W H I T E PA P E R Drive Agility and Innovation with ERP in the Cloud Sponsored by SPONSOR PERSPECTIVE As global organizations across every industry adjust to the new normal, cloud solutions are playing an increasingly vital role in addressing immediate needs and paving a path to a resilient future. Many organizations running their SAP solutions on-premises have become increasingly aware of the need to be more agile and responsive to realtime business, technical, and environmental needs. According to an IDC survey, 54% of enterprises expect the demand for cloud software to increase. As global organizations seek agility, cost savings, risk reduction, and immediate insights from their enterprise resource planning (ERP) solutions, many of the largest enterprises choose Microsoft Azure as their trusted partner when moving their SAP solutions to the cloud. I start by saying “moving” as it’s the first step to realizing the value of the cloud. Smart organizations realize moving to the cloud should not be just a zip code change. They should embrace the cloud as a transformation of how they do business, engage with their clients or partners, empower their employees’ productivity, and improve operations. These are the pillars of a sound digital transformation strategy that should be examined as goals when organizations move to the cloud. Organizations that run their SAP solutions on Azure can integrate their SAP and non-SAP data and applications in Azure to gain real-time insights through a very rich set of data and artificial intelligence solutions and tools in Azure. Customers can also easily integrate their business processes with Office 365, Microsoft Teams, and Microsoft Power Platform. Customers are using Azure’s secure and scalable internet of things applications to take real-time data from trucks, retail floors, factory floors, sensors, and other equipment and analyze it to gain equipment health, perform preemptive maintenance, analyze customer patterns, increase supply-chain efficiency, and build other operational intelligence. Additionally, with DevOps with GitHub and Azure Kubernetes Service, customers can build, manage, and deploy applications on a massive global network. Through several examples, this report highlights how customers are leveraging their ERP solutions in the cloud to respond to real-time business needs and to drive long-term business transformation. It provides a blueprint to address key challenges and opportunities as organizations consider moving their ERP solutions to the cloud and look for the right cloud-provider partner in this journey. Talal Alqinawi Senior Director Azure Marketing Drive Agility and Innovation with ERP in the Cloud Business transformation is a battle fought on many fronts, and one of the most important is the modernization of core business processes. By optimizing enterprise resource planning (ERP) systems, for example, enterprises can unlock new insights from business data for better decision making and to identify new market opportunities. Large and mid-size organizations can also better manage finances and inventories, HR operations, supply chains, and other essential areas. With these benefits in sight, forward-thinking companies are upgrading to the latest ERP platforms and moving them to a public cloud service to reduce capital expenditures while increasing agility, innovation, and competitiveness in quickly changing markets. The need for nimbleness became particularly apparent as the Covid-19 pandemic upended companies throughout the world. Traditional, on-premises ERP systems aren’t designed for agility—for example, they can’t quickly support large numbers of people who suddenly must work from home. Organizations that had already migrated ERP systems to a public cloud were able to make on-the-fly changes to financial and supply-chain operations to maintain high levels of customer service, optimize their internal operations, reduce costs by scaling back service levels, and create resilient supply chains that adjust quickly to changing demands. Important as hyper-agility may be during a global pandemic, or perhaps to capitalize on the next large-scale business opportunity, migrating essential ERP systems to the cloud offers other equally important possibilities. These moves are enabling some organizations to expand their business transformation White Paper | Drive Agility and Innovation with ERP in the Cloud HIGHLIGHTS Companies that had migrated enterprise resource planning (ERP) systems to a public cloud prior to Covid-19 were able to make on-the-fly adjustments to maintain high levels of customer service and quickly react to changing customer demands. Migrating ERP to the cloud offers additional business transformation benefits by mining data for new insights to help companies reimagine their go-to-market strategies and ultimately reduce costs and drive innovation. To realize the potential of running ERP in a public cloud, enterprises must understand the potential challenges, determine the right cloud provider for their needs, and map out a two-phase plan for incrementally migrating critical business systems off-site. Harvard Business Review Analytic Services 1 To realize the potential of combining leading ERP platforms with public cloud services, enterprise leaders must develop a clear understanding of the near- and long-term impact the migration can have on their organizations. goals by mining data for real-time and predictive insights that drive better business outcomes. The new insights also help companies reimagine their long-term go-to-market and customer-service