By Pat Phelan, VP of Market Research, Rimini Street
CIOs consider the cloud for a variety of reasons, many of which are forcing them to rethink their application strategies. You are not alone if you are feeling pressure to migrate applications and infrastructure to the cloud. But which cloud moves are the right ones?
One of the most important reasons to move to the cloud is to enable innovation that drives competitive advantage. Some cloud strategies accelerate innovation while others delay or inhibit it. For example, moving infrastructure to the cloud can increase an enterprise’s ability to change (flexibility) and enable IT to change more quickly (agility). Adopting software-as-a-service technology where the enterprise interacts with customers or users can increase competitive advantage. Examples of this include using Qlik to provide associative business intelligence or using Salesforce to improve customer experience. Alternatively, transitioning ERP to the cloud as SaaS is not a good move for most enterprises because it doesn’t create a meaningful improvement to the business, and it consumes resources that could be used to deliver innovation.
Choosing the right cloud strategy is complicated by the fast-paced introduction of new cloud technologies into the market. As CIOs make cloud decisions, they should choose cloud technologies that accelerate innovation and enable digitalization rather than moving capability to the cloud just for the sake of “being in the cloud”. Move capabilities to the cloud in order to support business goals such as growth and improving competitive advantage. Avoid moving core ERP capabilities such as manufacturing, transportation, financials to SaaS unless there is value to be gained
Following are common cloud strategies that can hinder or help accelerate your innovation roadmap.
Avoid These Cloud Strategies That Can Hinder Innovation
- Migrating ERP to the cloud as SaaS: This low-value shift of non-differentiating functionality to a different platform (the cloud) is not a smart move for most enterprises. Since ERP is highly complex, moving it to software-as-a-services (SaaS) can be very expensive and disruptive. SaaS ERP is still an evolving market with functionality and operational issues that are yet to be solved. Also, there is no business case for most enterprises to make the move since SaaS ERP won’t improve most enterprises’ ability to operate systems of record processes. Investing in SaaS ERP diverts focus and resources from digital initiatives that can make a difference to the business. It does not magically make an enterprise better able to respond to business demands for growth and innovation.
- Following your ERP vendor’s cloud roadmap without questioning business value and ROI: Following a vendor-dictated roadmap diverts resources from business priorities for innovation and can cost more for a poorer fit. For example, Oracle cloud licenses can cost up to as much as 3x more than internally deployed seats plus maintenance costs. SAP customers who switch to SAP Cloud applications will pay, on average, double their current annual maintenance fees according to figures shared by SAP’s CFO at an SAP Investor Symposium. Following the vendor’s roadmap can cause you to miss out on innovation opportunities. License trade-in programs are an example of this. Trading existing application licenses to avoid an audit or to get a price break might look attractive on the surface but it can lock customers into the vendor’s cloud strategy even though analysis hasn’t been done to confirm that it is the right cloud strategy. The ERP vendors’ cloud products were developed to fit the broadest common denominator of requirements, which means that they may not be the best choice for industry-specific or customized business needs compared to best-in-class alternatives. In another attempt to lock existing customers to their cloud roadmaps, the ERP vendors are encouraging customers to take an initial step of migrating to the vendors’ proprietary cloud infrastructure. Beware! ERP vendor SaaS products only operate on the vendor’s cloud infrastructure/IaaS, which can lock licensees in to a technology platform that hinders the enterprise’s ability to support business goals. Once contractually committed to the vendor’s roadmap, it is very difficult financially and contractually to change or reverse course.
- Moving applications to the cloud “for cloud’s sake”: Some software applications support the business but are commodity-like in that they don’t differentiate the business from its competitors. Examples of this include financial applications and consolidation tools, manufacturing systems, or supply chain execution systems. Moving these types of applications to the cloud “for cloud’s sake” won’t likely result in any measurable business or technology improvement. Instead, these low- or non-value-add cloud projects could hinder your ability to innovate by consuming precious resources and budget that could be better spent on cloud initiatives that matter more to the business. Also, don’t move applications to the cloud “for cost’s sake”. It is a generally perceived myth that moving applications to the cloud will result in cost savings. The migration itself isn’t cheap, particularly when customizations and integrations must be rebuilt. The ongoing subscription fees can cost up to 2-3X more than existing license and maintenance fees. Cloud application projects should only be a part of your cloud strategy if they contribute to business objectives such as growth, create competitive advantage, or deliver innovative capabilities. When adding an application into your cloud roadmap, ask whether there is an improvement that will offset the higher cost.
