Friday, 19 June 2009

Thru a glass darkly

It occurred to me that when writing these posts, I've fallen in the same trap as a lot of people; I make assumptions that the readers will know certain things about SAP that I don't need to elaborate on. So I thought that I would clarify a few issues.

SAP is an acronym - Systems, Applications & Processing. The title was originally in German, but it works the same in English. It is both the name of the company (SAP GmbH or SAP Inc etc.) and it is also the name of the software product that the company produces. Normally, it is fairly clear which of the two is being referred to, but just occasionally, it can be a bit confusing.

The company is a global player - they operate in almost every market area of the world. Previously, due to the size, complexity and cost of implementing their product, they concentrated on selling to the larger organisations. However, some years ago, they realised that there were a lot more smaller businesses out there than larger ones and so changed their focus somewhat - they now try to sell to all sizes and type of organisations.

The software is a massive product, with many modules covering different areas within a business. It is intended to be a true Enterprise Resource Planning (ERP) product; that is, it allows data from all areas of a business to be handled and processed in order to allow a seamless transition of data and therefore much greater accuracy of processing and transparency of data for analysis. This has previously been of real importance to the larger operations, but is becoming equally important to the smaller ones that wish to compete on a equal footing.

So far, so good. However, now it starts to get a bit more complex. You see, SAP (Inc) don't actually do most of the selling of SAP (product) . Yes they have a massive marketing budget and teams of specialists that help in the selling process, but the majority of the selling is really done by other companies; and these are the ones that also (generally) do the implementation of the product. These can be smaller companies operating in a single country or larger one that operate across a global region - it could also be one the big boys such as the major consultancies. This actually also includes people such HP & IBM who are surprisingly active in this area.

Now there are people out there that will tell you that SAP (the product) can operate "out of the box". I know what they mean, but in fact that is a very simplistic statement and in reality is simply not true in the way that say Microsoft Office would work out of the box. From my experience, I can say with utter certainty that the software installation is not a just case of putting a CD / DVD in the drive (they actually supply a large box full of over 100 discs!). In order to carry out even the most basic of installations successfully, you need to know certain things about the product and your business before you start. Even then, there are a number of factors that could prevent an installation taking place at all.

In order to use the product effectively, it also needs to be set-up - SAP (the company) refer to this as "best practice". What they actually mean is that over the years, they have developed a series of modifications and changes to meet the needs of the larger businesses that they have installed the product in. They have a wide range of these based upon sector and process type; they can select which of these to install on a "mix and match" method. This requires a good knowledge of the product AND of the business - and I would suggest that this one area is responsible for many of the problems that occur during implementation.

Now it gets even murkier. In some of the consultancies, the people that work for them are employees, but many are only on short term contracts - say 18 months to 2 years. These consultancies will hire people for the specific project based upon need and skill. Unfortunately, many of the people hired are of varying quality - and in some cases, they end up working in a module area that they are not particularly skilled in. I've also seen that the consultancy can hire in a person who is in turn a private contractor, and these generally get paid by the day or week. I also understand that in some cases, the larger consultancy contracts out part of the work to a smaller firm. And of course, the smaller firm can then hire in the actual people, who might even be employed by yet another business.

You see, some of these consultancies specialize in specific areas - HR, Accounts, or groups of modules such as those that make up the manufacturing process. The concept is fairly sound - you hire in the expertise in the area that you have the need. This allows you to act as a consultant even if you don't have the required specialization.

But with all of these different people, using different employment methods and structures of reporting, you find communication problems even in the relatively simple projects. From experience, many of the individuals like to work in particular way and use specific methods or practices - in some cases, these clearly don't meet the specific requirements, and I've seen that they often go against the defined goals.

Now, for a lot of people, this will seem a strange way of working - but you have to understand that this is the SAP business model. They are NOT in the business of selling software - they actually want to sell the knowledge and experience of the consultants, either as business consultants, project management, training, education services - basically all of the additional items that are perhaps a bit harder to quantify.

Don't get me wrong, when the software is set-up properly, it seems to work well (if perhaps a bit long winded). However, I would suggest that the way that the product is sold and then managed is almost designed to lead to issues that will then require the hiring of additional outside expertise. The problem then of course is that often people get locked in to the product - no-one (especially in senior management) wants to admit that they might have made a mistake, so they act like the gambler who keeps on playing in the hope that the one big win will cover all his losses.

Our project is one of the less expensive ones - we've spent nearly $2 million so far after 2 years and based upon some of the comments and observations, I expect that we will see an annual expenditure of another $100k to $150k for the next 5 years in addition to any contracted support cost (which was hiked from the beginning of the year). I still have a copy of the original documents - they stated categorically that the total cost over the first 5 years would be $1.06 million and this covered all installation costs, support and consultancy.

