Industry Analyst firm Gartner has issued a new advisory, namely that CIO’s and their IT teams must take action to address the fast-approaching reality of ‘legacy ERP’. According to Gartner’s latest prediction, by 2016: “heavily customized ERP (Enterprise Resource Planning) implementations will be routinely referred to as ‘legacy ERP. CIO’s and application leaders must take action to address the fast-approaching reality of ‘legacy ERP.’”
Pause for a moment and reflect on the above statements. The analyst firm that first introduced the applications IT market to the concepts and benefits of Enterprise Resource Planning systems along with the rating of capabilities among ERP vendors so many short years ago is now raising warning flags for technology end-users. A Gartner Vice President observes: ”The need for agility and responsiveness has led highly customized ERP implementations to an impasse, creating a subset of legacy ERP installations that must be dealt with constructively.” Similarly, analyst firm IDC has been strongly urging IT vendors to concentrate all future applications development on the so-termed “Third Platform” namely cloud, mobile and business intelligence enabled applications.
From our experience within the industry analyst world, that is the clearest acknowledgement by the traditional analyst firms that traditional ERP platforms and applications are struggling to keep pace with supporting required business change utilizing legacy behind-the-firewall applications. Keep in mind that these same analyst firms garner significant revenues from ERP vendor clients but must advise multitudes of end-users.
Most in the supply chain and B2B fulfillment community who have had any experience with information systems or transformation initiatives have long discovered the obstacles and pain levels associated to highly customized ERP systems. Customization becomes a significant obstacle to timely business process innovation not to mention the heartburn for streamlining information flows and decision-making. Legacy ERP was constructed with the design principle of inside-out control, but today’s businesses are faced with the challenge of outside-in information, planning and decision-making needs.
IT leaders who follow Gartner’s research may recall that a couple years ago, the analyst firm articulated three layers of systems innovation:
Systems of Record (presumed to be legacy ERP systems)
Systems of Innovation (presumed to be best-of-breed or cloud-based point solutionbs_
Systems of Engagement (presumed to be extensions social based systems in the concepts of Facebook, Linked-In, Twitter and others)
A new reality is occurring however, at a far more rapid pace. Business and supply chain functional teams are stepping-up to accept more time-phased accountability for delivering required business outcomes or dynamically responding to ever changing business process requirements. Accountability includes more responsibility in IT applications funding and selection. The CIO and his/her IT teams have similar strategic needs to accelerate the pace of business innovation but also reduce the legacy IT infrastructure costs.
As noted in Prediction Ten of our 2014 Predictions for Global Supply Chains, the fate of technology investments now rest in the hands of business and supply chain teams, with the counsel and assistance of IT. The days of multi-year, highly disruptive IT transformation has been subsumed by highly targeted business process initiatives directed at phasing-in continuous improvement capabilities toward a desired business end-goal.
Gartner, IDC and indeed ourselves in our advisories are acknowledging the reality of today’s IT landscape, namely that continuous innovation and faster time to business value dominate the C-level agenda. Leveraging the technologies of cloud and mobile computing, deeper business analytics and faster decision-making processes are increasingly looked upon as systems of innovation and engagement enablers.
Need more evidence.
SAP, a major player in ERP, announced to its investors that it has elected to forgo previous profitability goals for the next two years in order to accelerate development efforts to transform its business suite of applications to better leverage cloud platforms. Co-CEO Bill McDermott told investors: “we have bold ambitions in the cloud.” Bloomberg reports: “SAP is searching for a balance between expanding cloud-software offerings and safeguarding its mainstay license business.”
Similarly, Oracle has been aggressively investing in cloud offering through both acquisition and internal development as are many other ERP providers.
In today’s new normal of business, industry competitiveness is predicated on seizing market, product and services opportunities quicker and faster than competitors. The new realities of business imply a globally based supplier and trading partner ecosystem bringing increased dimensions of complexity, scope of control and risk. The IT applications landscape supporting end-to-end supply chain business process innovation will benefit from the rapidly changing applications development trends being enabled by today’s cloud, mobile and analytics technologies.
Heed the growing evidence that highly customized ERP systems are headed toward legacy status and systems of innovation, engagement and deeper supply-chain-wide intelligence and insights should be your organization’s priority.
© 2014 The Ferrari Consulting and Research Group LLC and the Supply Chain Matters Blog. All rights reserved.
In the Business Technology section of Wednesday’s edition of the Wall Street Journal, an article appeared that is often the nightmare of any provider of enterprise software. The article, Avon to Halt Rollout of New Order Management System (paid subscription or free metered view) reports that Avon Products has elected to pull the plug on a $125 million SAP software implementation. That is no small amount.