strategies and can ultimately improve cost savings and drive innovation. One such enterprise is Mars, a global consumer packaged goods company that sells familiar brands of snack foods and pet supplies. In the months prior to the Covid-19 outbreak, Mars was using sophisticated business intelligence analytics available from its cloud-ERP combination to understand the shifting preferences of consumers. “Much of our product is bought by impulse in brick-and-mortar stores, so we were asking ourselves how we could maintain and strengthen that connection with consumers when footfall in stores was declining,” says Praveen Moturu, vice president and chief enterprise architect at Mars. “We realized we needed to use innovative channels to get our product to market, as well as solidify connections to consumers.” Having a cloud-ready ERP capability in place gave Mars the agility it needed to face the unprecedented challenges brought on by Covid-19. The company identified changes in consumer buying patterns and quickly responded with changes to its supply-chain operations. “We are seeing people buying large-sized packages rather than individual [candy] bars, which is altering what we are sending to market,” says Joe Carlin, senior director of technology services at Mars. “We also see changes in the channels that people are using to buy our products, including a lot more online sales. We’re able to understand these shifts and rapidly adjust our supply pipeline to match the changing demand patterns.” To realize the potential of combining leading ERP platforms with public cloud services, as Mars and other global companies are doing, enterprise leaders must develop 2 Harvard Business Review Analytic Services a clear understanding of the near- and long-term impact the migration can have on their organizations. Enterprises should also acknowledge the potential challenges associated with these projects, understand how to determine the right cloud provider for their needs, and map out a two-phase plan for incrementally moving too-critical-to-fail business systems to the cloud. How Cloud ERP Impacts Organizations The combination of ERP applications and cloud services comes in a variety of forms, the two most common being softwareas-a-service (SaaS) and hosted ERP, also known as cloud ERP. The SaaS model provides a single, cloud-based software environment that multiple customers share. While each client’s data is securely segmented from other subscribers’—one customer can’t access another’s financial records, for example— SaaS’s multi-tenant model has drawbacks for enterprises, including a limited ability to customize the application for unique business requirements and, depending on the SaaS product, the absence of some key modules that may be found in enterprise-class applications, such as supply-chain management and predictive analytics. An alternative is to run a comprehensive ERP application hosted in a public cloud, referred to here as cloud ERP. This option uses a leading public cloud service to run an ERP platform that an enterprise may have been managing in its data center for years. This cloud-ERP pairing is attractive to organizations because it not only offers the features noted above that SaaS ERP may lack, but also lets users quickly capitalize on digital innovations like advanced analytics, such as artificial intelligence (AI), machine learning, and the internet of things (IoT), that cloud providers integrate into the ERP stack. Carhartt, a 130-year-old apparel company based in Dearborn, Michigan, is taking advantage of ERP and cloud synergies to help it continue modernizing its business strategy. The company had traditionally only wholesaled its line of work clothing, but in recent years it has been moving increasingly toward direct sales to consumers through online transactions and its own retail stores. “Every company has to recognize that it’s now a digital company,” says Tim Masey, Carhartt’s vice president of IT infrastructure and security. Accordingly, the company expects to launch its first cloudbased ERP module—one that manages consumer sales—in the near future. The program will directly link e-commerce sales to inventory levels in Carhartt’s retail stores, which means that consumers for the first time can purchase clothing via the web and pick up orders at a physical location. That wasn’t previously possible because Carhartt’s sales and inventory systems were separate and couldn’t exchange information in real time. Connecting those systems is possible now thanks to the integrations available via cloud ERP. In time, Carhartt White Paper | Drive Agility and Innovation with ERP in the Cloud Because these migrations typically happen in multiple steps over a handful of years, the payoffs for businesses come in phases. executives hope to extend the integrations to select retail partners so online customers can use those locations as pickup sites. Other venerable enterprises are also using cloud ERP to remain market leaders in highly volatile times. Headquartered in the United Kingdom, Coats is a manufacturer of industrial threads and specialty yarns that has been in business for two centuries and is now well into a multiyear plan for moving ERP to the cloud. So far, the migration is bringing about greater agility in the company’s supply-chain operations, which executives there consider a key competitive advantage. The added flexibility came about after the company consolidated the multiple on-premises ERP systems it had been running into a single instance. That, in turn, enabled Coats to centrally manage the global