Sameera Simjee
The move to SAP S/4HANA or any ERP software is likely to highlight costs that may be missed or underestimated in budget evaluations. A realistic view of how big the bill could be – with hidden as well as obvious expenses – can help to control cost creep and enables organisations to enter into these complex endeavours with their eyes open. It can also help you choose the S/4HANA approach that best fits your business and will deliver real value. So, what costs are often overlooked, how much should you allow and how can you build this into your S/4HANA strategy?
When clients come to us as ERP strategy and execution consultants, one of the first questions they ask is “how much is S/4HANA really going to cost us and how can we tangibly realise its value?
As we explored in an earlier article, 'S/4HANA: balancing ambitions, costs and constraints', how much you spend often depends on what you want to achieve. The options range from a fully re-implemented platform to selective optimisation of functions like Finance or Procurement, or even a technical upgrade. Yes, the big ambitious programmes could be more expensive in the short-term. But this needs to be set against the potential medium and longer term value that a solution like this could provide.
What’s less clear and almost always underestimated are the implementation costs.
A key cost multiplier is how many divisions and operating territories are involved.
The outlay needed for a regional versus global deployment of S/4HANA can vary strikingly. Drivers of increased costs include duplication of resources across local teams, along with the need to customise processes and develop the necessary capabilities on the ground.
The scale and cost of local recruitment within what can be limited technical talent pools are one of the first major budgetary underestimations – and indeed causes of implementation delays.
S/4 migrations change processes and core structures. Ensuring that programmes work with functional stakeholders to define the future state operating model is key, especially since many organisations use the transformation opportunity to evolve and optimise the core business operating model.
Similarly, definition and implementation of the service support model is also crucial to ensure the integrity of the platform and processes in life and to promote continuous innovation. Setting up tech and business functions to work in new ways such as DevOps, Release Management, Centres of Excellence and Global Process Owners are all part of the target operating model for the run organisation. We often find that these core activities are not considered as part of the migration programme, and so are often overlooked or undercooked in business case costing. Being clear on what change will be brought to the future operating model is key to ensuring a transparent and confident ROI commitment to the Board.
You will have to free up your people from their day jobs to be involved in the migration creating skills gaps in other areas of the business. You should set an allowance for backfill, training and education to ensure your team is up set up for success to deliver the migration without risk or impact to your core business as usual operations.
The next set of unseen costs centre on interfacing S/4HANA with internal systems such as payments and payroll, along with the platforms used by third-parties including suppliers, customers, banks and tax authorities.
The technical requirements of S/4HANA mean that getting it to interface with all the other systems in your value chain can be an exceptionally complex and expensive task – adding between 5%-10% to the overall implementation bill. But the more business functions or key processes S/4HANA covers, the fewer legacy systems it needs to integrate with and hence less remediation and workarounds required. So it’s important to factor this trade-off as well as the maturity of the existing integration landscape into your ambition and appetite for change.
Organisations frequently fail to factor in the costs of establishing and setting up new ways of working to support their ERP migration. They often overlook or underestimate the direct and indirect costs of new teams, methods, processes, data and tech capability to realise their goals. The time required and the impact on existing business-as-usual activities should not be under-estimated.
The other largely unseen and underestimated costs are contingency. You’ll need to factor in up to 5% a year for inflation, so in a three-year implementation programme, that would increase the bill by 15%.
You’ll then need to allow typically around 10% for what will inevitably be increases in the scope of the programme. Some of this expansion could follow a review of ambition and strategy during implementation, though there may also need to be adjustments to address initial assumptions which then become clearer over time. The final contingency would be 5-10% to tackle overruns in delivery and time.
So whatever figure you had initially come to, you’ll probably need to add at least 25% more and possibly as much as 35% in a large and complex programme.
So how can you rein in these potentially escalating costs of your S/4HANA migration? The more you know about the cost drivers, the more you can control them, while making sure resource is targeted where it can deliver the most value. Five priorities stand out:
1. Clarify your ambitions
With a clear set of ambitions for what you want to achieve through S/4HANA migration and an objective cost-benefit analysis to support this, the easier you will find it to decide what gets funding and what doesn’t.
2. Be realistic
While certain costs are unavoidable, you can anticipate and mitigate some of the more common unseen costs. Be clear about what costs should be included and evaluated upfront and which ones are a priority, so you can have a plan to catch potential overruns and tackle them early.
Evaluations should clarify what is a capital expense (CapEx) and operating expense (OpEX). There is discussion in the world of accounting on whether, as a cloud-based platform, much of the move to S/4HANA would be designated as an OpEx in the UK, rather than the CapEx that would have been usual for non-cloud-based systems implementations. The allocation of OpEx or CapEx status will impact whether the project spend is included on the balance sheet or not. Note the treatment will vary by jurisdiction beyond the UK.
3. Build in the trade-offs of S/4HANA migration
Evaluations should include an SAP S/4HANA implementation’s indirect as well as direct costs, along with the trade-offs between them.
A key aspect will be not underestimating the potential costs of sticking with your legacy enterprise resource planning (ERP) system or a bare minimum S/4HANA implementation. Higher maintenance costs, as well as workarounds, inefficient processes and lost opportunities that could come with a ‘do nothing’ or ‘almost nothing’ strategy should all be considered.
4. Recognise the value of the investment
The cost of S/4HANA could also be considered as being a valuable investment.
Given how business critical S/4HANA can be and the risks and opportunities that come with this, it pays to assign your best people to design and direct the programme, even if this requires some temporary backfilling in their usual roles.
Similarly, the better the talent you hire and more effective the upskilling of existing employees, the more return you can generate from your S/4HANA investment.
5. Track the value levers
Identifying the value levers for realising your return on investment in S/4HANA and creating key performance indicators (KPIs) to measure delivery will help you to track progress and intervene where necessary. Examples might include how much less time you’re spending on invoicing compared to your target, or the amount of contract leakage from your procurement solution.
The other big advantage of these value levers and KPIs is in helping to target and communicate early gains, which can help build buy-in and momentum for S/4HANA roll-out and deployment.
SAP S/4HANA or ERP journeys take significant investment, so organisations need to understand how to identify the crucial costs and make the right objective choices when looking at their options. Having an understanding of those less-seen project costs when calculating your financials will give your budgeting a much firmer foundation. Not only will you de-risk the pricing of your project, but decision-making and prioritisation will be vastly improved. You will achieve better outcomes for your business and gain much better value from your S/4 investment.
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