It is further a fresh reminder for supply chain leaders and technology selection teams of two very fundamental shifts occurring in software evaluation deployment and acceptance.
Readers familiar with Avon Products will recall that they practice a unique business model. Independent (non-employee) salespeople of all walks of life represent and sell Avon products to friends, colleagues and acquaintances, with sales assistance tools provided by Avon. The personal relationships among the independent Avon representatives sustain continuous sales cycles involving varieties of product offerings. Orders are continuously inputted by the independent sales representatives and order status is in-turn provided on a continuous basis.
The WSJ reports that Avon began its implementation of an SAP order management system in Canada in the second quarter of this year, and while the system was described as working as planned, it apparently was disruptive for Canadian Avon representatives. Plans called for a broader worldwide rollout over the next four years. The WSJ further reported that this was not the first broad system implementation problem encountered by Avon. Two years ago, the Brazil operation attempted to move from manually intensive operations to a deployment of enterprise software from Oracle, without acceptance.
According to a filing with regulators this week, Avon elected to halt the company-wide rollout and expects to incur anywhere from a $100 million to $125 million write down of the cost of the software. The company will continue using the software in Canada. In the earnings conference call, the CEO of Avon acknowledged the issue in Canada but indicated the system was working as designed. Further acknowledged was the degree of disruption that occurred in daily processes associated with independent representatives that resulted in steep fallout of sales resources.
In the article, a spokesperson for SAP is quoted as indicating the order management system “is working as designed, despite any issues with the implementation of this project.” A further statement indicated a “solid and productive relationship.”
Solid and productive, but at a significant cost write-off and another lesson learned.
While we may not have added testimony to what did or did not occur at Avon, Supply Chain Matters has two observations to share with our community of broad supply chain management followers.
The first and most obvious is the critical importance and weighting of user acceptance in any evaluation and systems implementation. The most advanced and sophisticated technology is of little use if those that interact with the system on a frequent basis have no confidence in the system’s value in helping with completion of their work or providing deep insights to decisions. Avon’s unique requirements concerning daily use from thousands of independent representatives had to have been a key concern. With today’s increased availability of cloud-based software alternatives, end-user acceptance and uptake takes on even more meaning.
The second involves the groups that are involved in selection and accountability for the results from investments in advanced technology. Last week, Supply Chain Matters called attention to IDC’s validation that the information technology buyer influence continues to shift to the business side. The industry analyst firm predicts that 61 percent of technology focused projects will be business rather than IT funded. The implication is that business and supporting supply chain functional teams now hold far more influence on specification of required business process and associated technology investments. With that comes more direct accountability for successful implementation and timely business benefits.
While some may view the Avon story as another knock on the complexity and cost risks of complex ERP systems, it is rather important to focus on how important user input, change management, comprehensive training and acceptance make for successful systems implementations.
The business is clearly gaining more influence in technology specification, selection and deployment. Gaining timely business benefits and expected outcomes is ever more dependent on insuring the commitment of those end-users accountable for getting the work done is incorporated into planning and deployment. Too often, teams dwell on specifications and cool functionality without allocating adequate time for user acceptance.
Recently, ERP technology providers have rushed to take advantage of today’s buyer preferences for adoption of more cloud-based applications that can surgically be inserted to support specific business processes. They effect of that strategy has come home to roost for the major players.
This week, SAP AG reported a 23 percent increase in third-quarter profits but the winds of currency and buyer preferences impacted the growth of software license revenues. Total revenues climbed a mere 2 percent to slightly over €4 billion, compared with a 14 percent growth rate a year earlier. According to business media reports, revenues for the company’s core software licensing businesses actually decreased by 5 percent overall, including 13 percent in the Americas and 9 percent in the Asia regions. License sales in the EMEA region increased by 8 percent. Cloud subscription revenues more than doubled in the quarter to €191 million and claims to have 33 million cloud subscribers. Looking toward its final quarter, SAP executives forecasted an overall 10 percent excluding currency fluctuations. That would imply an aggressive sales effort in the very important upcoming final fiscal quarter.
In mid-September, rival Oracle also reported a mere 2 percent increase its fiscal first quarter revenues, continuing its trend of two challenging quarters of revenue growth. Oracle does not breakout its revenues for cloud based application and indicated that revenue from the combination of new application software licenses and cloud subscriptions grew 5 percent in the quarter. First quarter profits rose to approximately $2.2 billion, compared with just over $2 billion a year earlier. Looking forward to the remainder of the fiscal year, Oracle indicated that combined software application and cloud subscription revenues growth would range from a negative 4 percent to a gain of 6 percent in constant currency, a rather wide range.
