Monday 20th May 2019 - Logistics & Supply Chain

The rising cost of ERP support

The November annual conference of the SAP UK and Ireland User Group promises to throw light on an increasingly contentious aspect of logistics IT: the cost of running enterprise resource planning (ERP) systems.

ERP systems have generally been regarded as a cheaper alternative to so-called best of breed supply chain and warehouse management software because the logistics modules included with them can be turned on at lower cost.

However, many IT buyers believe that the extra cost is worth it because performance and features are superior in software developed by specialists. European companies that opt for an ERP solution compared with those that go for best of breed or custom applications are split roughly 50/50, according to research company AMR.

Members of the SAP UK and Ireland User Group, many of them with big supply chain operations, have spent the last three months arguing with SAP, the company that virtually invented ERP software, about increases in the amount of money that it charges them to look after the software. Support from SAP is a vital element in getting the best out of the software.

The cost of support for new SAP customers went up from 17 per cent of the value of their contracts per year to 22 per cent in June. Existing customers will move to the higher rates in phases which SAP will complete in 2012.

SAP user groups around the world have protested about the price rise which they say represents an increase of close to 30 per cent. SAP will in effect move all its customers from cheaper ‘standard’ and ‘premium’ support to a higher priced ‘enterprise’ support package.

However, the UK and Ireland User Group argues that many of the technologies covered by enterprise support such as service oriented architecture are of no use to smaller and medium sized companies, because they do not use them.

“We understand that if SAP is to provide more comprehensive support then it has to charge more for it,” says Alan Bowling, chairman of the group. “However, many of our members may not want or need this extra level of support and therefore are reacting negatively to having a new support product and the associated increase in costs forced upon them.”

SAP says the price hike is a result of the increasing complexity of its products. However, the company recorded an 18 per cent drop in profits earlier this year and is under pressure from customers looking to keep IT costs to a minimum.

A spokesman for SAP explained that the company’s job is to be broad enough to help the majority of its customers, most of whom need a level of support that addresses expanding IT complexity and increased adoption of a service-oriented-architecture strategy.

There is a change in the way software is delivered that has big implications for SAP. Until recently most software has been licensed to users to run on their own premises. But over the past three years a new way of buying software called software-as-a-service (SaaS) has gained ground.

Under this model, suppliers host software on large, central systems and sell monthly subscriptions to customers who access the applications via their Internet browsers.

The arrangement reduces the capital cost of IT and removes a lot of the management overhead involved in programs that run on a user’s own computers. With SaaS, IT departments do not have to get involved in maintaining software and sorting out glitches.

Gartner Group forecasts

that within three years 35 per cent of packaged software will be supplied as a service.Companies are already selling ERP applications using the SaaS model. And Gartner Group forecasts that within three years 35 per cent of packaged software will be supplied as a service.

SAP has begun testing its SaaS product called Business by Design. The company has found it hard going to translate its existing portfolio, which was designed for large companies to the SaaS format. Service levels have to be high. For example, SAP makes concerted efforts to record errors that occur in its SaaS offering, because it cannot rely on non-technical end users to describe problems accurately.

Some observers believe that mainstream software companies such as SAP will lose out financially, because the amount of money they can charge for subscriptions is much less than they can for software packages. But the economics of SaaS are by no means clear and costs per user may turn out to be much closer to the conventional method of delivering software.

In the meantime watch out for fireworks in November.

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