RESEARCH NOTE D23

ROI ANALYSIS YOU CAN TRUST T M

The Real ROI from SAP

THE BOTTOM LINE Fifty-seven percent of SAP customers interviewed did not believe that they had achieved a positive ROI, after having used their SAP applications for an average of 2.8 years. Those who did achieve a positive ROI limited customization and project scope, and they focused on user adoption and repeatability. SAP AG is a global provider of e-business solutions. SAP has traditionally provided enterprise resource planning (ERP) solutions, with one of the largest installed customer bases among competing providers in this space. SAPs set of e-business solutions include the following: Customer relationship management. mySAP CRM enables realtime availability checks, contract management, billing management, fulfillment visibility, and order tracking, and it connects front-end and back-end customer systems into a single system. Supplier relationship management. mySAP SRM supports supplier collaboration by automating processes with suppliers for all purchased goods and services. Product lifecycle management. mySAP PLM enables collaborative engineering, custom product development, and project, asset, and quality management among multiple business partners. Business information warehouse. mySAP BW forms the core of the mySAP business intelligence offering, providing an independent data warehousing and reporting solution capable of gathering information from internal SAP and external data sources. Supply chain management. mySAP SCM helps manufacturing organizations track financial, informational, and materials processes and identify processing exceptions. With mySAP SCM, departments and business units can gain greater visibility into inventory, planning, and scheduling. Companies license and use SAP applications either as separate modules or as part of the overall mySAP.com suite of e-business solutions. In the past, many companies invested in ERP solutions that bundled functionality for financial reporting and operations management. Recently, ERP providers, including SAP, have tried to diversify their offerings into more discrete offerings that meet specific business needs and challenges, such as product data management, supply chain management, and corporate financials. As is Nucleus Research normal practice for its real ROI series, Nucleus analysts independently contacted SAP customers without SAPs knowledge to gather data for this real ROI report, on behalf

2003 Nucleus Research, Inc. Reproduction in whole or in part without written permission is prohibited. Nucleus Research is the leader in the return on investment analysis of technology. Please visit www.NucleusResearch.com.

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of Nucleus clients who need fair and accurate data about the costs and benefits associated with a technology deployment. This report takes a broad look at the returns and costs associated with various SAP technology deployments. Nucleus clients should contact Nucleus Client Services for detailed information on the costs and benefits associated with specific SAP solutions. THE PROCESS Nucleus searched the SAP Web site for companies that were listed as reference users of SAP. Nucleus found 93 reference customers of various SAP solutions and contacted each one: Twenty-one agreed to participate in interviews. Twenty declined to participate for various reasons. Fifty-two never responded to repeated requests for interviews. The sample of SAP customers surveyed included companies that had purchased and implemented a combination of SAP applications and modules. Nucleus has included the data from all customer interviews in this report. The majority of companies provided details of their deployments on condition of anonymity. Nucleus asked companies about various aspects of their SAP deployments that would impact ROI, including the following: Why and when did you select SAP? Which SAP solutions have you implemented? How long did your SAP deployment take? Did you stay within your deployment budget? What are the most significant returns and benefits from your SAP applications? How much did you spend on the project; in particular, how much did you spend on software, hardware, consulting, training, and personnel? What were the key deployment challenges? Do you think that the costs of your SAP deployment have been outweighed by the returns? Fifty-seven percent of SAP customers interviewed did not believe that they had achieved a positive ROI from their deployments. On average, the companies surveyed had been using SAP for 2.8 years. THE BENEFITS FROM SAP Nucleus found companies achieving benefits from SAP in three areas: Increased employee productivity and reduced head count Improved operations management Improved information organization and access for decision making

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Increased Employee Productivity and Reduced Head Count Numerous companies interviewed reported increases in employee productivity and reductions in personnel costs as a result of using SAP solutions R/2 and R/3, PLM, BW, and SRM. However, a positive return on the SAP investment was achieved only when there was both a sufficient number of users and sufficient frequency of use (breadth and repeatability) to reap significant productivitybased gains from the solution. Companies using SAPs BW solution reported significant improvements in reporting accompanied by increases in the productivity of end users (who could now create their own management reports) as well as IT personnel (who no longer had to support the end users in the creation of ad hoc reports). The use of SAP PLM also brought similar benefits, especially in the way of reduced document rework, improved collaboration among employees of different departments, and reduced time to market. Companies that had used Excel spreadsheets for product data management before implementing SAP, for example, saw significant drops in the amount of time spent on version control and rework. However, not every company interviewed achieved a positive ROI from its PLM deployment because of a lack of repeatability in the workflow and document management functions affected by the technology. One company that did achieve a positive ROI made sure its processes could be adapted to SAPs technology and that many engineers rapidly adopted SAP PLM to support their workflows. Several organizations that used SAP R/2 or R/3 for financials and operations management either reduced the number of finance personnel or avoided hiring additional staff as a result of improved financial reporting. The achievement of a positive return on the R/3 investment was contingent upon the extension/deployment of R/3 functionality to departments such as human resources, which would produce enough returns to outweigh the costs of the solution. Companies that were using SAPs SRM solution found that the automation of the document exchanges in the supply chain cycle resulted in timelier ordering and less manual effort in sending out orders to suppliers. Improved Operations Management Several companies reported cost reductions resulting from improved financial and operational management through their use of SAP. In particular, companies that had been active users of SAP R/3 and SRM found that the visibility these solutions provided into operations along with the automation of various business processes led to significant reductions in costs and more profitable management of business operations.