supply chains of 130 distribution and manufacturing facilities. “Moving to the cloud and consolidating multiple [ERP] functions was the catalyst that made that transformation possible,” says Hizmy Hassen, Coats’ chief digital and technology officer. phases. The first phase focuses on the fundamental step of migrating an on-premises ERP platform to a public cloud service. IT leaders often use this opportunity to upgrade their existing ERP suite to the latest version to tap into new features and performance improvements. Moving to the cloud also relieves the internal IT staff of having to maintain all the servers, storage arrays, and other assets needed to support enterprise applications. Phase one’s other benefit is that it creates a foundation for reaping more advanced capabilities in phase two. Even so, the first step can deliver a variety of relatively quick, high-value returns for enterprises, including: Phase One Benefits of CloudERP Migrations Increased agility from on-demand provisioning of IT services. These examples illustrate only a handful of the potential benefits available to business leaders who consider moving core ERP systems that had been running on-site to the cloud. Because these migrations typically happen in multiple steps over a handful of years, the payoffs for businesses come in White Paper | Drive Agility and Innovation with ERP in the Cloud Increased systems uptime and availability. Because public cloud providers run data centers in multiple geographical locations, they protect against disruptions by shifting workloads to facilities that deliver the best prevailing performance levels. “We are an apparel company, not a computing company,” Carhartt’s Masey says. “There’s no way we have the resources to create data centers that are as reliable and available as the leading public cloud vendors.” Kennametal, a tooling and industrial materials supplier headquartered in Pittsburgh, Pa., completed the migration of its ERP system to the cloud in 2019, which culminated a three-year journey that finished just in time to face the Covid19 crisis. “When we made the rapid shift to remote work, over Harvard Business Review Analytic Services 3 A company may see a permanent rise in IT demand when the business grows at unexpected rates, leaving IT departments with on-premises data centers struggling to quickly implement the necessary hardware, software, and networking resources. 6,000 employees were sent home with their laptops,” says Tom McKee, Kennametal’s CIO. “That move has been fairly seamless, and I attribute much of that successful transition to the investments we had made for moving to the cloud.” Similarly, cloud ERP helped executives at Coats quickly reduce IT service levels to match the decreased demand the company was seeing after the pandemic struck. The dial-down, in turn, significantly reduced IT-related expenses by utilizing the consumption-based cost controls associated with cloud hosting. “We’re seeing between a quarter and a half million dollars in savings,” says Helge Brummer, vice president of technology and operations at Coats. “That would have been impossible to do with a traditional data-center cost model and the fixed-cost components.” Enterprises that closely manage IT spending can also implement cost-avoidance measures during noncrisis periods. For example, IT managers frequently overprovision their on-premises data centers to prepare for demand spikes that may occur during holidays or other seasonal events. While having extra capacity available is necessary during these intense periods, the extra resources are underutilized during nonpeak times, resulting in unnecessary costs. What’s more, a company may see a permanent rise in IT demand when the business grows at unexpected rates, leaving IT departments with on-premises data centers struggling to quickly implement the necessary hardware, software, and networking resources. Adding additional capacity requires IT managers to lobby senior executives for new funding and then go through a lengthy procurement and installation process. “That delay goes away with cloud” by enabling companies to adjust processing power as needed, says Masey. “The time to stand up services goes down exponentially with the cloud compared to on-premises systems.” Enhanced security and compliance. “Cybersecurity risks do nothing but increase over time, and that means more risk than many security teams can keep up with,” says Lisa Anderson, president of LMA Consulting Group, which specializes in supply-chain modernization. “It’s well worth evaluating how a cloud partner can reduce the risks.” Although Coats executives and its chief information security officer invest significant resources in security, they look to a cloud provider to extend their capabilities. “We are not able to maintain a team of security people and continuously train them to fully defend against the ever-changing world of intrusion and cybersecurity threats,” Coats’ Brummer says. Regulatory compliance, a close relative of cybersecurity, demands similar resources for ensuring that requirements are being met and to gather compliance documentation for auditors. Because cloud providers take on that responsibility, “our risk is reduced and there’s a huge chunk of work that has now gone away from my daily life,” Brummer adds. White Paper | Drive Agility and Innovation with ERP in the Cloud Phase Two Benefits of CloudERP Migrations Once enterprises make the initial move to the cloud, they’re positioned to extend their ERP applications beyond what was possible with on-premises implementations. Phase