SAP Enhances ERP 6.0

News Analysis: Will SAP's upgrade road map convince users to embrace the improvements?

As part of SAPs core platform strategy geared toward its large enterprise customers, the company released a second enhancement package July 31 that amounts to the next go-round of upgrades for the companys ERP suite.

The upgrades to the enterprise resource planning offering, SAP ERP 6.0 (formerly MySAP ERP 2005), include functionality that can be implemented on an as-needed basis, rather than requiring a single major upgrade.

The enhancement packages upgrades include both horizontal and industry-specific functional enhancements, core application upgrades, process and user interface simplifications, and new Web services derived from SAPs business applications.

The enhancement packages themselves—SAP plans to release about two per year—are designed to simplify the way customers manage and deploy new software functionality. The company announced its strategy in 2006 to keep its ERP 6.0 platform stable until 2010, providing upgrades and enhancements in chunks that customers can chose whether to implement.

The idea is to break the massively expensive and time-consuming cycle IT shops go through in order to upgrade. SAP particularly is noted for the number of customizations and iterations its customers experience in large implementations.

The question is, now that SAP has built ERP 6.0—and decided to keep it stable for the next several years—how fast will users come to the upgrades? And will customers reluctance to upgrade have an impact on SAPs ability to innovate?

"Its always better to have software that is more modular and easier to upgrade, absolutely. That said, these [SAP] implementations are really large. Customers are stuck between a rock and a hard place," said Judith Hurwitz, an analyst with Hurwitz & Associates. "I remember talking to a customer who said that to do even a point release is six months of work, and thats just a point release. Upgrading an entire system, you have to check and recheck every area youve done customized work to. You have to test it all."

To date, SAP has about 2,800 customers on its ERP 6.0 platform—a small fraction of the 33,000 or so customers the company has on its roster. SAP also has about 5,800 customers on its MySAP ERP 2004 platform, the next-generation predecessor to R/3 that introduced NetWeaver.

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But even MySAP ERP 2004 customers still need to upgrade to ERP 6.0 to get the switch framework functionality necessary to utilize SAPs enhancement packages, which is a minor upgrade, according to Philip Say, vice president for solution marketing at SAP.

While customers have responded favorably to SAPs strategy of maintaining a stable core for several years at a time, the majority havent yet voted with their dollars. SAP understands the issues involved in upgrading, particularly those to do with testing a complex environment, and is working to solve the issue with the enhancement packages, Say said.

"Weve taken a radically different approach to upgrades. Today we have a lot of transparency into the new version of the product," he said. "We figured out that a lot of the costs around upgrades were really around testing. Weve provided a lot of visibility and very discreet testing scripts."

Say said SAP hopes to absorb some of the costs of upgrades for its customers, so they in turn can upgrade more quickly and eventually enjoy the lower overall costs of upgrading with enhancement packages. Having customers upgrade would also be a boon for SAP, as a customers investment in ERP 2006 also means an investment in SAPs ESA strategy, one the company laid out in 2003 and that includes the NetWeaver platform and SAP services, which could play a big role in the future as companies utilize more and more applications services.

But a lot of customers are seriously weighing their current systems against new functionality and coming to the conclusion that an upgrade may not be worth it, according to Hurwitz.

"Thats why old software never dies," Hurwitz said. "If you spend x millions of dollars upgrading to whatever version of SAP youve upgraded to, its working OK, youve customized it and its doing what you want, you really have to do that cost analysis to figure out, What benefit am I getting by spending a lot to upgrade?

"There is hesitancy because of all the manual requirements. Its a real dilemma for these customers; they dont have the staff. I dont know any IT organizations that are expanding their staff for testing," she said.

However, Hurwitz said IT shops are expanding their business and purchase plans for new architectures that are focused and business-driven. If customers are shopping around for a new architecture, that should be good news for SAP, given the companys investment in its ESA strategy, according to Forrester Research Analyst Ray Wang.

"The challenge for SAP customers is the amount of customizations and the number of instances customers run, which is more reason they should go to the new platform, which should make [upgrades] easier," Wang said. "The enhancement packages would be the equivalent of MySAP 2007—some would come earlier, some later—but instead of a major upgrade," customers can pick and chose what to implement, he said.

Wang said SAP is experiencing a normal adoption cycle, in which it takes an average of three or four years to get a good third of ones customers to move over to a new release. To get half of a companys customers to migrate to a new release—about 15,000 companies, for SAP—should take between five and seven years and "is a pretty big accomplishment," Wang said.

SAP, headquartered in Walldorf, Germany, introduced MySAP 2004 two years ago, and SAP ERP 6.0 last year in 2006.

The incentive for large customers with very complex environments, with lots of customizations and instances, is that SAP has been upfront about its enhancement package road map for the next three or four releases, according to Wang. "It will be a good way to [convince] them to upgrade," he said.

However, Hurwitz sees a different scenario unfolding for SAP should its customers continue to dally. "I think its a real problem," she said. "Its a problem because [SAP] cant sit still and wait for everyone to pull plug on old stuff."

SAP does not appear to be sitting still. The company launched a major development effort earlier in 2007, at a cost of $414 million to $552 million over eight quarters, to develop a new suite of software, code-named A1S, that will be on-demand and appliance-based. Some industry watchers have predicted that A1S will be the future replacement suite for R/3, despite the massive investment in SAP ERP 6.0.

In a July 19 second-quarter 2007 earnings call, SAP Deputy CEO Leo Apotheker nixed the idea that larger companies would be more interested in a cheaper, more nimble suite from SAP.

"Once A1S is out, there will be interconnections," Apotheker said. "There will B2B [business-to-business] traffic and there will be some innovation that will go both ways and you cannot exclude [the fact] that once we are in the next phase of evolution, some differences will happen. But for the foreseeable future, the next two or three years, our enterprise customers want to see an evolutionary approach minimizing downside risk."

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