitments, it’s probably time to revisit those metrics, especially if the overall demand for their services is in decline. Again, if your AMS provider was killing it at full demand, they’ve got room to reduce staff and cost when you fall below your previously anticipated requirements.
- In addition, AMS providers have continually leveraged automation to improve their efficiency and margins. Obtaining a higher degree of transparency into how automation is used to support your SAP platform (especially if you have a fixed fee financial model) is critical to then extract and share those efficiencies (and savings) and reduce cost. AMS providers are touting these improvements to their shareholders, so it’s time they “share” with you, their customer.
- Finally, understanding and properly allocating resources globally is a way to operationally address cost. Pressure-testing the staffing mix and maximizing offshore delivery is an opportunity to reduce fees, especially if there are no immediate plans for upgrades or new deployments which often require on-site or on-shore support.
Competitive Levers:
Given SAP’s historic position as one of the major ERP software providers, and while not exactly a commodity, SAP AMS services are widely understood and offered by many highly qualified and proven vendors. Competing your AMS business can be a valuable lever to address and capture cost in the medium- to longer-term in three ways:
- First, if your organization can credibly develop a competitive environment and execute the evaluation process, there is an opportunity to capitalize on the current economic climate.
- Second, given the uncertainty in the market, all viable vendors in this space, including your incumbent, will be very motivated to participate and aggressively chase new business.
- Third, speaking of your incumbent, a credible RFP process is an excellent way to drive further creativity and cost opportunity with that provider which may yield benefits beyond what you may have historically seen. No provider will want to give up the inside track or be less aggressive to hold onto existing clients.
SAP Hosting Optimization
Commercial Levers:
From a hosting perspective, the commercial levers are very similar to those for SAP AMS in two respects:
- First, there certainly is the opportunity to benchmark your relationship, renegotiate the terms and investigate the benefits of an early renewal. The glut in hosting capacity makes this a buyer’s market and now is an excellent time to revisit your deal. This even holds for those who have recently executed new agreements to host SAP.
- Second, there is no historical precedent for the current environment and as such, informed customers can confidently engage their providers to ensure they are not only getting the best deal, but they can also address gaps in their current arrangements to improve the cost model.
Operational Levers:
From an operational perspective, it’s all about what and how you use your infrastructure focusing on three areas:
- Looking at the capacity requirements of your SAP environment is the first place to re-capture value. If you have downsized, reduced revenue-generating capacity, or otherwise slowed your business, these factors all have an impact on the infrastructure you use, or more importantly, do not use.
- Second, beyond potential lower utilization on your production systems, if your plans have changed in the short-term related to spend on SAP, i.e. pausing an expansion or upgrade, it’s probably worth it to reduce your development and test environments.
- Third, you may consider reviewing the SLA’s for your environments. A look back at the number and severity of outages can reveal systems which can be revisited to a lower level of support, and thus cost. This is especially true if those systems support applications that have a reduced workload or are going to be decommissioned or shelved in the short-term.
Competitive Levers:
From a competitive point of view, hosting services for SAP, like many hosted application services, have been impacted by the AWS effect. Essentially, AWS and other hyperscalers like them, have turned application hosting into a utility and a commodity. No longer should your organization have to listen to providers talk about “required investments”, “sunk cost”, “equipment lead-time”, etc. Unless your SAP system is running on museum-era hardware, the cost of change has been materially reduced and thus optimized in a more rapid fashion through two key elements:
- First, if you’ve been a customer of the legacy data center providers, e.g. Dell, IBM, etc., the time has come to test the market especially in this economic environment and, if properly educated, you will find there is opportunity to not only improve cost, but obtain a higher degree of flexibility going forward with vendors who have aligned their service offerings to a more on-demand, utility-oriented model.
- Second, SAP has established relationships with AWS, Google and Azure to enable clients to more seamlessly engage these partners as SAP has realized that, for many of their customers, the hyperscalers are, in many respects, the future of SAP hosting.
SAP HEC
It is clear that SAP is moving away from this service offering. They have established partnerships with the hyperscalers and are making it easy for clients to transition and they are not investing in this platform. In addition, there were some interesting messages delivered during the Q1 2020 earnings call which, in addition to SAP’s signals to the market on the future of HEC, provide points of consideration for HEC customers for improvement in their HEC cost structure:
- First, SAP’s leadership indicated they were taking a client-by-client view into those who are seeking relief from existing financial commitments. There were no specific qualifications or limitations mentioned (and no specific reference to HEC customers) so all customers should take advantage of this messaging to request immediate relief especially if you’ve recently executed a large, multi-year commitment. In this new reality, SAP appears ready to push outside its standard business practices if a customer can develop and deliver a credible, coherent and appropriate modification to their financial arrangement with SAP.
- Second, the current environment provides an avenue for HEC customers to challenge SAP’s lack of transparency regarding the cost of software, AMS, and hosting, which are often bundled together. Due to the opaque nature of this cost model, it is difficult (and SAP does not help in this manner) for customers to determine on their own, what the opportunities could be. Once you’ve been through the process of rationalizing your software demands, customers can have a direct conversation with SAP to not only reduce software costs but also require the transparency needed to reduce the appropriate AMS and hosting costs.
Given that these costs are not often clearly allocated in a predictable ratio, (e.g., decommission 10 licenses = a reduction in $X.XX of AMS and $X.XX in hosting fees) this is a prime time for an educated client to validate the cost/value of the software and use this opportunity to “crack the code” to drive future transparency. This exercise can also develop a business case to compete these services holistically and either obtain concessions from SAP or harvest the opportunities with third party suppliers.
The current economic environment has resulted in numerous and unsettling challenges to the global economy. However, this environment has also presented unprecedented opportunity for those IT organizations who are brave, informed and creative enough to test the boundaries of what is possible to seek cost reduction opportunities. This is the time to reset expectations in your favor and make bold moves now which will benefit your organization both today and in the future and put your SAP platform on a more solid cost and performance footing.
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