two involves integrating their ERP platforms with new capabilities that leading cloud providers deliver to support higher levels of agility and innovation. For example, some cloud companies offer extensive data management and analytics services, as well as support for IoT initiatives. These cloud services work closely with the core ERP platform to help organizations gain a better understanding of their markets, develop new business models, and respond to new challenges. Other benefits include: More detailed insights from data and analytics. “We’re seeing companies make better use of data and consolidated information in the cloud for decisions around supply-chain management, such as how to alleviate bottlenecks or ramping up production when there’s a spike in demand,” says Eric Kimberling, CEO of Third Stage Consulting Group, an independent ERP consulting company. “Companies can perform what-if scenarios to anticipate how well the supply chain can handle a big spike in production needs in particular areas of a company’s business.” Opportunities in other areas of business may also arise. Coats executives consolidated departmental data into a central data lake, a cloud-based information storehouse, and are now mining it to improve business in the 50 countries where it does business. “The underlying data has always been there, but it has never been fully visible,” Coats’ Hassen says. “Having a more complete view of our data strengthens our competitive advantage by, for example, revealing new ways to increase product quality,” says Hassen. “That’s been one of the benefits of digital transformation up to this point. In addition, we’re using IoT data in the cloud to monitor and control our effluent discharge from the thread-dyeing process. Our ERP integration of various cloud services has also been instrumental in underpinning the back-office transformation program.” More complete analyses by integrating data from within and outside the ERP platform. Leading public cloud providers enable organizations to connect information from other cloud services, including the ERP vendor’s other cloud applications, and apply analytics to the combined data sets. Integration also extends to an organization’s existing productivity and collaboration tools, such as business automation suites, videoconferencing applications, and business intelligence programs. By streaming data from production equipment on its factory floor and combining it with cloud-based analytics, Kennametal gets a jump on emerging bottlenecks. “The alerts have been real eye-openers for the business,” Kennametal’s McKee says. Harvard Business Review Analytic Services 5 “If companies remove that barrier by adopting a newer ERP solution and then running it in a modern cloud environment, they’ll gain a level of agility that they’ve never had before,” says Cindu Jutras, president of Mint Jutras. “Instead of reacting to issues when someone submits a report at the end of a shift, factory workers at all levels are seeing in real time where the next trouble spot will be and responding before the problem becomes serious.” Faster access to emerging technologies. After linking the IoT capabilities of its cloud provider with its off-site ERP platform, Kennametal has the foundation in place to automate its factory processes with tools like robotic process-automation and AI technology to create “smart” factories that deliver real-time insights enabling improved factory performance. In time, company leaders hope to directly connect information about customer demand with production systems to react more quickly to changes in demand preferences. IT staffs shift from managing on-premises data centers to focusing more on business transformation. McKee says the automation strategy got a boost because technology experts were able to devote less time to managing data centers once IT resources moved to the cloud. “The IT team is focusing on more innovative opportunities than server management,” he explains. A Blueprint for Overcoming Cloud ERP Challenges There is a wide range of potential benefits from moving ERP to the cloud, but IT executives and industry analysts say careful up-front planning and attention to possible roadblocks are needed to reduce the chance that migrations won’t live up to expectations. integration, we realized the challenge was going to be much greater than we had initially analyzed.” As business and IT staffs learn how to fix problems, they’ll be more prepared to tackle ERP modules that directly support daily business operations, such as shipping and logistics activities or accounts receivable and payable. Update and refine business processes. Next, the migration team should analyze the organization’s existing workflows and business processes to eliminate areas of inefficiency and redundancy that have no place in the new cloud environment. Moving ERP to the cloud shouldn’t be a lift-and-shift exercise. “If companies simply move the same legacy applications they’ve been running for decades into the cloud, they’re not likely to see any significant advantages from the project,” says Cindy Jutras, president of Mint Jutras, a research and advisory firm that specializes in ERP systems. “However, if companies remove that barrier by adopting a newer ERP solution and then running it in a modern cloud environment, they’ll gain a level of agility that they’ve never had before. That should be a goal of everyone today, because everything is changing so quickly, and the risk of disruption has never been higher.” Upgrading to the latest version of an ERP platform and migrating it