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Companies that had implemented SAP SRM found that they were able to negotiate lower prices with suppliers (because of their ability to perform global spend analysis), reduce order-processing costs, and increase compliance with supplier contracts as a result of having a centralized supplier management system. However, the achievement of benefits depended on a number of factors, such as user adoption and training, vendor adoption, and the specific industry that the company was operating in. One company, for example, found that it didnt achieve the expected benefits from SRM because its suppliers werent as Web enabled and because the benefits expected didnt apply to its industry of operation. Companies using various components of R/2 and R/3 found that they were able to increase supply-chain efficiency and reduce operational costs in a similar fashion. Companies that were using SAPs ERP and SCM systems reported reductions in inventory (along with general reductions in working capital and asset base), increases in the order-to-fulfillment rate, forecasting accuracy, and fill rates as a result of using SAPs functionality for logistics, order management, and sales and distribution. In addition, the order management capability within SAP was of particular value to several organizations because it allowed employees to place orders and track shipping status via the Internet. Improved Information Organization and Access for Decision Making Users of various SAP solutions specifically, BW and CRM told Nucleus that these SAP solutions provided them increased visibility into their business operations and the ability to analyze their customer bases and revenue sources across territories and product categories. Companies that migrated from paper-based or Excel-based reporting protocols to SAP BW found that the standardization of data and the improved access to management information allowed executives and managers to make better business decisions that were based on sound business data. Users of SAP CRM reported that the ability of SAP CRM to create targeted mailing lists based on customer intelligence, for example, led to increased hit rates on companies Web sites. However, the SAP CRM customers interviewed by Nucleus had not achieved a positive ROI from their deployments because of excessive expenditure on customization that was needed to accommodate heightened detail into their CRM systems. THE COSTS OF SAP The companies surveyed by Nucleus either had licensed SAP R/2, R/3 or the mySAP.com business suite or had invested in separate licenses for specific applications such as mySAP BW, mySAP PLM, mySAP SRM, mySAP CRM, and mySAP SCM. Although many had

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achieved some measurable returns, they had yet to recoup enough returns to cover their investment. In this report, Nucleus presents an average cost model for all SAP deployments studied and also provides software, hardware, consulting, personnel, and training costs applicable to specific application deployments. Specific cost data for each application can be obtained from Nucleus Client Services. Nearly half of the companies studied reported that their implementations of various SAP applications exceeded the initial deployment budget. Software The average software license investment, for all SAP deployments studied, was $1,853,333, and the median license price was $1,000,000. Unlike other vendors whose maintenance fees vary from 15 percent to 20 percent, SAP appears to be consistent in the way it charges clients for license maintenance most companies with maintenance contracts were paying at 17 percent of the original license price. The average annual cost of maintenance for all companies studied was $338,872, and the median maintenance cost amounted to $212,500. Most companies that were under maintenance contracts with SAP were paying maintenance fees at the standard rate of 17 percent of the original license price. Unlike other vendors whose maintenance fees vary from 15 to 20 percent, SAP appears to be consistent. The software costs were as follows: Licenses for R/3 ranged from $1,000,000 to $5,000,000. Licenses for SAP SRM ranged from $300,000 to $5,000,000. Licenses for SAP PLM fell in the $500,000 to $600,000 range. Licenses for SAP CRM fell in the $100,000 to $500,000 range. Licenses for SAP BW ranged from $100,000 to $500,000. In the case of a few BW deployments studied, companies inherited rights to use BW as a result of their overall mySAP.com license, hence incurring no costs to add additional BW users. The average SAP software license investment was $1,853,333, and the median license price was $1,000,000. Consulting Companies used both SAP and SAPs consulting partners for their deployments. The average consulting spend for SAP deployments was $3.64 million, and the median was $850,000. The costs of consulting varied widely, depending on the technology area and the scope of the project. ERP deployments required in addition to huge personnel resources extensive investments in outside consulting for customization, back-end integration, and

