How to Understand The Real Story with SAP Support
Executive Summary
- SAP support is rarely discussed, but the reality of SAP support is far different from what is promised by SAP and their consulting partners.
- What are the massive hidden costs imposed by using SAP support?
Paying 22%+ for SAP support, and do you still have employees feeling like this?
Video Introduction: How to Understand The Real Story with SAP Support
Text Introduction (Skip if You Watched the Video)
Our work in SAP support comes from our overall research foundation in SAP. This leads us to the inescapable conclusion that canceling SAP support for the vast majority of customers is one good option for reducing SAP support costs and improving support quality. However, the story that has been explained thus far by third-party SAP support providers is often only a partial explanation of the benefits of this moving away from SAP support. You will learn about the greater benefits of moving away from SAP’s support that far exceed just reduced costs.
Our References for This Article
If you want to see our references for this article and other related Brightwork articles, see this link.
Notice of Lack of Financial Bias: We have no financial ties to SAP or any other entity mentioned in this article.
The Importance of Focusing on SAP Support
SAP support is one of those areas that tend to get much less emphasis than it deserves. Brightwork TCO estimations have maintenance absorbing an average of a little more than 60% of the total TCO of an application (this number varies per application).
Our research shows the following average allocation per TCO category.
[show-rjqc id=”4″]This research is based upon the evaluation of 53 applications and is available online with our TCO Calculators.
The smoother the application is to implement and maintain, the higher the software and hardware components become as a percentage of the TCO. Obviously, in every case, the total must be 100%.
As license purchases, hardware costs implementation costs an average of roughly 40%. It makes sense to place more than 50% of the effort on the equation’s maintenance side.
The Different SAP Support Types
There are three different types of SAP support available.
- Third Party Also Known as 100% Outsourced Support
- 100% SAP Support
- Combined Consulting Firm + SAP Support
It should be observed that third-party support is a small percentage of overall SAP support delivery and that this type of support is a relatively new option.
Third Party Also Known as 100% Outsourced SAP Support
Here SAP receives no money for the support.
This means that the support entity and the customer do not have access to SAP’s upgrades or patches. The software versions are frozen at the point that the SAP support expires. SAP uses this as a point to scare their customers. And at first blush, this seems like a significant disadvantage. But Brightwork’s research has demonstrated that it makes far more sense to keep what they have and not move to SAP’s new products for many SAP customers. That is by either upgrading existing products or not buying new SAP applications.
SAP attempts to present regularly, keeping SAP upgraded as a good thing. However, the research goes in the opposite direction. Constant SAP upgrades not only lead to higher costs; they are disruptive to the customer. They also sap both energy and funding from investing in applications outside of SAP ERP that have a higher ROI.
At this time, we still recommend against buying or implementing S/4HANA or HANA. Companies that purchase either of these products will end up with a negative ROI in the vast majority of cases.
Important Findings of SAP Support
Rimini Street has made important contributions to understanding third-party support by explaining that most customers don’t use the upgraded functionality in new SAP releases and that upgrades are a massive hidden cost for IT departments. These observations are correct, and of course, not popularized widely because they are contrary to the interests of both SAP and the SAP consulting partners, which both make high margins on SAP support.
If only SAP upgrades were like an Android upgrade. The term “upgrades” sounds perfunctory, responsible even—however, the costs of what is supposed to straightforward end up being mind-boggling expensive.
Poor Reasons for SAP Upgrades
- It is Necessary Housekeeping!: SAP IT departments often perform upgrades without planning how to use the upgraded software. That is, it is approved as a “housekeeping measure.”
- Based On fear?: Many upgrades are driven by fear of being out of date, fears that SAP often overplays to motivate the upgrade. Long story short, SAP uses updates as a form of control where, in most cases, the customer sees the minimal benefit. The term used is a “forced upgrade” Another word we might offer is a “vendor-oriented upgrade.”
- Just Wait For the Next Version!: Companies will often upgrade to obtain new SAP functionality only to find out that the feature is still not ready — but it might be in the future version!
- All Issues Answered in New Version?: There is an unwarranted optimism that the next version of SAP software will solve a previous issue, often a prior promise from SAP that turned out not to be true. In this way, upgrades can be a way for assuaging dissatisfaction in their business that the newer version of SAP will “fix all of that.”