to the cloud does deliver the biggest payback, including creating a foundation for the phase two benefits cited earlier. But many of the phase one results also materialize just by moving an existing version of the software to the cloud. Thus, both options should be considered, along with an organization’s transformation timetable and available resources. Capitalize on new resources for data and analytics. Begin with a gradual move to the cloud. Increasing the odds of success starts with mapping out a phased migration plan. By gradually moving ERP applications to the cloud, organizations can learn about unexpected stumbling blocks, such as inadequate integrations with data storehouses that impair transactions or stymie trend analyses. “Problems with the integration and interconnectivity of systems that feed into the main ERP platform are some of the major issues that may arise if companies try to move everything to the cloud at once,” Masey warns. “When we started to do a deep dive into 6 Harvard Business Review Analytic Services Leading cloud providers offer capabilities for aggregating data from different sources and quickly analyzing it to better understand volatile market conditions and optimization opportunities in internal operations. For example, Mars needed to increase the accuracy of demand planning to ensure that suppliers could make timely deliveries of the products in the package sizes that customers preferred. “In the past, our ERP solution didn’t give us end-to-end visibility and traceability, as products moved through different layers of the supply chain,” says Mars’ Moturu. White Paper | Drive Agility and Innovation with ERP in the Cloud To change that, Mars focused on the discrete sets of financial and supply-chain data that were being stored in individual departments. The company consolidated the information within a cloud-based data lake that created a centralized view of information. “We’re able to leverage all the data for internal traceability, transparency, and financial reporting,” Mars’ Moturu says. “This is a huge value add compared to where we were in the past.” Better use of data also improves decisions about extending credit to customers. Business intelligence and AI technology provided by Coats’ public cloud vendor quickly looks at the payment history and financial standing of companies submitting each purchase order. The credit staff, for example, might receive a recommendation to automatically approve the order or to review it in more detail to address inherent risk factors. Since the analytics became available, the number of manual interventions has declined from 60% to only 15% of all incoming orders, Hassen says. The combination of ERP with IoT technology and analytics from the cloud service provider is yielding improvements in product quality and helping Coats hone its competitive edge. The technology combination is dynamically analyzing various parameters of the manufacturing process to determine which production orders should be checked for quality. One result is that the company is reducing the overall number of knots in its threads. “Before the move to cloud, we hadn’t been able to visualize the data so well,” Hassen explains. “Running ERP in the cloud offers new capabilities like microservices, which means almost endless possibilities from an infrastructure perspective for better supporting the business and its applications,” says Tim Masey, vice president of IT infrastructure and security at Carhartt. Brummer is seeing IT staffs respond to the idea that they’re no longer just providing a support function for the company. “Operations and technology are now intermingled in a DevOps model that joins them at the hip to do strategy planning and provide direct input into operations,” he explains. “That sets free a lot of potential for IT to learn, adapt, and change the thinking within the company. There’s an excitement in my department that you usually don’t find in companies that haven’t adopted the cloud.” Prepare workforces for working with ERP in new ways. Next up: develop a strategy for managing cultural change. The cloud-ERP transition team should anticipate resistance from people who are skeptical about having to perform their duties differently. It’s important to note that because cloud-ERP migrations impact each work group differently, targeted messaging about the ultimate benefits, complete with real-world examples, should be crafted for each group. For example, business decision makers will likely capitalize on advanced analytics to identify new market trends and business opportunities through cloud-based AI, machine learning, and business intelligence systems. Bringing the IT staff onboard with ERP migrations may require communications that alleviate fears of lost jobs. Once data centers move to the cloud, key members of IT teams will not only remain onboard; they will likely see new, more creative opportunities for helping their organizations become more agile. “Our goal is for the IT staff to become innovation engineers as opposed to traditional system engineers,” says Masey. “Running ERP in the cloud offers new capabilities like microservices, which means almost endless possibilities from an infrastructure perspective for better supporting the business and its applications.” White Paper | Drive Agility and Innovation with ERP in the Cloud Finding the Right Public Cloud Provider Once organizations create a multistep plan, update legacy processes, and work with staff members on transitioning to the cloud, they must make the important decision about which cloud provider