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development of user interfaces. The ERP consulting spend for the sample studied ranged anywhere from $1.5 million to $45 million. On average, the companies interviewed spent $3.64 million on consulting for their SAP deployments. The median consulting spend driven by a need for customization, back-end system integration, and the development of user interfaces was $850,000. Table 1. Average 3-Year Cost of a SAP Deployment Initial Costs Average Software Consulting $1,853,333 $3,637,039 Data Components Average initial license price Average standalone consulting expenditure of customers interviewed Average hardware expenditure of customers interviewed Average number of personnel needed to deploy: 31 Average time of deployment: 1 year Assumed fully loaded cost of an employee: $80,000/year Average number of users: 1038 Average training time: 49 hours Assumed fully loaded hourly cost of an end user: $25 Average initial cost of deployment

Hardware Personnel

$882,000 $2,480,000

Training

$1,271,550

Total

$10,123,922

Ongoing Costs Software maintenance Personnel $1,016,616 Average annual cost of license maintenance: $338,872 Average number of FTEs required to support SAP: 14 Assumed fully loaded cost of a support FTE: $80,000/year Average 3-year cost of software, consulting, hardware, personnel, training and maintenance

$3,360,000

Total 3-year costs

$14,500,538

Hardware The average hardware spend for SAP deployments was $882,000, and $345,000 was the median. Because of the diversity of technology deployments studied, there is a notable variance in the

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standalone hardware expenditure that companies made on their SAP deployments. Table 2. Median 3-Year Cost of a SAP Deployment Initial Costs Median Software Consulting $1,000,000 $850,000 Data Components Median initial license price Median standalone consulting expenditure of customers interviewed Median hardware expenditure of customers interviewed Median number of personnel needed to deploy: 11 Median time of deployment: 11 months Assumed fully loaded cost of an employee: $80,000/year Median number of users: 550 Median training time: 10 hours Assumed fully loaded hourly cost of an end user: $25 Median initial cost of deployment

Hardware Personnel

$345,000 $806,663

Training

$137,500

Total

$3,139,163

Ongoing Costs Software maintenance Personnel $637,500 Median annual cost of license maintenance: $212,500 Median number of FTEs required to support SAP: 6 Assumed fully loaded cost of a support FTE: $80,000/year Median 3-year cost of software, consulting, hardware, personnel, training, and maintenance

$1,440,000

Total 3-year costs

$5,216,663

Personnel Nucleus interviewed companies about both the initial and the ongoing personnel costs associated with their SAP deployments. On average, companies deployed 31 full-time employees (FTEs) to manage their deployments, and the median was 11 staff members. This average has been driven up significantly by the ERP deployments in the sample, in which project teams ranged anywhere from 25 to nearly 200 full-time staff members for the entire life of the project. Therefore, a recurring deployment challenge for companies was the need to extract key employees

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from their regular job responsibilities and staff them to deployments of such technologies as ERP and SRM. On an ongoing basis, companies had an average of 14 personnel and a median of six to support their SAP deployments. These employees were responsible for a host of job responsibilities, including ongoing development of interfaces, user support, and database administration. Training Companies trained their users for an average of 49 hours and a median of 10 hours following their SAP deployments. The level of training required varied widely and depended on the technology implemented and the degree of change that the SAP application introduced into the users work environment. In those cases where users were migrating from a mainframebased computing environment to SAP R/2 or R/3, the learning curve warranted a significant investment in initial and ongoing training. Training was also a particular challenge for several companies that undertook SRM implementations based on SAP technology. Because of the diversity of the user community in location and in technical skills, these companies had to invest in extensive training for both the supplier community and internal users in order to ensure user buy-in. SAPS ROI CHALLENGES Nucleus found that the companies interviewed had achieved a number of benefits from their SAP solutions. Yet, a majority of these organizations reported that these returns had not yet outweighed the costs of implementing, customizing, and supporting their SAP infrastructures. Based on these customer interviews, Nucleus has identified the following key challenges that companies face in the achievement of a positive ROI from SAP: Lack of breadth and repeatability High personnel costs Excessive customization Lack of Breadth and Repeatability Many companies continued to struggle with leveraging their investments in SAP. In the mid to late 1990s, companies in a number of industries were facing excess market demand, and there was an immediate need for a system that managed resources more efficiently. In addition, year 2000 technology challenges compelled many companies to rapidly replace obsolete legacy systems with new systems for the sake of business continuity. Thus, many companies invested in large SAP licenses without explicitly evaluating costs and benefits, considering payback period, or developing a clear road map aimed at the full exploitation of SAPs functionality. Over time, companies found that such factors as evolving market conditions, industry deregulation, and bankruptcy proceedings prevented IT departments from extending SAP

