Customers will see benefits after lengthy implementations, but many deployments anchored down by excessive consulting costs

Nucleus Research (NucleusResearch.com), the leading provider of bottom-line focused technology research, today announced the results of an independent study of SAP AG (NYSE: SAP). According to the results, 57 percent of SAP reference customers interviewed believed they had not achieved a positive return on investment (ROI) from their SAP deployment. However, customers with less customization and consulting requirements were more likely to receive enough returns to drive a positive ROI.

Despite having used the SAP applications for nearly three years and having spent, on average, more than $5.4 million on license fees and deployment consulting costs, more than half of these SAP reference customers did not realize a positive ROI. Most of these customers were hampered by excessive customization of the solutions and its interfaces, and extensive consulting costs, which averaged more than $3.6 million per implementation. For deployments in which consulting amounts to more than twice the cost of software, a positive ROI is unlikely. Where customers did derive benefits, they came from increased productivity, reduced headcount, improved operations management, and improved information organization and access for decision making.

The full report is available from Nucleus Research at: NucleusResearch.com

SAP: From Incredible Bulk to Discrete Modules

While the press has taken the entire ERP market to task as hulking behemoths that plagued customers with lengthy, costly deployments, SAP has continued to grow at a tremendous pace and, more recently, diversified its monolithic ERP offerings into more discrete bundles of business applications. Now, companies license and use SAP applications either as separate modules or as part of the overall mySAP.com suite of e-business solutions. These solutions include product data management (mySAP PLM), supply chain management (mySAP SCM and mySAP SRM), customer relationship management (mySAP CRM), business information (mySAP BW) and corporate financials. Nucleus interviewed customers representing a cross-section of SAP's ERP systems and individual modules.

"Among the 'Real ROI' research we've done, SAP emerges as an anomaly for those technologies with unimpressive ROI trends. More than half of the reference customers aren't recognizing a positive ROI, yet the prognosis isn't as bleak as it is for other vendors' enterprise software," said Rebecca Wettemann, Nucleus Research's vice president of research. "Most of SAP's customers expected a lengthy implementation. Companies that can manage this process without purchasing software that is beyond their business and functional needs, and without excessive customization of the solution and its interfaces, will be poised for significant benefits."

The report is the latest in Nucleus Research's "Real ROI" series, which most recently has included reports on Manugistics (MANU), i2 (ITWO), Siebel (SEBL) and Cognos (COGN). The "Real ROI" reports provide Nucleus' research subscription customers with fair, unbiased data about the costs, benefits and financial best-practices associated with deploying a specific vendor's enterprise technology deployment. Nucleus' analysts use a standard methodology built around a series of in-depth interviews with independently researched customers who have implemented a specific technology. Nucleus analysts independently contact these vendors' reference customers—without the vendor's knowledge—in order to take a broad look at the returns and costs associated with various technology deployments.

Key ROI Challenges

Fifty-seven percent of SAP customers—who had been using SAP for 2.8 years—interviewed did not believe that they had achieved a positive ROI from their deployments. During the last decade, SAP emerged as a "simple" solution to Y2K issues, as companies looked to replace obsolete legacy solutions with new systems for the sake of business continuity. However, many of these companies bought more SAP than they needed: they purchased large SAP licenses without explicitly examining costs and benefits, considering payback period or developing a clear roadmap to fully exploit SAP's capability.

And the costs were hefty: among those companies surveyed, the average license investment was more than $1.8 million, with SAP maintenance fees running at a standard 17 percent. However, when consulting, hardware, personnel and training were added, the figure ballooned to a three-year median cost of more than $5.2 million. Most companies had evolved significantly during the implementation period, and evolving market conditions prevented IT departments from extending SAP functionality to enough users and departments to offset the high deployment costs of SAP.

Additional factors included:

• High personnel costs and support. Nucleus found that high personnel costs associated with implementing SAP were a huge challenge to the timely achievement of a positive ROI. The ERP deployments, for example, required the involvement of anywhere from 25 to 200 full-time internal personnel for implementation, and the SRM project teams ranged in size from 10-70 full-time business and IT staff members. Additionally, the time and costs spent on training was significant in many cases.
• Excessive customization for implementation. Many companies found that the consulting costs associated with customizing SAP were very high. Some early adopters of SAP's ERP suites told Nucleus that they customized their systems too much and developed too many individual interfaces. The ongoing risk with monolithic deployments such as these is that companies either spend more on customization than planned, or have to undertake a business process reengineering project they hadn't anticipated.

Potential for ROI Benefits

Nucleus found companies achieving benefits from SAP in three areas:

• Increased employee productivity and reduced headcount. SAP provides a positive return when there is a broad enough audience to reap significant productivity-based gains from the solution. Companies using SAP's BW solution, for example, reported significant improvements in reporting accompanied by increases in the productivity of end users (who could create their own reports) and IT personnel (who no longer had to support the end users to create reports). Customers using SAP PLM received similar benefits.
• Improved operations management. Several companies reported cost reductions resulting from improved financial and operational management through their use of SAP. Many companies found that the visibility into operations along with the automation of various business processes led to significant reductions in costs and more profitable management of business operations. SAP SRM customers found they were able to negotiate lower prices with suppliers, reduce order-processing costs, and increase compliance with supplier contacts. Users of R/2 and R/3 similarly found increased supply-chain efficiency.
• Improved information organization and access. Users of various SAP solutions—specifically, BW and CRM, benefited from increased visibility into their business operations and the ability to analyze their customer bases and revenue sources across territories and product categories. Furthermore, companies that migrated from paper-based or Excel-based reporting protocols to SAP BW found that the standardization of data and improved access to management information allowed executives and managers to make better business decisions that were based on sound data.

Study Methodology

Nucleus reviewed the SAP Web site for companies that were listed as reference users of SAP. From queries put out to a pool of 93 reference customers, Nucleus received responses from 41, 21 that agreed to participate in the interviews, 20 that declined to participate for various reasons.

Nucleus included data from all customer interviews in this report, with the majority of participants agreeing to participate 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?

The full report is available at NucleusResearch.com. Nucleus Research clients who are interested in more detailed information concerning the costs and returns of specific SAP applications should contact Nucleus Research client services.

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