Coverage for Custom Code?
Third party support has a significant advantage over the options to be listed next. This is never mentioned during the sales process by SAP or by an SAP consulting partner, but no custom code is included in support of these entities.
The problem with this is that most support is actually in this custom code area, and 92% of SAP projects have either a moderate or extreme level of custom code. This percentage would be even higher, but some companies in highly regulated industries (such as pharmaceuticals) do not customize for legal reasons.
SAP and its proponents will frequently talk to gaslight customers by stating that they should eliminate this code.
- This custom code exists because SAP cannot meet the business requirements of the customer without the code.
- SAP sales frequently misrepresent its software functionality, meaning customizations are often unplanned when the software was first purchased.
- A large part of this custom code was never anticipated when the software was initially sold. SAP will generally push the envelope and state that nearly all customer requirements can be met with standard functionality.
- This issue with unanticipated customizations is a major reason SAP projects will virtually always go significantly over budget.
Stating the code should be eliminated is a pivot the conversation away from why SAP charges so much. SAP won’t support the code necessary to get the SAP system to work in the first place.
Third-party support entities typically do support this custom code. This is a significant distinction between support through SAP and 3rd party SAP support.
This unbalanced comparison between 100% SAP support and 3rd party SAP support is why a simple comparison of the direct cost savings does not make any sense. For example, if a 3rd party SAP support offers to cut the customer’s support bill by 50%, this is meaningless to the overall cost difference between total maintenance costs between the 3rd party SAP support company and using SAP for support.
But this is only one of the reasons that comparison is wrong. We will get into the other reasons further on in the article.
The Massive Hidden Costs Imposed by Using SAP Support
Hiding costs are a big part of SAP’s and SAP’s consulting partner’s business model. And because both SAP, SAP consulting partners make money off these hidden costs (that is, they are the hidden costs). SAP spreads so much money to the IT media. There are extremely few entities in IT that have any interest in discussing these hidden costs. For this reason, it was surprising to find this article by CIO (who also receives money from SAP)
“A majority of surveyed SAP users find no compelling need to migrate to S/4 HANA. At the same time, almost half expressed dissatisfaction with the value of SAP support (emphasis added).
That unease is only likely to increase as businesses try to run and maintain their existing ERP systems while SAP shifts investments to build a new, as yet unproven platform. Over time, support and maintenance fees will become even more painful as perceived value decreases.
That’s a strong indication that enterprises are tiring of the rising costs for support of a relatively stable product, with only marginal improvements in the software. These systems for the most part have been built out over many years, are stable, and provide a central nervous system that businesses would just as soon not disrupt with new upgrades.
In the case of SAP, a survey of more than 200 SAP licensees conducted earlier this year found that only 8% believe the fees they paid for SAP support were “well worth the value they receive,” while 47% expressed dissatisfaction and said they were “paying too much” and/or “support costs are way out of control.”
Research repeatedly shows that SAP maintenance consumes a very high percentage of IT budgets. The common statistics quotes are somewhere between 70 and 80% of the overall IT budget goes to “keeping the lights on” for existing applications.
SAP’s total costs are hidden with the direct cost of using SAP support, dramatically underestimating the cost of using SAP. This is also a primary reason why neither SAP nor SAP consulting companies want their customers to know or calculating the actual TCO of SAP.
[show-rjqc id=”5″]Upgrade costs are so high because they are implementation projects. This means paying external consultants. And using SAP support often means accepting these costly upgrades.
- The Total SAP Support Costs: The real total cost of SAP support is continuously underestimated.
- Unincluded Portions of SAP Support: The current rate of 100% SAP Support is 22%+. We add the “+” because all SAP support types are not covered by 22%. For instance, the SNP Optimizer is not covered by 22%. Also, it was not always this high but had been increasing over time.
And, as stated earlier, this minimum of 22%+ is exclusive of customizations.
22%+ can be seen as just the starting point, with the steadily rising SAP maintenance costs, which use the money paid to SAP as just the foundation. Much like a mountain peak that is only partially exposed, using SAP support necessarily means several follow-on costs. The intent of SAP and its consulting partners is simple. To consume as much of the IT budget as possible, all beginning from getting into the account with the software sale.
