How to Budget for SAP
As the world’s leading integrated enterprise resource planning (ERP) platform, SAP has been widely adopted by small, midsized, and large enterprises as the digital backbone of their organization. With a robust set of base functionalities across finance, supply chain, procurement, manufacturing, sales, human resources, quality management, warehouse management, etc., it’s no surprise that 99 of the 100 largest companies in the world run on SAP. For companies across industries and of various sizes, the need for digitalization and streamlined processes is apparent. From improving operational efficiency to accelerating workflows to centralizing data management processes, implementing SAP helps companies run more profitably, efficiently, and sustainably. Implementing SAP, however, can be a considerable investment in time, money, and resources. Whether you’re going to implement SAP this year or in the near future, it’s important to start the budgeting conversation sooner rather than later. Below, we outline some considerations to account for when thinking through how to budget for SAP:
Considerations for How to Budget for SAP
1. Look at licensing options.
With the rapid growth of the cloud, most technology companies have or are moving to a Software as a Service (SaaS) model, and SAP is no different. While perpetual licenses are still available, most new SAP clients have moved to a subscription-based model.
To put it in simpler terms, SAP’s licensing options are like getting a new car. A perpetual license would be the equivalent of buying the car outright, where you pay a one-time fee to purchase the licenses. With perpetual licenses, your organization owns and is responsible for any ongoing maintenance – you also have more control over your system and can carry the licenses as an asset on your books. However, in the long-term, you can expect higher maintenance to upkeep the system.
Subscription-based licenses would be the equivalent of leasing the car. With subscription-based licenses, your organization is paying for the rights to use SAP but doesn’t own the software. This option tends to be a cheaper option for most organizations with an annual cost, as it requires less infrastructure and has lower maintenance costs because SAP is responsible for the maintenance and upkeep.
2. Look at deployment options.
In addition to the different licensing options, SAP offers different ways to deploy its solution. There are three ways SAP can be deployed: on-premise, multi-tenant (public) cloud, and single-tenant (private) cloud. On-premise deployments are largely only for perpetual licensing. With this type of deployment, you would deploy SAP on data centers owned by your organization. This option requires a large amount of infrastructure and up-front cost and effort to just start the implementation. As such, we’re seeing many new SAP clients move to the cloud.
The other option includes both variations of a cloud deployment. Public cloud is the closest to a traditional SaaS model, where your instance of SAP is hosted on infrastructure that is shared with multiple SAP clients and not just your organization. Public cloud is traditionally the most cost-effective option, but system upgrades and patches are automatically pushed out quarterly, and for companies that are required to have validated systems, this would mean dedicating time, money, and resources to quarterly validation efforts.
Private cloud lands somewhere between the middle of public cloud and on-premise, where you have the benefits of a cloud solution with some of the control of on-premise. With a private-cloud/single-tenant deployment, SAP is hosted in the cloud, but the infrastructure isn’t shared with any other organizations. This allows your organization to have more control over when patches and updates are deployed to your instance.
3. Talk to your finance team about OPEX vs. CAPEX
It’s important to consider how SAP will affect your overall expenses for tax and reporting purposes. Whether or not you can consider your SAP project under OPEX or CAPEX expenses heavily relies on the type of licensing you purchase. As stated earlier, if you go with a perpetual license, your organization will be able to treat those licenses as an asset. With a subscription-based model, you will be paying an annual fee which will be an operating expense.
4. Consider implementation expenses as well as ongoing maintenance costs.
While some organizations may elect to implement SAP on their own, most do so with help of an SAP system integrator. When determining the total cost of ownership (TCO) and return on investment (ROI), it’s important to include the costs associated with implementing the system. In addition to the costs associated with the implementation, long-term support and maintenance should also be included in TCO and ROI calculation. These costs, like many aspects of SAP, are largely determined by the type of licensing and hosting you buy. For example, in SAP RISE, SAP and Hyperscalers will cover the technical side of maintenance, but an Application Managed Services (AMS) provider will be needed for functional- or project-based needs. If you have perpetual licenses, the hosting and maintenance costs are consumed by the client instead of being included in RISE.
Learn More about Clarkston’s SAP AMS Services
When budgeting for an SAP project, companies must remember to account for both the upfront costs of implementation and any potential future costs of system maintenance to get a holistic and more accurate view of your TCO and ROI.
5. Determine if you’ll add new roles or reallocate resources to backfill them
As you consider your overall costs, don’t forget about the people involved. With perpetual licensing, you’ll need more resources (people, time, money) to manage services after implementation. If this is the route you’re taking, will you need to add new roles to your team, or can you reallocate resources to backfill them? If so, it’s essential to have strong organizational change management strategies in place to mitigate any resistance and ensure seamless integration as well as a strong SAP Project Manager. With the subscription license, certain maintenance services are part of your package, resulting in fewer overhead costs, but you will still need to understand the impacts to your organization and if personnel need to be added or if third-party support is required.
6. Begin conversations with SAP partners
As you begin to budget for an SAP implementation, it’s vital that you include an SAP partner in your initial planning discussions, sooner rather than later. An effective SAP partner can help guide you through the process and expected costs, including those implementation costs and any potential longer-term costs. You’ll absolutely need this information to better estimate the total cost of ownership, which will be helpful to present to your board or C-suite for budget approval.
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