The COVID-19-infected world is in turmoil and no business sector reflects that better than manufacturing. A checklist of effects might include workplace safety, access to labour, collapsing demand and revenues, rapidly rejigged supply chains and more. Who could have predicted distillers and brewers making hand sanitiser and couture fashion brands turning production over to masks and scrubs? The name of the game has switched away from obsessing over digital transformation, AI, the Internet of Things, Industry 4.0, the user experience and new go-to-market channel and value-chain strategies. Those are all being put on hold and today, it’s all about the more brutal, near-term reality of trying to survive.
But what can be done? Managing cost bases has become the number-one priority as marques from Nissan to Jaguar Land Rover and Rolls-Royce drive efficiencies through layoffs and other measures. Many CIOs are reporting that they have clawed back time from their schedules after the initial rush to support home working and this is the time that they should be forensically examining their cost bases as a critical aspect of the famous ‘new normal’.
What does that new normal look like? In a word, efficient. Manufacturers need to find new levels of parsimony, extracting every possible cost in order to be in the best possible shape for a return to order. And that brings us to ERP… ERP systems are the digital heartbeat of manufacturing operations and they will usually represent the biggest software investment a manufacturer will make, so it makes sense to look at the economics of those investments. But this isn’t about swapping out one brand for another as the days when an ERP might deliver significant value creation, much less competitive differentiation, have long since gone. The boom time for ERP customisations and its accompanying gravy train for systems integrators implementing such tailored applications, has faded. The traditional lever for vendors of claiming their ERP could help to increase revenues also seems very difficult to justify right now. The priority for customers is identifying savings made in lowering costs and sweating assets.
The time is right
There is another reason why manufacturing sector CIOs should be taking a close look at their ERP cost spreadsheets right now. COVID-19 comes as one of the biggest companies in manufacturing ERP is seemingly implementing swinging changes to its products and support plans.
Any SAP watcher should know that the German giant wants to move its installed base currently on ECC 6.0 to S/4HANA in the cloud. Although the end-of-life mainstream support deadline for that switch has been moved back to 2027, it’s a cut-off point that’s forcing manufacturers to make decisions about the future of critical applications, ready or not. This is effectively a forced march that ends in lock-in, given how tough it can be for customers to disentangle themselves from the branches and tendrils of an ERP vendor. For SAP it’s a way to keep the gravy train on track with streamlined SKUs and support overhead, but for customers there’s a high risk of failed implementations that potentially wreck operations. Look to the recent examples of Revlon, Hertz, Leaseplan, Haribo and National Grid for some alarming lessons.
And with COVID-19 taking a wrecking ball to the usual dynamics of manufacturing, SAP’s road plan could hardly come at a worse time for companies that need every bit of wiggle room and focus they can muster just to ride out the crisis. The latest CBI report suggests that UK saw its biggest quarterly fall in manufacturing since records began in 1975: April figures were down 28.5 per cent on the year-ago figure. The challenge is that SAP is so deeply embedded in the manufacturing industry where it claims to touch 77% of global transaction revenue. Many internally-deployed installations are highly customised and that means it could be challenging to replicate them in their current form in the new S/4HANA environment, despite SAP’s pledge to work tirelessly towards that target. So, there is the conundrum: go to S/4HANA, potentially lose your highly customised apps and risk lock-in, or stay put, keep your customised apps, but risk losing full support. So, what can SAP customers do?
A game of risk
Firstly, customers must understand 2027 is an arbitrary deadline put in place to benefit SAP, not its customers who have choices. Even for those already minded to strategically move to the cloud it’s important to understand how challenging the transition can be. This is no lift-and-shift operation and now is probably not the time to accept risky manoeuvres that SAP is proposing, such as moving to SuccessFactors for payroll.
The balanced choice for many to buy time to make that big upgrade decision and reduce costs at the same time will be to adopt third-party support. Most customers don’t want to be locked-in or bullied by vendors, especially now. By staying fully or part internally-deployed, third-party support and application management services (AMS) provide robust support at costs way below SAP’s 22 percent annual maintenance tax. Digital transformation and Industry 4.0 will be critical for manufacturers once they have ridden out the pandemic but those big decisions will be parked for now.
Don’t just take our word for it. Gartner predicts, based on inquiries it is receiving from sourcing, procurement and vendor management leaders, that third-party support will triple over three years from a $351m market in 2019 to one worth $1.5bn by 2023. We’re certainly seeing unprecedented waves of inbound interest as CIOs seek to address costs urgently. Ultimately, companies will act pragmatically and in these extraordinary times that means cutting costs and not being squeezed into a corner by the vendors that should be serving them.