- This means that using SAP or a combination of SAP and an SAP consulting partner for support means taking on some associated costs that the customer cannot avoid.
- This distinction is mostly lost as most of the comparisons only focus on the direct cost of support.
How third-party support will support custom code on SAP implementations is explained very well by this quote from Dan Woods, an analyst with CITO Research. The quote is about Oracle but applies equally to SAP.
“These folks (at 3rd party support entities) understand the intricacies of Oracle and related customizations because they have hands-on experience implementing, supporting, upgrading, and customizing these products. In short, they’ve already done what enterprises are trying to do. They don’t just serve as tech support but as problem-solving ninjas. And because these products are so complex, usually the solution is not a bug that needs to be fixed, but a mistake in configuration, customizations or in the way the product is being used. This can be solved without any needed participation of the software vendor.”
100% SAP Support
This is where SAP provides all of the support for the customer. This is the most common choice for SAP customers. It is not necessarily the best choice, but just the most common. Understanding the market share of 100% SAP support is a bit like the earlier phase of Microsoft Windows.
In the early phase of the Internet, Microsoft Internet Explorer had a massive market share. However, this was more due to being the only browser first installed (and impossible to uninstall) than Internet Explorer’s inherent value of the product versus available options. As soon as people became aware, often through word of mouth of better alternatives, Internet Explorer lost market share, and its early market share is now reversed with Google Chrome.
As with SAP, Microsoft took advantage of a lack of consumers’ exposure to better alternatives to impose a lower quality product on them.
SAP wants its customers to know the least about its support options to keep the highest possible margins for SAP support.
An SAP Focused on Application Sales or Support Revenues and Indirect Access Revenues?
SAP is increasingly reliant. Things like support and indirect access (which imposes made-up rules to restrict who can connect to SAP systems so SAP can charge customers for the “privilege” of integrating to SAP) for their revenue.
SAP’s major revenue streams are not actually selling software. SAP has had an abysmal record in innovation and new product development for decades. This means that to meet its revenue targets, it needs to get more revenues from other areas. This is referred to as harvesting the existing customer base.
SAP Support Versus Automobile Service Parts and Dealer Service
- Automotive Service Parts: SAP treats support, much like automobile manufacturers treat service parts. When the customer is in the market for buying a car, they can buy that car from any supplier. But once they choose the vehicle, the service parts tend to come from that supplier. That is why service parts have traditionally had a higher margin than the finished good (the car).
- Car Dealerships: Car dealerships operate the same way despite scoring lower in customer satisfaction versus independent service shops (according to Consumer Reports). Car dealers try and are often successful in converting what an initial purchase (the car’s sale) is. Although not as successful as SAP. Only around 30% of US car buyers take their vehicle to the dealer while the vehicles are still under warranty. This is much lower than the percentage of customers that use SAP for support.
This is true even though the premium of going with SAP is always a minimum of 2x using third-party support on just the explicit costs. This provides an indicator of the opportunity present in using third-party SAP support.
Saving money on SAP maintenance is easy as pie. But it starts with moving away from SAP or SAP consulting partner support. Reducing SAP maintenance is extremely difficult if one stays with SAP or SAP consulting partner support.
How Does SAP Maintain a 90% Margin on SAP Support?
SAP has a 90%+ margin on its support.
Some people have debated us in that a company should be able to charge whatever they like. But those arguments weaken when it is apparent that the only way to receive 90% margins is if you somehow have enormous leverage over the account. In all the other areas that one can find where 90%+ margins exist, one invariably finds abusive practices on the supplier. As a customer, are you interested in paying a 90% margin to any of your suppliers?
So while it might be something that sounds nice to some people to charge (although even then, we have to question this), it’s certainly not desirable to pay. The same people who would brag about charging 90%+ margins might very well complain quite loudly about having to pay a 90%+ margin.
[show-rjqc id=”6″]It is essential to consider what a 90%+ margin means. If we take the value 92% (as it is 90%+) if a company pays $100,000 per year in support, SAP moves $92,000 to profits. And only $8,000 is used to pay for support and other allocation areas.
How SAP Minimizes its Support Investments and Undermines its Capabilities
Something that is left out is how SAP attains a 90%+ margin. They charge a lot for support, but on the other side, they invest as little as possible into support. It also means that the 90%+ margin is not allocated even to product maintenance or new features.
