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Where Does SAP Offshore Development Make Sense?

October 10th, 2011 by
SAP Return on Investment or ROI

SAP Offshore Development Cost

If you are capable of providing detailed design specs where there is almost no deviation or thought required this is a great option.  The instant your SAP design requires a measure of experience and insight to make judgment calls, or to look for data or processing that is not explicitly spelled out in detail, you are headed for huge hidden costs. 

The level of detailed spec design work by SAP functional consultants merely shifts the development time and costs to the higher priced resources where it is “hidden” from TCO and sales quotes.  If you are capable or writing “functional” specs that are really more like technical specs with specific table and fields spelled out in detail, program pseudo-logic defined, every possible alternative anticipated, and no detail left out then SAP offshore development works well.  If you are not prepared for that level of detail and “perfect specs” then you are likely headed for a much larger invoice in change order costs and hidden functional time than you ever anticipated.

Offshore resources are often smart, industrious, and hardworking but the ugly reality no one talks about are the real rates because these resources do NOT have any significant amount of SAP experience.

This is the final post in this series.

A quick “test” for the SAP outsourcing or SAP offshore fit is the nature of the work.  “Commodity” services are a perfect fit for SAP outsourcing or SAP offshore work. 

If the effort involves any type of innovation, business transformation or needs any level of change management then SAP outsourcing or SAP offshore development may be dangerous and it WILL cost you far more than you are led to believe.

SAP Upgrades Might Support SAP Offshore Development

One area I have seen where SAP offshore development work makes sense is with upgrade projects.  Much of the development work there is re-working existing objects where the requirements from previous projects have been well tested and adjusted.  Or, if there are enhancements the gaps are well-known and understood so that the detailed SAP development requirements can be easily defined.  From this standpoint SAP offshore review and adjustment of existing code makes sense.  There is little in the way of experience needed to use the syntax checker and to do the occasional program adjustment.  And other than poor coding which causes performance problems the risk is lower.

SAP Production Support Might Work With SAP Offshore Development

In a fairly stable production environment, where there are not a lot of enhancement or new functionality requests SAP offshore support might work well.  The “fix” requirements are very specific and limited so that these types of small adjustments or corrections work well in an offshore environment.  Even for some of the smaller and less complicated enhancements or improvements SAP offshore support might work well.  However, for more extensive troubleshooting, or very complex requirements, you are likely better with some sort of local or onsite support. 

For a more details see Outsourcing Your SAP Application Support.  This provides some insight and a little framework for understanding the SAP outsourcing or SAP offshore fit.

Conclusion on SAP Offshore Development

Regardless of the hype and sales pitches SAP Off Shore development has far more Total Cost of Ownership than anyone has been led to believe.  There is a place for it but that is rarely in a new project or an extensive rework of complex processing requirements.  While you may not see the costs, the offshore project model will cost you unless you are fully aware of the requirements and hidden costs that are never defined in any of the sales pitches or materials.  Of course they will never tell you SAP offshore development might cost you far more than higher priced local resources in many situations.  If they had that level of integrity you would never engage with them for those services. 

For more information and insight on this topic see IT Outsourcing, Off Shore Support, Cost Cutting and IT Department Changes.  That post provides some additional insight on helping to understand where SAP internal resources should focus as well as where offshore support might make sense.

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Hidden SAP Offshore Development Costs

October 3rd, 2011 by
SAP Offshore Development

SAP Offshore Development

My experience with SAP offshore development is that no matter how detailed your spec is their lack of experience with standard SAP transactions and functionality means they will never properly test their own creations.  Their results are more than just full of bugs, often times they crash when attempting to do even basic testing.  Repeat testing by expensive functional resources happens so frequently and consumes so much hidden time from parallel project activities that entire project timelines are frequently affected. 

Functional resources have to babysit and handhold these SAP offshore resources through the whole process because of the language barriers and lack of experience.  More functional time, more project management time, more unplanned distractions from functional Realization activities and your entire project timeline can be wiped out.  If that happens you have to pay even more for a missed development date because you have to move your go-live date.  And that cost is completely hidden from you by some of the shell games they play on their supposed efforts.  All of that functional time and the risks to the project timeline point to some of the real hidden costs of SAP offshore development. Develop, test, bugs, fix, develop, test, bugs, fix, rinse and repeat at least a dozen times.

A common SAP offshore practice is to keep throwing “crap” at you saying it is “done.”  With all of the crashes and bugs that are so common with offshore development, and especially all of the program crashes, how much testing could they have done?  The bigger question is how much is this really costing you and how do you find the hidden costs?

SAP Project Timeline and Budget Due Diligence

Because of the nature and pace of SAP project work whenever the issue of blown budgets and blown timelines come up most companies rarely perform root cause analysis or due diligence.  Instead the accusations and recriminations fly in the heat of the moment.  Meanwhile the offshore developers keep saying “we finished x development on y date… the functional teams didn’t support us…” or “the specs were bad and we had to make 20 changes…”  You name it, the extent of the excuses are never ending.

Evaluating Hidden SAP Offshore Development Costs

Because of how SAP “functional” consultant time (needed to support the offshore development) is hidden from you it never shows up anywhere in the rates you were quoted.  You really have no idea about the real Total Cost of Ownership (TCO) for that offshore SAP development.  The offshore company constantly claims the “specs were not detailed enough” or every microscopic change and adjustment becomes a “change order.”  I’ve even seen this where standard SAP functionality was completely broken by the development and the developers insisted because there was nothing spelled out in the design spec about allowing standard functionality to continue working a change order would have to be separately paid for!

