As the global COVID-19 crisis has disrupted normal business operations for all of us, we see unique challenges faced by businesses and their management
Obviously, this gives ample opportunity to revisit and fine tune strategic decisions from the past, including key IT transformations, based on new assumptions and parameters. With SAP ECC 6.0 support officially ending in 2027, you were likely already planning or delivering such a high-profile IT transformation for your company due to the multi-year effort usually required. If so, we suggest you take some time to rethink and, if needed, recalibrate your ERP transformation strategy.
COVID-19 has changed priorities, which have shifted toward optimizing topline with digital products and distribution channels, as well as fixing newly revealed supply chain issues. Cutting costs is also a renewed priority. IT executives can take measured steps to realign IT strategies within this framework of disrupted transformational momentum.
Now more than ever, the most crucial question for your ERP transformation is: what is the right approach? Typically, this is the most critical strategic decision for senior leaders dealing with ERP even in non-crisis times: to create a new implementation, conversion, or hybrid approach.
This entails a total restart, should be especially driven by the business and can yield considerable benefits. It’s the ideal opportunity to reinvent business and optimize overly complex processes and internal structures. But this is also a higher risk and more costly approach, as it involves significant level of effort (e.g., for process design, reintegrating legacy systems) with special requirements in resourcing and business buy-in. At the end of a new implementation, day-to-day run cost will usually diminish as processes are more standardized, once all users are on the new platform and the old legacy can be decommissioned.
This is a technical upgrade usually driven by IT. It entails companies performing a technical migration of the old solution to a new technology stack and only adopting the new S/4HANA features, selectively based on ROI (including some must-do changes like migrating to the new G/L). Conversions are more technically focused and so, have less impact on the organization in the interim. A technical conversion can be undertaken in less than a year, however more meaningful improvements, e.g., business process redesign, would follow incrementally in later stages. Conversions are roughly 1/3 the cost(1) of new implementations, but with limited business benefits, as process innovations and improvements are not stringently prioritized.
This is a balanced approach, combining both new and conversion, so companies can pick the most relevant processes, code, and customizations to transform. Hybrid offers balance between complexity, impact on organization and effort, which can be adapted as needed during the transformation journey. The cost of hybrid migration is typically moderate, but heavily dependent on the actual customer situation. Like the conversion approach, a working ERP can be built in less than a year. Hybrid can be a great opportunity, but only if correctly applied and managed as a viable compromise between a new implementation and conversion approach.
While current market analysis varies on which migration scenario companies tend to use, SAP claims a 50/50 split between new implementations and conversions, while hybrid approaches account for less than 10% of the chosen migration scenarios.(2) Many IT executives and business stakeholders remain unsure on how to move forward with the enormity of business and IT challenges of migrations, as they try to discern among approaches with deviating directions from SAP, system integrators and other consultancies. Leaders may also lack clarity on how to refine their strategies during the COVID-19 pandemic.
“In our opinion, the basis for selecting the right approach is a strategy phase allowing for an objective assessment. This phase should encompass all strategic parameters, including constraints on budget and resources.”"
At BCG Platinion, we believe that there is no general recommendation for the best approach, as that must be determined case-by-case. Instead, the basis for selecting the right approach, in our opinion, is a strategy phase allowing for an objective assessment. This phase should encompass all strategic parameters, including constraints on budget and resources. We see that companies tend to fall into the “new implementation trap”– huge efforts in the three-digit-million-dollar range which often fail to fulfil promises due to lack of business leadership or a solid business case, plus over-reliance on system integrator and vendors driving strategic IT discussions.
To help your enterprise avoid common failures on your ERP journey, we offer these insights for your internal discussions:
I. Do not embark on new implementation without dedicated business leadership
In any transformation scenario, business buy-in is essential and achieved only with a solid business case and clear value creation — especially critical to define upfront for new implementations. The more a company veer toward new implementations, the stronger the business needs to own and drive the project.