SAP’s support has been in decline for roughly 15 years, with continual disinvestment. Support personnel is obviously inexperienced, frequently have deficient English writing skills, etc.. SAP support’s overall orientation is to put more of the support burden on SAP’s customers while finding ways to charge more for support.
SAP Support Margin as a Form of Charity for Undercompensated SAP Executives
Companies that pay for SAP support will not find those monies used to pay for support personnel or systems but are used for executive compensation or profits. You may believe Hasso Plattner (net worth of $20+ billion) or Bill McDermott (annual salary of $50 million) have been under-compensated in life.
In fact, if that is true, continuing to purchase SAP support from SAP is an excellent way to help them get a fair shake in life finally.
SAP Likes Competition?
The reason SAP and Oracle’s support margins exist is due to the lack of competition in support. As monopoly theory would dictate, the companies with this excellent position eventually abuse that position.
Companies talk a good game about competition. Yet, the evidence from an uncountable number of case studies demonstrates clearly what they seek is monopoly positioning. This allows them to make the possible money for the least possible work.
SAP and Oracle have both put themselves in positions where they have achieved this goal.
- This has naturally lead to higher prices and lower quality/customer satisfaction with SAP support.
- Oracle, for instance, has attempted to maintain the monopoly over its support but has lost those legal challenges.
Combined Consulting Firm + SAP Support
The SAP consulting company, usually that does the implementation, gets the support contract. They are in the account, and sometimes they take the support contract rather than SAP taking the support.
The consulting company takes 1st level support, and SAP is 2nd level. The only real difference here from SAP support is that the consulting company collects the money and has some support people who follow up, act as facilitators, etc.. The consulting company is prime. But there is a payment from the consulting company to SAP.
According to research by Nucleus Research, this type of support is a head-scratcher because SAP consulting companies as a group have a lower score in SAP support than SAP.
“SAP gets a B for support. Their partner gets D. There’s no support. It seems like they get the account and then shove you under the rug.”
And that is reinforced in our experiences with SAP consulting companies and support. The quotation is not similar to what happened with SAP consulting companies that received the contract but is precisely what happened.
Providing SAP Support or Coordinating SAP Support?
Our observation is that the consulting company acts more as a facilitator rather than providing actual support. We have seen consulting companies take service contracts for which they lack the skills and refuse to hire the expertise. One company we are familiar with employed no one with any SAP software experience but instead chose to employ a coordinator who managed the emails between the customer and SAP.
This consulting company billed $500,000 yearly for this service from one customer and paid back 2/3rds of it to SAP.
Consulting Companies as a Low to No Value Support Intermediary?
We question whether they take 1st level support or if that is more of a sales pitch. A few of the SAP consulting companies that refused to invest in the right skills still had their salespeople go into the account and talk about how they would “fall on their sword” to support the account. The salesperson had no control over the support organization, so what they say has no bearing on the received support. This salesperson would complain about support failures as it limited his ability to sell more software into the account.
This brings up another problem. SAP consulting companies usually are not that interested in support. Instead, they want to keep the support contract only to sell more software and implementation services to support customers.
Do consulting companies take SAP support for the sake of support, or do they take support as a Trojan Horse, to get a higher margin business?
Interactions with many SAP consulting companies and understanding their financial incentives tell us it is the latter.
Therefore, we label this type of support the “Frankenstein’s Monster” of SAP support and combines the worse SAP support features (that is a high expense) with less margin going to SAP and with more people in between the customer and the individuals doing the support.
Conclusion
SAP and its partners have played an impressive trick on their customers.
- The 22%+ support that SAP or a combination of SAP and a consulting partner charges is just a starter kit that ties a customer into far higher costs.
- SAP does not provide support for customizations, treating them as an “aberration” on the project.
- SAP has its customers spending a great deal of money on SAP in continual upgrades and fixes and recoveries of problematic SAP applications. This is considered normal and “the right thing to do.” SAP and their consulting partners “advise” customers; this is the right thing to do.
- This means that there is little budget left over for other projects.
- SAP hides these costs within IT budgets.
- This keeps the customers continually dependent upon SAP.
- This keeps SAP customers from broadening their horizons and putting their IT dollars to (far?) more effective uses.