Use These Cloud Strategies to Accelerate Innovation
If you are like most CIOs, IT dollars are precious. It is critical to allocate the IT budget to cloud investments that will make the most difference to the business. Your cloud strategy should support innovation that enables growth and creates competitive advantage. In other words, your cloud strategy should follow a business-driven roadmap where business goals are the metrics that all IT investments must meet in order to be included on the roadmap. Today, more than ever before, the business is demanding innovation faster than IT can deliver solutions. CIOs must find ways to use their cloud strategy to accelerate innovation. Specific innovation accelerators include:
- Preserve and extend core ERP systems with cloud-based technologies: Keep your well-functioning ERP system in place and deploy cloud-based capabilities that support user- and customer-facing business processes. Two recent surveys conducted to better understand Oracle and SAP customers’ plans for moving ERP to the cloud showed that 80% and 65% respectively have no plans to or are undecided about moving to the vendor’s SaaS ERP.
When ERP is not consuming precious IT resources, the focus can be shifted to systems that support customer/user engagement. These types of systems typically attach to- or sit outside of ERP. They are more loosely coupled than ERP, making them less expensive and time-consuming to deploy in the cloud. They can quickly improve the customer/user experience, enable business growth, and create competitive advantage. Although there are a few scenarios where ERP in the cloud makes sense (small to midsize organizations or those with minimal complexity), most enterprises are keeping core ERP systems operational while they innovate with cloud around the edges via SOEs.
- Modernize infrastructure to increase IT’s ability to change and to enable IT to change more quickly: IT market research firm, IDC, predicts that “65% of organizations will aggressively modernize legacy systems with extensive new technology platform investments through 2023” . Most CIOs want their software to run on the best, most modern hardware. This means making sure that the hardware isn’t a hindrance. Getting out of the data centre business is proving to be the least complex and most cost-effective initial cloud move to support innovation. Infrastructure-as-a-services (IaaS) and platform-as-a-service (PaaS) can hyper-scale the business at a lower price. This ‘lift and shift’ of existing perpetual applications licenses frees up IT resources and budget while increasing IT’s flexibility and agility for handling change. Choose IaaS and PaaS providers that keep you from getting locked into your incumbent ERP vendor’s cloud technology stack. Some ERP vendors offer proprietary versions of IaaS and PaaS. However, their offerings are likely not as robust as those available from vendors like Amazon and Microsoft who are heavily investing in infrastructure and platform technologies.
- Migrate to new technologies that better support the digital business model: Becoming a digital business is a core component of many business’ innovation plans. Some existing technologies can’t be modernized enough to serve as part of the enterprise’s digital platform. For instance, an order fulfilment application designed to support mass production using standard bills of material could be overwhelmed by a business model change to online customizable orders where every order is a custom order that creates a single production request. Another example is when a new technology (such as using drones to monitor equipment for maintenance issues) would break the existing technology architecture (huge volumes of new data exceed existing compute capabilities or break the existing security architecture). In these kinds of scenarios, migrating to new technology may be necessary to provide a solid platform to innovate on.
If the new technology is on the critical path to innovation, it may be perceived as a hindrance since it initially slows the roadmap down. However, putting the new technology in place upfront can result in downstream acceleration since it opens the door to using solutions that are best fit for the business and that can more rapidly and effectively be adopted.
When built properly, putting the business first rather than moving to the cloud for cloud’s sake, your cloud strategy can accelerate growth and innovation. However, actions such as migrating ERP to the cloud may not be the right strategy. Moving your internally deployed ERP to an open, vendor-agnostic cloud infrastructure as IaaS can yield better return, at a lower cost, and with less disruption. In the meantime, innovate now with other cloud technologies, particularly customer- or user-facing systems that improve the customer experience. This is a great way to let what the business needs to drive your cloud moves to accelerate innovation.
 SAP Investor Symposium, NYC, Feb 4, 2014