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functionality to enough users and departments to produce sufficient returns to offset the high deployment costs of SAP. One company in the utilities industry that has been using SAP for financial functions such as accounts payable and cost accounting for more than six years told Nucleus: We didnt really buy [SAP] to pay for it If only we could implement the HR functionality to the organization, then we would get a great return. Because of internal corporate restructuring and market factors, this company has been unable to invest in the further development of SAPs human resources capabilities and hasn't yet achieved a positive return on its investment. Expressing a similar challenge, the project manager of one SAP R/3 implementation, when asked by Nucleus about the ROI from the companys implementation, said: There is no ROI from SAP. People just tend to put these systems in and await the returns. This company has been using SAPs Finance and Order Management functionality heavily since 1996 and is currently unsure of when it will see a positive return on its investment. The project manager estimated a payback period of 810 years for a positive return on its investment. Another company found, after implementing SRM, that a vast majority of its supplier community was not Web enabled and could therefore not be deployed to SAP SRM as rapidly as the company had initially planned. In addition, returns fell short of expectations because the benefits werent applicable to this organizations industry. The project lead for the SRM initiative at this corporation told Nucleus: By now, according to plans, we were hoping to achieve returns of 600 million pounds. I think we were grossly optimistic about the kinds of cost reductions that this technology was going to bring about. What we discovered was that the industry gurus and evangelists were talking about benefits that didnt apply to our industry. We were seduced by all that talk about benefits; we are in [a services-focused] business, and I think that a lot of these benefits that they were talking about applied to manufacturing firms. One SAP customer who achieved a positive ROI did so by ensuring that the system was rolled out to more than 1000 internal and 7000 external users so small savings in efficiency per transaction produced significant returns. High Personnel Costs Nucleus found that the high personnel costs associated with implementing SAP were a challenge to the quick achievement of a positive ROI. This was especially true for all ERP deployments and a number of SRM deployments studied. The ERP deployments in this sample required the involvement of anywhere from 25 to 200 full-time internal personnel for implementation, and the SRM project teams ranged in size from 10 to 70 full-time business and IT staff members. Several companies stated that the extraction of

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internal resources from their daily activities for an extended period of time posed a particular business disruption and cost to the organization. The R/3 project owner for one company in the natural gases industry told Nucleus that it had not achieved a positive ROI from its implementation, which was three years old at the time of the interview: It cost us a lot to put this in in the time frame that we put it in As with any ERP implementation, the personnel and other internal resources required were huge. In addition to the large number of deployment personnel needed to implement SAP, the personnel time spent on training was significant in some cases. SRM implementations, for example, involved a heavy investment in user training and the championing of the solution because of the diversity of the user community in location and technical skills. Excessive Customization Many companies also found that the consulting costs associated with customizing SAP were very high. Some early adopters of SAPs ERP suites told Nucleus that they customized their systems too much and developed too many individual interfaces. One company that has been using SAP R/3 since 1996, without achieving sufficient returns to outweigh the costs, told Nucleus: Since we were an early adopter of SAPs ERP technology, there are probably a million lessons we learned in terms of cost management and methodology. We modified our system too heavily, for one. This was related to everything from technology to strategy. Back then, SAP, Oracle, PeopleSoft all had very closed supply systems, and they really needed to make their systems more open. A number of SAP CRM customers interviewed by Nucleus had not achieved a positive ROI from their deployments because of excessive expenditure on the customization that was required to accommodate heightened detail into their systems. Based on these deployment experiences, it is not unlikely that companies adopting SAP CRM will have to invest in development and customization to achieve returns from the solution. The ongoing risk with ERP and other monolithic deployments is that companies either spend more on customization than they had expected or have to undertake a business process reengineering project they hadnt anticipated. The pitfall with this scenario: Deployments for which consulting costs amounts to more than twice the cost of software are unlikely to deliver a positive ROI. SAP deployments for which consulting costs amount to more than twice the cost of software are unlikely to deliver a positive ROI. CONCLUSION A majority of SAP customers interviewed have yet to achieve a positive return on their investments. Many of these organizations

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hampered their ROI by investing in expensive license contracts and deployments without developing a clear road map for the full exploitation of SAP functionality and the rapid achievement of returns. Those who did achieve a positive ROI followed a clear strategy for success: they managed the scope of their deployment, limited customization of the solution, and ensured broad user adoption. SAP is a significant investment, both in direct expense and in personnel, and should not be undertaken without a fully developed plan including clear objectives and milestones. Companies considering an investment in enterprise licenses from SAP should do the following: Ensure that the software being licensed does not exceed the foreseeable business and functional needs of the organization. Develop a clear road map for the full exploitation of functionality to a wide breadth of users and departments within a reasonable period of time. Conduct a thorough review of reference users in similar industries to evaluate whether the promised benefits really apply to the industry and the user base in question. Avoid excessive customization of the solution and its interfaces, focusing instead on deploying a usable system that will deliver returns within a measurable time frame. Conduct a predeployment ROI analysis that evaluates expected returns and costs, taking into account the probability of achieving those returns and the payback period for the investment.

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