In reality, we will probably have spent around 3 times as much by the time that we are finished. I did some basic numbers and to get the return that they suggested, we would have to continue to use the product for around 18-20 years, and that doesn't allow for any subsequent changes or projects. I have to be honest, I cannot see that we will ever actually get a return on our investment - it's just going be a big old money pit.


  1. What a brilliant summary! I don't understand what you mean when you say that SAP does not sell software. Their price is VERY high, they charge a lot. In my company, they wanted to charge us for being beta testers. yes, you read correctly, they wanted to charge us for testing and debugging their next version! In addition to the fee, we were supposed to pay a project leader dedicated to our beta testing phase. That's what I call over exageration.

    You explain well that the critical factor of success of a SAP implementation is the quality of the consultants, that is their knowledge of the product AND their knowledge of the business domain. SAP consultants are very rare and therefore are more expensive than other consultants. In Europe, the range is between 1000euros/day to 2500euros/day. But don't ever think that for 1500euros you will get the big guru. Sometimes you just get an early beginner who arrives at 10am and leaves to the airport at 4pm. Many people guess that the consultants know little about the business domain, but few guess that in some cases they know also very little about the product.

    I have heard cases of true beginners who were charged as confirmed SAP consultants. I believe the selection of the contractors is the most important point. Vendors statements must be verified, analyzed, challenged, etc

    But here it brings us to the vast discussion about consultants in general. Consultants firms are sometimes telling a lot of false statements just to get the contract. The rule is to be very critical and selective.

  2. I really appreciate your blog, it's inspirational. Thanks.

  3. Hi DD,

    The point that I was trying to make is that SAP could give the software away free; the bulk of their revenue is from consultancy, education, training etc. In several cases, it appears they don't charge that much for the software. I heard of a project where they were in a bidding war against Oracle - they dropped their software / licence price for 5,000 users to under a $100 per user. This was becase they knew they would make the money back on the services side.

    Your point about beta code is also very valid. Someone I met a while back told me that they only found out that they were on beta code after 8 months into using it and they had paid $15 million for this.

    I can also confirm your point about the beginners being put forward as experienced consultants as we have seen that ourselves. Unfortunately, they keep adding these people to the project and we know nothing about them or their background before they start. As you say, consultants are a whole other can of worms.

    As always appreciate the kind words.

  4. I love the blog and have read everything up to this point but have to comment here.

    SAP AG is a software company 100%. They are NOT a services company. SAP has a consulting service but they only make up less than 1/3 of the company and only (in the USA) take up about 5-10% of the SAP consulting market. SAP's main focus has historically been developing enterprise software, not servicing it.

    Point #2, your comment on consulting is spot on. SAP products are deep and complex making the knowledge of the underlying processes and configuration very valuable. One of the negative side effects of this is the massive amount of filth that has been attracted to the consulting side of the industry. The stories are endless!!! And you hear them over and over... so-and-so consultant is presented as a "Senior" level resource on a Monday and by Friday the customer finds out that he doesn't even know XYZ even exists! At times it can be a bit funny to hear this stuff until you realize just how outrageous the lies are and degree of mis-reprensentation that exists in the market. In the end, customers get really screwed in this and they NEED to be more disciplined in vetting the people they onboard. For the consultant PIM, you shouldn't even let them in the door until you talk to 1-2 past customers and get a chance to meet him. As shocking as it is to hear stories about the know-nothing consultants in the market, it is even more infuriating to me to hear about customers who DO NOT KICK THESE GUYS OUT THE DOOR. I understand the limitations (staffing, cost, time, scope) at customers, particularly the smaller ones, tend to be firm and you don't have much room for error... but customers cost themselves so much more money by going live with sub-optimal (or non-functioning) solutions that were designed and built by third party guys that were walking the streets as freelancers just weeks before showing up at your door as a "Senior Consultant" with "BIG 4 Consulting Firm". It's like my doctor tellling me to eat better; in the end, I have only myself to blame for not following his advice.

    Best of luck with your journey. Keep posting.

  5. Keven,

    Just to point out that according to SAP's own annual report (2008) their revenue was $11.5 billion of which software sales accounted for $3.6 billion. Sales of software only make up a third of their income - the bulk of it comes from support, consultancy revenue, training services and "other professional services". I'm not saying that they don't sell software - but their business model is based upon "value added" business functions generated thru their own or partner consultancy, not thru sales of software or licences.