S/4 HANA – Conversion vs New implementation

The need for S/4HANA

In today’s digital economy, it is imperative that a business is constantly engaged with the outside world, especially the customer. Digitization of the business environment impacts the organization in many ways, especially in its Business Models, i.e. the way it does business. In this context, the success of the Business also depends on two major factors – the ability of the organization to seamlessly connect with customers and the ability of the organization to manage the changes that come along with the new business models.

S/4 HANA is the Enterprise Application that is designed for an Organization that wants to thrive in the Digital economy. On the one hand, the Digital Core of S/4 HANA enables the organization to carry out its business processes in line with the new Digital economy through simplification of Applications, Data models and User Interface. On the other, the technical architecture of S/4 HANA enables the organization to quickly and easily connect to the external world – especially the customers and the machines.

Options to adopt S/4 HANA

For a successful business, therefore, adoption of S/4 HANA as the Enterprise Application for its processes is desirable if not inevitable. In the case of an organization that is new to SAP, the answer is clearly to embark on a new implementation of S/4 HANA. However, for an organization already running on SAP, the path to S/4 HANA presents more questions than answers.

The objective of this paper is to clearly present the options available for an existing SAP customer to adopt S/4 HANA effectively and to provide clarity on the key parameters and decision factors in this endeavor.

System Conversion

For a business that is already thriving on SAP (ECC), the path to S/4HANA is straight forward – the “System Conversion” project. Aided by well documented processes and approach and facilitated by inbuilt tools for the System conversion, an existing SAP ECC instance can be converted into an S/4 HANA instance with all the old data intact. The steps to be undertaken in this journey are well established and this conversion takes care of Data migration to the new Data models and includes steps for code optimization for the Custom code developed in the existing system, not to mention the numerous technical steps to reach S/4HANA.

New implementation of S/4 HANA

However, in my opinion, this is alright in an ideal world. Our experience of the reality is that many businesses currently running on SAP do not have an optimal deployment of SAP. In such cases, in spite of the huge accumulation of data, the best option could still be a new or fresh implementation of S/4HANA. Some of the reasons why a fresh and new implementation is relevant are:

Sub-optimal Enterprise Structure: The definition of Organizational Elements is ironically the most important aspect of an SAP implementation. It is ironic because, in most cases, the definition of these elements happens at the beginning of an implementation when there is not a complete and comprehensive understanding of the SAP processes.

Enterprise structure plays a major role in the Reporting structures of the organization as well as the Controls that it wants to build in its processes. As in many cases in real life, the value of these Enterprise Structure definitions are better understood once the use of the system matures. But by then, changing the Enterprise structure becomes somewhat constrained.

In certain other cases, the constraints of SAP during the original implementation would have impacted the decision on the definition of the Enterprise Structure resulting in a not so optimal set up. With some of the new functionalities, the old constraints become irrelevant thereby providing greater scope for a more pragmatic Enterprise Structure definition.

This then becomes a major reason to start afresh when moving to S/4HANA rather than just convert the existing system.

Poor Data Quality: Another common situation we find with businesses running on SAP instances is that of Data… especially Master Data. The problem with quality of Master Data is two-fold:

1. The structural definition of the Master data could have been wrong (this is similar to the sub-optimal Enterprise structure definition). It could be the numbering logic for the Material Masters, or the basis of defining the Customer and Vendor Account Groups or the Chart of Accounts structuring… all this could lead to inflexibility in newer business processes or reporting requirements thereby tying down the business to patchy work-around solutions.
2. The lack of governance of Master Data. In many instances there is an unrestrained creation of Master data before a proper governance mechanism is put in place. The result is an abundance of unwanted data in the system resulting in erroneous transaction processing or inefficiency due to confusion.

Here again, a fresh and wiser start is desired.

SAP not fully leveraged: Many reasons contribute to a lesser than full utilization of SAP features and functionalities:

1. The Business requirements have significantly changed or evolved whereas the corresponding ERP set up has not kept pace due to various reasons such as availability of time / resources / budget for updating the processes in the IT landscape
2. The assumptions in the original implementation were simplistic and the resultant set up has not been very conducive or supportive of the actual Business Requirements resulting in a rudimentary usage of the SAP system such as basic accounting only. The rich features of the SAP system are not exploited to benefit the organization
3. Inadequate competency in certain special topics such as Credit Management, Actual Costing, Rebates processing, Cash Discounts, Materials Planning, etc. results in poor data for these processes thereby making these processes either redundant or discarded

Such reasons drive the need for having a fresh look at the ERP set up rather than continue with the existing set up. A fresh and new implementation S/4 HANA becomes an answer.

High level of Custom developments: In quite a few instances, the processes are not aligned to standard best practices. Instead the original implementation and subsequent changes are carried out largely to adapt the system to the exact old ways of doing the processes. The result is that there are a huge number of custom developments that primarily run the business processes. A highly customized environment in turn results in multiple problems:

1. Inability to adapt easily to changes – there is a significant effort and cost for every change to be implemented
2. Heavy maintenance – a highly customized environment spawns a whole sub-organization for its maintenance thereby straining the resources and bottom line of the organization
3. Inability to harness new innovations – businesses not adopting the standard processes often also miss the bus on key innovations that keep happening in the standard processes.

In such an environment, movement to S/4HANA presents a good opportunity to have a re-look at the customization done and adapt to standard best practices through a fresh and new implementation

Multi-system & multi-application environment: Large corporations, over a period of time, tend to develop a complex landscape of applications and systems for their core Business processes. This might have resulted from new requirements being met by specialized applications or from Mergers and Acquisitions. In such a case, the business is stuck with a complex interfaced network of systems and applications. Simplification of landscape (both systems and applications) becomes highly desirable.

The journey to S/4 HANA presents an opportunity to have a re-look at the Application and System landscape and simplify them. This again calls for a fresh and new implementation

Conclusion

With adoption of S/4HANA as a foregone conclusion, businesses have multiple paths to do that. For a business not already on SAP ECC, a new & fresh implementation of S/4 HANA is the only option. For a business already running on SAP ECC, an evaluation of its current setup and usage of SAP is a pre-requisite to determine the path. For a highly optimal setup, the System Conversion route is ideal. However as described in the previous sections, there are many reasons why many of the implementations are not optimal. In such cases it is recommended to have a fresh start with a new implementation of S/4HANA adopting the Standard Best practices as much as possible.