is right for their enterprise. Narrowing it down to the most suitable partner requires a close look at several factors. First, find cloud providers that have forged strategic partnerships with the vendor of the chosen ERP platform. Signs to look for include joint investments between the service provider and software. Another important gauge is whether the two companies use each other’s technology in their own operations. Each of these moves indicates a strong commitment from both companies to the success of the cloudERP initiative. That experience gives each vendor insights into best practices and how to overcome common hurdles that may arise when migrating ERP to the cloud. Equally important, a close relationship enables ERP vendors and cloud providers to jointly develop new capabilities, such as solutions that address the specialized requirements of individual industries. Teamwork also provides integrated support services to answer client questions about migration problems or integration challenges. Harvard Business Review Analytic Services 7 The key is not only devising a two-phase strategy, but also capitalizing on new opportunities for streamlining and optimizing ERP workflows in the new cloud infrastructure. Decision makers should also look for cloud providers with strong track records in serving organizations like theirs. For example, companies with complex ERP needs should target cloud vendors with enterprise-level experience for missioncritical ERP workloads. Another criterion to look for in a cloud provider is the ability to easily integrate the cloud-ERP solution with the office productivity and end-user collaboration tools used in the organization. These resources let work groups share information more effectively, which is critical for realizing the agility and innovation benefits possible with cloudERP implementations. In addition, leading cloud services offer business intelligence tools that create comprehensive dashboards for real-time views into the performance of business operations. Similarly, the breadth of partner ecosystems offers a barometer of the overall strength of the cloud-ERP package. Third-party partners can provide migration planning and optimization services, as well as ongoing consulting expertise. Enterprises should also work closely with cloud candidates to understand their security and compliance capabilities. The cloud service should not only demonstrate adherence to industry-standard cybersecurity practices, but also provide certifications for specific regulations important to the enterprise, such as the European Union’s General Data Protection Regulation or the U.S.’s Health Insurance Portability and Accountability Act, and the Federal Information Security Management Act, among others. After implementing cloud ERP, enterprises will need to continually monitor how well the implementation is meeting service-level agreements (SLAs). System uptime and business continuity, two important reasons for moving to cloud ERP in the first place, are key metrics to consider. Unplanned outages should be short term, rare, and well within the levels defined in SLAs. “It’s a strong testament to the value of our migration that unplanned system outages have become practically 8 Harvard Business Review Analytic Services nonexistent,” says McKee. “Especially since we’re a business that operates 24/7 and serves customers in more than 60 countries.” Expanding the Art of the Possible The potential benefits of updating and then moving ERP platforms to the cloud span a variety of near-term and longerrange returns. In the first phase of these migrations, executives report increased agility in responding to unexpected events, like the global Covid-19 crisis. Company leaders are also seeing higher uptime rates, stronger cybersecurity, more effective and economical use of IT resources, deeper and more valuable insights from data, and automations that improve product quality. In the second phase, veterans of these projects say the move can expand their goals for ongoing digital transformation strategies. The key is not only devising a two-phase strategy, but also capitalizing on new opportunities for streamlining and optimizing ERP workflows in the new cloud infrastructure. Enterprises should also prepare for some common migration challenges, including cultural change management. IT leaders say these foundational steps pay dividends once the migration is complete. “Being in the cloud is like opening a door and seeing new things you didn’t know were inside,” says Hassen. “Once you take the step, you see opportunities for using these services to expand the art of the possible. It makes strategizing and innovating that much easier.” White Paper | Drive Agility and Innovation with ERP in the Cloud ABOUT US Harvard Business Review Analytic Services is an independent commercial research unit within Harvard Business Review Group, conducting research and comparative analysis on important management challenges and emerging business opportunities. Seeking to provide business intelligence and peer-group insight, each report is published based on the findings of original quantitative and/or qualitative research and analysis. Quantitative surveys are conducted with the HBR Advisory Council, HBR’s global research panel, and qualitative research is conducted with senior business executives and subject matter experts from within and beyond the Harvard Business Review author community. Email us at hbranalyticservices@hbr.org. hbr.org/hbr-analytic-services Copyright © 2020 Harvard Business School Publishing. MCCRE10110620
