SAP’s Newest Innovations Will Be Cloud Only

SAP’s 2023 second-quarter earnings call on July 20, 2023, started with remarks on the company’s strong financial performance. It was announced that the cloud revenue increased by 19% to €3,316 million, while current cloud backlog increased by 21% to €11,537 million. These numbers were driven by SAP S/4HANA cloud revenue, increasing by 74% to €823 million, and SAP S/4HANA current cloud backlog which increased by 65% to €3,717 million.

However, shortly into his prepared remarks, CEO Christian Klein explicitly stated that SAP’s newest innovations would only be available with SAP S/4HANA Cloud, public edition or SAP S/4HANA Cloud, private edition delivered by GROW with SAP or RISE with SAP. In situations where an organization used a hyperscaler hosted implementation outside of RISE with SAP, for example, an infrastructure-as-a-service (IaaS) environment, the innovations that SAP is planning will not be available. They will also not be available in on-premise deployments of SAP S/4HANA.

This announcement highlights a significant shift as SAP had previously maintained that it was not limiting enhancements to cloud-based offerings despite a strong cloud ERP message. In fact, executives at the German-speaking SAP user group DSAG called out the company earlier this year for overlooking the on-premise customers and focusing more on cloud-based innovation.

During the call, Klein also highlighted that SAP will not be offering AI, generative AI, and sustainability capabilities in on-premise releases. The reason being the inability to put AI in a hugely customized application as it requires a cloud environment. This emphasizes that only cloud-based environments offer the processing power and data capacity required for technologies like generative AI and for processing large data sets.

While no specifics were announced today, it appears that SAP is developing an add-on solution package that integrates AI and sustainability capabilities with an organization’s existing SAP S/4HANA Cloud environment. Organizations will have the option to leverage this premium offering with generative AI capabilities to improve their existing capabilities and leverage the data layer they have already created in RISE with SAP.

Such features will be a part of new RISE with SAP and GROW with SAP deals. Also, existing customers can add the premium version to their existing implementation and consume the technologies “out of the box”. SAP expects that such packages will have a potential 30% uplift potential in the cost of RISE with SAP and GROW with SAP.

Impact on SAPinsiders

Organizations who have been planning the move to SAP S/4HANA and use the existing perpetual licenses to deploy either in their data centers, or in a cloud-native manner using an IaaS environment hosted by a hyperscaler, should be aware that they will be unable to leverage the new AI and sustainability capabilities that are introduced in the future. While this does not restrict organizations from using the existing contextual AI capabilities that exist in many SAP solutions, it will curtail their ability to use generative AI, which can integrate with the data layer created in a single SAP S/4HANA Cloud and SAP BTP environment.

At present, organizations may choose to not leverage these capabilities and remain with on-premise, private cloud, or hyperscaler-hosted environments, as this may be the first of many such announcements. AI related innovations are only available in the cloud today, but the same scenario may play out for other innovations in the future.

SAPinsiders need to thoroughly evaluate their future ERP plans and what their requirements will be. While this announcement may significantly affect decision-making, SAP has already been dissuading organizations from moving forward with SAP S/4HANA on-premise deployments by significantly increasing the associated costs. SAP is now using new capabilities and innovations as the carrot to encourage organizations to move away from traditional licensing and deployments.