ERP vendors have a special challenge, they have to convince customers that their current cloud computing offerings have a more compelling value proposition that those of existing best-of-breed cloud-based vendors. Recent cloud-focused acquisitions have had a slower record of integration with existing applications with elongated timetables, and that probably accounts for why buyers are shopping the field.
The other more subtle challenges is that ERP vendors have built a legacy of staffing and overhead directed at supporting traditional direct sales of applications while cloud-based sales are more developed by longer-term relationship selling.
According to announcements from both the German and Americas SAP Users Groups, SAP has begun to modify some of its software maintenance policies to allow customers some flexibility in retiring older software licenses related to on-premise installations. This is good news, even though the terms are complex and dependent on individual circumstances.
A posting on ASUG News (Americas SAP User Group) indicates that SAP will now allow customers to terminate on-premise licenses in order to buy new cloud-based software. According to the ASUG posting: “In effect, customers can eliminate maintenance payments on the software they are no longer using and use that money to pay for cloud software.” Specific customer needs will be apparently taken on a case-by -case basis, implying that SAP Sales and Services teams will maintain control of the negotiations, in essence, assuring that any changes ensure a net positive outcome for SAP. The posting reinforces that the one caveat is that new cloud-based subscriptions which include either SAP’s newly developed HANA applications, or offerings from Ariba or SuccessFactors, have to add-up to more than the customer is currently paying in legacy maintenance and support for the eliminated on-premise software.
A later ASUG News posting informs of another option, the ability to terminate an on-premise software maintenance plan to buy a new on-premise plan, or to terminate some licenses without a new purchase of software. Again, these policies are highly dependent on existing contract terms and customer related discount structures and include lots of fine print.
On the newly formed start-up digitnomica web site, veteran SAP observer and sage Dennis Howlett opines that these new maintenance licensing policies are indeed complicated to understand and interpret. Howlett notes SAP’s history of giving customer benefit with one one-hand, only to take-away with the other. Howlett opines: “The message is clear: while customers always welcome initiatives that provide more bang for the buck, they also want a much simpler pricing landscape. It is worrying to see customers becoming annoyed to the point where I am receiving inquiries about 3PM from what I also see as SAP only shops. SAP won’t want to see that become a trend, especially in light of the fact that SAP’s on premise business is looking over a fiscal cliff of its own.”
Supply Chain Matters highlights these changing SAP software maintenance policies because by our observation, SAP supply chain management applications often feature many unused seats or applications that were placed on-the-shelf for later implementation, and remain in that state. The takeaway message for supply chain functional teams is that your IT or technology procurement teams now have some flexibility in the ability to modify the ongoing cost burden of the unused or not widely deployed supply chain applications. Again, as noted above, there are lots of caveats and SAP obviously is attempting to provide its installed-base customers the economic justification to upgrade to the newer cloud-based software offerings. For SAP Supply Chain Management Suite customers, that applies directly to consideration for the adoption of Ariba’s broad B2B supplier connectivity applications or SAP Business Suite Powered by HANA applications that directly support supply chain business process needs. There are also SAP customers that might have acquired licenses to the entire SAP Supply Chain Management suite, including SAP APO that really did not widely deploy these applications because of other business needs or disruption concerns. Your IT team may now have some flexibility to consider a non-SAP cloud based application without the excuse of the SAP maintenance costs already budgeted, forcing you to make do with previously acquired but unused software.
As many software industry watchers have pointed out these past months, enterprise software customers are no longer willing to tolerate high legacy software maintenance costs which are perceived as a burden with marginal upside business benefits. Customers are pushing back with their collective voices, and vendors such as SAP are responding, albeit in a conservative, highly controlled manner. The good news is that other enterprise vendors are bound to follow, and supply chain functional teams will gain added flexibility in their needs to plug-in process automation capabilities such as more predictive supply-chain decision-making support. In essence, SAP is dealing with customer realities and supporting the financial ability to adopt cloud-based options more readily than before.
This Supply Chain Matters commentary is a follow-up to our previous breaking news commentary regarding E2open and its acquisition of supply chain planning, collaboration and response management technology provider icon-scm.
Our initial commentary noted the previous favored Solution Extension partnership that icon-scm had in the area of SAP capabilities in response management or what is sometimes referred to as fast planning. I
In the interests of fairness, we noted that Supply Chain Matters had reached-out to SAP for comment in formulating our commentary, but had not heard back at the time of publishing.
This afternoon, SAP proactively responded and provided additional perspectives which Supply Chain Matters would like to share
We were informed by SAP representatives that the Solution Extension partnership with icon-scm and the application SAP Supply Chain Supply Chain Response Management by ICON-SCM has not officially be dissolved as yet. There is a prescribed process for winding-down such a relationship in terms of communication with existing customers, attending to existing sales cycles and other matters, but we were informed that the partnership is in all practicality is likely to be closed.