It’s no surprise that business leaders are often reluctant to create a business case for changing legacy systems, as it appears to be an IT topic without any choice. On the upside, developing a business case for ERP transformation may reveal the fact that there’s no need to re-engineer legacy business processes entirely, and instead to integrate smaller adaptations.
II. The liberation of data can be achieved without a new implementation
Even if a full business process redesign won’t be required, we believe that companies need to liberate data and augment core business process in an additional digital layer to increase overall flexibility to fulfill business requirements.
The BCG Data and Digital Platform framework suggests a multi-layered architecture to enable building digital use-cases at scale. ERPs are key elements of the “Core Transaction Layer” of the framework as key building block for digital architectures, and to provide crucial inputs to the data layer. To harness the full benefit of a modernized ERP system, as part of DDP-ready IT, a use-case driven approach to implement ERP and DDP in parallel can help realize benefits early in the process.
The liberation of data from the “Core Transaction Layer” through the “Data Layer” is crucial for future readiness of your enterprise architecture – particularly to flexibility build data-driven use cases with the use of state-of-the-art technologies in the “Smart Business Layer”. However, considering the layered approach outlined above, this can be achieved without implementing a new ERP system from scratch.
III. SAP S/4 HANA enables usage of new technologies for any implementation scenario
The adoption of new technologies such as artificial intelligence and IoT are often the cornerstones of an enterprise-wide digital transformation. While companies don’t need a new implementation imminently, the new modular S/4HANA platform does allow for easier implementation of digital use cases based on off the shelf innovations.
A conversion is an ideal opportunity to transform the legacy ERP, step-by-step, into a lean “digital core.” After the technical conversion, legacy complexity can iteratively be removed while new innovations can be developed, outside the lean core — thereby moving differentiating functionalities into the “Smart Business Layer”. These amplifying customizations and developments can be built using low code / no code tools such as Mendix on cloud technologies such as SAP Cloud Platform or the hyperscaler of your choice, including the preferred SAP partners AWS, Microsoft Azure, Google Cloud and Alibaba Cloud.
IV. The evolution of tools makes conversions more appealing
Historically, SAP or non-SAP legacy ERP transformations were extremely complex endeavors. The identification of custom objects and data migration were time-consuming, manual activities. This meant increased risk of custom developments or specific data objects being inadvertently overlooked.
Fortunately, tooling for migrations and conversions have matured dramatically in the last few years. This includes standard SAP migration solutions and supporting tools — SAP readiness check, SAP Transformation Navigator, SAP Migration Cockpit — and 3rd party accelerators. Tooling makes conversion and hybrid approaches more effective and efficient. Tooling maturity affords simplification of overall migration, reducing time-to-market and total cost.
In sum, there is no right or wrong approach to ERP transformations. For the reasons we’ve delineated above, any S/4 transformation must convince stakeholders with a proper, sustainable business case; and the case for new implementations should be critically examined and challenged.
Key to a successful transformation: The BCG Data and Digital Platform framework
(1) based on BCG Platinion project experience
(2) based on ‘Mapping Your Journey to SAP S/4HANA- A Practical Guide for Senior IT Leadership’, March 2020
About the Authors
Pierre SchatlowskiAssociate Director
Pierre is a senior expert in the topics ERP architecture, S/4HANA strategy, IT transformation, IT governance/organization, IT management and IT cost cutting. Pierre joined BCG Platinion in 2014 from SAP where he was working as an ERP implementation consultant.
Ruben is an expert on Data & Digital Platforms, large-scale ERP transformations and IT Architecture. Prior to BCG Platinion, Ruben worked as an ERP implementation consultant at a System Integrator. He is a SAP Certified Associate on SAP S/4HANA Implementation Scenarios for Architects.
Paul is an expert on digitalization, e-commerce and commodity trading, especially on process and IT landscape. He has supported clients from different industries with IT strategy formulation, restructuring as well as conceptualization and steering of project implementations.