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Cloud or Captive - IT cost reduction strategy for SAP infrastructure

Two broad trends once can see in the SAP market.

Trend 1 - Working with SAP hosting partners and then move towards full-fledged SAP on the cloud

By and large organizations are moving away from an on premise SAP data center environment to having partnership with SAP hosting service providers. Basically companies lease server space and as well outsource BASIS Administration activities of their SAP systems to the hosting partners. These organizational can be expected slowly and steadily move towards embracing full fledged ERP on the cloud model as they mature and gain confidence with the hosting partners and also with the whole partnership model. Small organizations of $2 to $ 5 billion sized are the ones who are moving towards the "Public cloud" option which provide the most cost effective solution for them. Bigger organizations will tend to go for "Private Cloud" as they tend to have multiple SAP systems in their landscape and will see more advantage in the dedicated infrastructure even on cloud. "Hybrid cloud" is something that can appeal to bigger organizations as that addresses the risk and confidentiality aspect by moving only the development and quality environments into cloud while leaving the production environment on premise. To me the Hybrid cloud option is the ladder through which SAP user organizations can join the cloud bandwagon, build robust partnership model around risk and confidentiality for moving towards the Private cloud option which provides economies of scale.


Trend 2 - Keep the SAP data center on premise but move the SAP service department into a captive unit in a low cost location.

This option is sort of preferred for large SAP behemoths. Big companies in the order of sizes more than $10 billion will have huge SAP infrastructure and such systems tend to be dated and something heavily customized environments. It is these kind of organizations which consider going for cloud based SAP systems is too risky. These companies have large SAP systems and will keep adding new SAP systems or engage in spin-off activities due to regular merger and acquisitions. Over the time their data center have become too big and too complex, that any new CIO is threatened by the risk involved in even considering disturbing the functioning data center environment. So moving to cloud as a cost reduction strategy will have no buy in and even if implemented it will be on very small areas on ad-hoc basis. For such companies moving the IT support organization to low cost locations is safest bet on cost reduction. Having already outsourced many of the regular production support process, most likely these organization will have retained a core team of IT professionals who run the show with in house knowledge capability around core processes. It is these core process knowledge retention team that will become target cost reduction by way of opening a captive unit in a low cost country.


Is the second trend a viable?, given the rapid advances being made on cloud capabilities in the market and as well on the fast paced changes in the SAP capabilities. 5 to 10 years from now would the large SAP user organizations be better served by an in house data center or complexities will zoom to a level of tipping point where in move to cloud becomes a necessity. I read about a very similar story during the early industrialization due to lack of reliable power grids, big manufacturing industries had invested in building power plants on their own to ensure reliable electricity supply. But with the advancement made in power grids, and efficiencies achieved by utility companies, the concept of in house power plants vanished. It looks to me the same will be the case of data centers for large organizations. Given the advances being made by cloud service providers, it is going to soon become un economical to even have on premise data centers. SAP being the core ERP system for these companies, it is better addressed early for cloud migration. Investing in captives can be a strategy on IT cost reduction along with movement to cloud, but the latter will have larger impact on the bottom line and make large organization's IT nimble enough to react to market dynamics quickly and effectively.

Comments

Hi Ramesh,
The article is very helpful. There are a lot of benefits of SAP cloud hosting i.e we can minimize the capital investment cost and also utilize the IT team for other tasks.
Thanks for posting!

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