SAP confirmed that existing customers that have secured SAP support will be assured that they will continue to receive that support until maintenance contract renewal, or for the life of the application SAP customers utilizing icon-scm will likely have the option to renew maintenance with SAP or opt for another alternative including that of E2open. Existing customers should rest easy that both SAP and E2open have affirmed a transition support plan.
Regarding some background to the partnership, SAP indicated rather positive customer interest and uptake in the initial year of the icon-scm partnership, not so in the second and third year. Mark David, who has supply chain planning solution management responsibilities for SAP affirmed the importance of customer interest in supply chain response management capabilities.
While a lot of icon-scm interest came from customers from the high tech sector, SAP was challenged to generate customer interest from other industries. This was not from a lack of effort from the SAP Supply Chain Management Solutions Management team. a muted admission that SAP sales teams did not have either the domain knowledge or patience to ride out elongated sales cycles. SAP customers were apparently demanding a more harmonized approach in integration to the broader array of the SAP Supply Chain Management applications suite and thus willing to continue use of existing SAP planning applications such as APO, awaiting such harmonization.
While SAP viewed icon-scm as strategic down the road, there was apparently not enough momentum to justify a corporate acquisition decision at this time. SAP however affirmed to Supply Chain Matters that the company has been working on a full harmonized supply chain response management collection of capabilities that would address today’s challenges manifested by multi-channel fulfillment and more outsourced activities. That approach could likely include leveraging of the B2B networking patform provided by Ariba, SAP’s most recent acquisition concerning supply chain and procurement support.
Obviously, the timetable of that effort has a renewed emphasis and urgency.
Since our initial commentary, Supply Chain Matters has received additional background and other information from E2open which will be shared in a later commentary.
Disclosure: E2open is one of other named sponsors of the Supply Chain Matters blog.
The announcement declares that its Supervisory Board, the German equivalent to a Board of Directors, has agreed to propose co-CEO Jim Hagemann Snabe to be elected to that body in May 2014. The proposal is subject to at least 25 percent of existing shareholder approval but more than likely comes with some endorsement of SAP Co-founder and Supervisory Board Chairmen, Hasso Plattner. None the less, Snabe will have to replace one the current 16 Supervisory Board members.
This announcement anoints current Co-CEO Bill McDermott to the role of sole CEO by May of 2014, an announcement that will draw mixed reaction both internally and externally.
The obvious question is why now?
On the executive briefing for Press and Analysts, an agitated Hasso Plattner explained that the Supervisory Board held an extraordinary meeting over the weekend after hearing of Mr. Snabe’s personal decision. Snabe’s existing employment contract extended to 2017, thus Plattner explained that regulatory factors deemed that SAP had to make a public announcement regarding this leadership development concerning the company’s top leadership and its Supervisory Board leadership. Otherwise, it would have been an internal matter. In the Q&A session, representatives of the press provided many questions related to why this timing, especially since Mr. Snabe just three weeks ago was extolling the praises of the co-CEO structure.
There will no doubt be lots of open questions and possible implications from this significant announcement. It was no secret that the SAP co-CEO model was working for SAP because of the respect that each co-CEO garnered internally and their working relationship with one another. Mr. Snabe had a loyal following from the business unit and product development teams while Mr. McDermott’s following came from the sales and field aspects of SAP.
Obvious open questions relate to how leadership will evolve over the next eight months of what could be termed as a “lame-duck” transition. From the call it seemed apparent that Vishal Sikka’s technical leadership will expand along with Bernd Leukert, with product go-to-market leadership influence expanded to Robert Easlin. Perhaps that was already in the works.
SAP has a rather challenging next 12-18 months as it continues to make yet another major transition, the latest being HANA and cloud computing capability. Whether today’s announcement detracts from that challenge remains a matter of much speculation in the weeks to come.
This author came to know of Jim Snabe during my tenures both at SAP and as an industry analyst. I found him to be a highly competent and personable senior manager, one that drew the trust and respect of many teams and individuals. His leadership of both SAP business units and product teams was admirable. I found Jim to be a very down-to-earth and approachable executive, not swept-up in power tendencies of certain CEO’s or senior executive leaders.
From the wording of the announcement and this morning’s executive briefing, it would appear that this was a personal decision on the part of Jim to spend more time with his family. Our Supply Chain Matters gut feel is that there were probably more signs occurring behind the scenes to prompt such a sudden decision such as this.
By our lens, this is a big leadership loss for SAP.