Doctor's Note (April): SAP Upgrade Woes

SAP announced its latest upgrade in February (SAP® Business Suite 7 software) to coincide with the global credit crunch. As always, the sales representatives and assorted consultants are buzzing like bees around a honey pot to get a piece of the pie, promising painless upgrades, lower costs, and increased competitiveness through functional innovations. The stick is that maintenance costs will increase if a company does not upgrade its SAP installation.

Unfortunately the IT manager has a harder time than ever these days in justifying the cost of an upgrade to the business. Companies are not in the mood to accept that upgrades are simply the “cost of doing business” anymore; especially when upgrade costs can approach almost one-third of the initial implementation. Those slick new functions and features are not very appealing when you are shutting plants and laying off people. But there are a couple of sensible things that companies can do.

Some innovative companies are using the upgrade as an opportunity to re-negotiate. SAP costs are tied very much to the number and type of licenses. Rather than rely on SAP's internal statistics to estimate the users and the transactions that each user has access to, an independent audit can yield some surprising results. Users often have access to functions and transactions that they haven’t used for years. Eliminating this can save oodles (to use a technical term) of money.

A significant cost of an upgrade is testing and training. To keep the upgrade costs reasonable, some IT managers are adopting a “like for like” upgrade strategy. By not adopting the new functions they do forgo some of the reasons for upgrading to a new version, but in the current environment that seems to be prudent course.

SAP license requirements can also be significantly reduced if data analysis and data summarization requirements that don't require real time access are provided to users through something other than SAP. In today's IT environment, these are better handled through a SQL Server based data repository and assorted Microsoft based reporting tools anyway. The companies adopting this approach are refocusing SAP on the functions that it is good at - keeping data synchronized and internally consistent. These companies have accepted that data consistency is more important than making sure every person uses the data in the same way.

Supply chain improvements are driven by business crisis. We all don’t want to make any changes if we don’t have to. Climbing inventories and scarce working capital offer many companies a golden opportunity to not only address the short term issues but to institutionalize a strategic realignment of inventory. Supply chain organizations need to at the center of this effort, and need to lead this effort rather than merely react to financial pressures. After all, isn’t operational excellence the reason that supply chain organizations exist?

Companies have a choice. They can either continue to do business as usual and go down the ERP upgrade path as before, or step back and examine critically how modern IT technology can fully support the supply chain organization efficiently at the least cost.

It has always been a challenge to figure out what SAP really costs over time. The experience of the City of Palo Alto may be a good representative example though. The city spent $3.2 million in consulting alone in 2002-2003 to install SAP for its financial, personnel and payroll systems. In 2007 the city elected to install the invoicing functions to manage utility billing. So it spent another $1.4 million on a technical upgrade in 2008 which took 6 months. The final cost for the improvements is budgeted at $6.9 million. To put this in perspective, the annual utility revenue of the city is about $200 million.