On new SAP implementations the functional time premium can easily cost you 50% to 75% (and in some cases even exceed 100%) of the total development hours.  Think about that for your next quote as you try to put the pen (or your spreadsheet) to the numbers.  Have you really factored in the amount of high priced functional resource time needed to support those “inexpensive” offshore developers?  Between writing “super enhanced” specification documents, repeated endless functional testing of buggy SAP development, “training” of inexperienced developers, language barriers, “babysitting” the actual development, and the lost opportunity to focus on other functional Realization activities can kill any supposed savings.  It’s all a shell game.  You pay just about the same amount (and on many occasions even more) with far more headaches and lower likelihood of making your go-live date.

Even after all of this, there is still one more hidden cost that is not realized immediately at go-live–, the cost of poor coding.  You may have significant performance problems, constant bug fixes, and a whole host of other maintenance activities that you never planned or budgeted for.  Now this is true of any development but because of the language translation issues and the modest (at best) quality of coding you are likely to have incrementally more production maintenance costs with the offshore development.

Some Considerations to Help Reduce The SAP Offshore Development Shell Game

First and foremost NEVER accept the offshore development group’s code review options.  One way you can help to combat so much of this is to budget for at least one local developer, even at premium rates, to serve as a quality checker.  They do not have to review all of the code from all of the developers but they should look for the “tells” of experience over inexperience.  And your SAP statement of work (or SOW) as well as your contract with the offshore developers should include various protections about the quality and expectations of the development work and functional consultant time and contributions.  That SAP SOW should also include some definition around what a “change” is and what a “defect” is.  Without that everything will be considered a “change request” and destroy any supposed savings.

Next week the wrap-up part 3 of this series:  Where Does SAP Offshore Development Make Sense?  There are some situations where it is a great cost saving alternative.

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Overcome SAP-ERP System Integrator Sales Tactics 7

June 20th, 2011 by
Business software negotiations - licenses and maintenace

Business software negotiations

As we get close to wrapping up this series we will take a short look at ERP and business software licensing.  There are a lot of things to consider here and a number of strategies you can use in negotiating your licenses.

One thing to keep in mind here is that there are two revenue streams for the software provider.  The first is the license sale and the second is the maintenance agreement.

ERP – SAP – Business Software Licensing Negotiations

One negotiating tip I learned a long time ago is to always, always, always ask for more than you really need or want.  And I don’t mean in the form of the number of licenses or the amount of maintenance.  What I mean are the concessions you want the vendor to provide.  These are your negotiation “bargaining chips.”

It is always easier to give something up than it is to take something back so if you start from a position where you have several “throw away” items you will find yourself with a decent bargaining position.

  • Software is licensed, not purchased.
  • Determine “End Game” strategy for licensing
    • This Starts “Hard” Negotiations
    • Time is on Your Side – end of fiscal year and end of quarter negotiations are best because of pressure to meet sales goals
    • Use a “give and take” approach, or a “good cop, bad cop” approach on the vendor(s)
    • Carefully evaluate their sales approach
      • Telegraph to the vendor your willingness to “walk away” from the deal if the right agreement cannot be reached
  • What are the different payment terms?
  • Consider “tiered” licensing options
    • License “stage” commitments – # of initial licenses for developers / system users during setup, and then additional # of users at actual go-live only to be paid for when the system goes live.
    • Ask vendors for interest free licensing options
  • Down payment requirements?
  • How are software modifications addressed in the license?
  • Sticker shock?

ERP – SAP – Business Software Maintenance Negotiations

Software maintenance fees can be a real challenge to negotiate.  This is one area where many software providers have a number of tactics they use to maximize your long-term payments to them.  One large vendor will just about give their software away, and even entice you with a one or two year, low maintenance fee agreement, and then “let you have it” just as the business and software have started to stabilize.  Right at the peak of your dependency on them they will suddenly balloon maintenance fees into the stratosphere.

  • How much is the annual maintenance fee?
    • What are the maintenance options?
    • What if you go off maintenance?
    • Is technical support included?
    • What kinds of technical support and how frequent (Phone, e-mail, fax, online messages, etc.)?
  • Negotiate any maintenance percentage of the software at the price you purchase it for, not at the list price.
  • Link fee increases to standardized economic indicators like the Employee Cost Index (ECI), Consumer Price Index (CPI), Factory Orders Report, Purchasing Managers Index (PMI), etc.  If you expect an inflation spike or economic downturn the PMI or Factory Orders would likely provide the best hedge here.
  • Lock in the rate for the entire duration of the contract to avoid “shock increases” as time goes on.
  • Require free license upgrades to any new version(s) of software as part of your maintenance.
  • What about Source Code?
  • Even after you make the final software selection decision, consider license negotiations with both of the top finalists to use as “buy down” leverage against the real selection
    • Try to negotiate contract language with caps or limits on how much or how quickly fees can increase.
    • Every publicly traded software vendor has strong market incentives at the end of their quarter to make any deal they can to increase revenue (often times regardless of the margins) so be patient!
      • At quarter ends the larger software vendors may resist cutting maintenance percentages but may be much more inclined to provide great deals on licensing.  As long as the maintenance is tied to the negotiated license cost then this is the same as getting a maintenance discount.
    • Seriously consider hiring a professional consultant who specializes in software negotiations.

    Final Thoughts on SAP – ERP – Business Software Negotiations

    Make sure your contract agreement does not contain “penalty” language if you decide to discontinue and then renew maintenance.  For example some contracts include provisions that if you stop maintenance and then re-start you will have to pay some amount of “make up” maintenance for the period you discontinued.

    Probably the most important component of your negotiation strategy is patience.  You ALWAYS have the option of walking away and pressing for serious concessions if the vendor wants your business.  Believe me, you CAN wait them out.  Be willing to wait as long as it takes to get the terms that are right for you but it is also important to be reasonable and fair. In the end everything is negotiable.

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