The SAP Services Sector
The SAP Services Sector is supporting German economic recovery. IT services and related industries are helping the economy directly and indirectly as more companies digitally transform in order to become future proof. This is contributing to the performance of the economy as a whole with the improvement of each customer’s bottom line as well as the revenue resulting from each system integrator’s own business.
In this week’s IgniteSAP edition, we delve into Germany’s economy, which is anticipated to shift from stagnation to growth by the end of this quarter.
We will examine the ongoing impact of Covid-19 and the continuing war in Ukraine on the German economy, as well as highlight how the IT services industry is playing a crucial role in improving the situation.
We will show how long term challenges and trends like changing technology, workforce, and skills shortages, as well as the need for sustainability accounting and automation, are fueling a massive spike in SAP services.
The German Economy
Although the global economic environment has undergone changes in recent years, the German economy, which is the 5th largest in the world, has historically been a source of stability and technical progress in Europe and beyond. However, it has faced some limitations and challenges. Earlier this year, depending on the method of measurement, the German economy narrowly missed falling into a predicted recession or only experienced a slight dip into recession. These changes have constricted the German economy to some extent.
In a report by the IFO Institute economic researcher Timo Wollmershäusern said:
“After a further 0.2 percent decline in gross domestic product in the first quarter, the economy will recover in the further course of the year. Starting mid-year at the latest, rising real wages will support Germany’s domestic economy… Inflation has peaked. At 6.2 percent, the average rate in 2023 is expected to be lower than last year’s. In 2024, price increases will then return to normal and inflation will fall to 2.2 percent”
The German Federal government and the private sector have both been taking steps over the last years to compensate for slowing growth in the economy and this has offset some of the consequences of global disruption, but due to the nature and scale of the disruption, the real effects of improvements in energy prices and supply chains will not apparent for some months.
Covid-19 and Energy Crisis Recovery
In September of last year, the German government announced plans for a third relief package amounting to 65 billion Euros. This package included credit support specifically aimed at assisting companies dealing with excessive energy costs. However, despite previous relief packages totaling 30 billion Euros, some commentators viewed this initiative as insufficient.
The rise in energy prices, a multitude of supply chain disruptions caused by COVID-19 and the Ukraine war, and the necessity to modernize manufacturing for sustainability and connectivity dealt a severe blow to the German manufacturing industry, especially automotive manufacturing.
In May the DIW economic research institute said that economic decline over the winter was greater than expected and recovery was “more timid” than previously assumed. High inflation and interest rates lowered purchasing power and lending rates. Despite this, DIW economic expert Guido Baldi added that the economy weathered the winter energy crisis “surprisingly well”.
Confidence has yet to return in the commercial and industrial sectors, limiting growth. Another economist from DIW said:
“Many companies are unsettled and are currently limiting themselves to maintaining their business activities at the current level rather than expanding them.”
To maintain previous revenue levels in the face of higher operating costs, German enterprises must pursue growth while embracing digital transformation to optimize output with existing resources and minimize unnecessary operating expenses.
Germany Federal Digital Strategy
Recognizing the importance of digital transformation, the German Federal Government appointed an advisory board in the autumn of 2022 with representatives from industry, academia and civil society. The board will continuously monitor digital progress according to 135 targets and create a database to improve inter-departmental collaboration on digital strategy, with meetings every 6 months.
Volker Wissing, Federal Minister for Digital and Transport said:
“We want to finally make Germany fit for the digital future, thereby facilitating the life of our citizens. Our Digital Strategy allows us to implement a major societal, economic and scientific digital transformation process. As the Federal Government, we have set ourselves measurable and ambitious goals we want to achieve by 2025. We want to be measured against these benchmarks. The BMDV will closely monitor implementation of the measures. Our monitoring is based on three pillars that go hand in hand and allows us to keep a constant eye on the Digital Strategy’s progress: also enabling us to make adjustments in the short term and support each other, if necessary. It is important to me that we, the Federal Government, find common solutions to our digital challenges in a spirit of trust and in an agile way. This will help us initiate the digital transformation in Germany.”
This government initiative adds to massive developments in the private sector as more and more German enterprises of all sizes implement their own digital transformation in a way that takes full advantage of cloud ERP, AI, business process analysis, and automation technologies.
The German IT Sector
Prior to the occurrence of global disruptive events, public and private organizations had already been actively encouraging businesses to invest in digitization and cloud technology. However, several factors have significantly accelerated this process.
This has meant that the IT sector in general and companies helping other enterprises with implementing software services in particular have remained relatively active despite the economic downturn. The main reason is that companies like SAP and their partners have been providing the solution to many of the new challenges facing German enterprises, and innovative ways to drive further efficiency and growth in their business operations.
The German SAP Services Sector
Changes in SAP’s portfolio of products has also acted as a catalyst for the pace of change, with new offerings like Rise with SAP and Grow with SAP very much centered on cloud deployments (of S/4HANA) and modularity (with SAP Business Technology Platform). The 2027 support deadline for legacy SAP products like SAP ECC has also focussed minds on modernization of SAP ERP systems.
Companies are actively integrating new technologies such as AI, Machine Learning, automation, and analytics into the entire spectrum of SAP products. This integration widens the technological gap between businesses that have up-to-date SAP systems and their competitors.
Most SAP user group members surveyed by DSAG and ASUG in 2022 recognized the importance of upgrading and modernizing their SAP systems. However, they have not yet initiated the process of transformation, resulting in a backlog and intensifying the already high demand for SAP consulting talent. There are also variations in views between SAP and its customers regarding the necessary implementation types and the maintenance of contracts and licenses.
More recently, the ISG Provider Lens SAP Ecosystem Report for Germany revealed that SAP partners are upbeat about services market across the board. The report surveyed the capabilities of 46 SAP services providers in four categories: SAP S/4HANA System Transformation (Large Accounts), SAP S/4HANA System Transformation (Mid-market), Managed Application Services for SAP ERP, and Managed Platform and Cloud Services for SAP ERP.
The German Economic Outlook
A report by Deutsche Bundesbank in June 2022 attempted to summarize how the positive and negative influences on the German economy would play out from 2022 through to 2024.
“The German economy is caught between opposing forces. As the pandemic containment measures have largely been rolled back, service providers and private consumption are receiving a strong boost. On the other hand, the steep rise in energy prices resulting from the war in Ukraine is driving up the already high inflation rate, eroding households’ purchasing power. Increased supply bottlenecks are throttling production and exports are also suffering from weaker demand.”
In June this year the German Economy minister Robert Habeck said that the German economy would reach 1.6% to 1.9% growth by next year, while the German government as a whole indicated it expected 1.6% growth in 2024.
While there is some range in the expected rate of growth, the average appears to be around 1.6% and most commentators agree that by 2024 the German economy would overcome its current challenges.
Habeck said that German economic strategy was based on resilience, sustainability and innovation , and that Germany was achieving those ideals by diversifying supply chains and enhancing digitization. He also said that Germany was fostering innovation potential by investing in research and development, and supporting start-ups and SMBs.
Germany’s economy was in a better position compared to many other countries to withstand the impact of Covid-19, the Ukraine war, and the associated disruptions. What both the public and private sector in Germany have discovered during this period of upheaval is that digital transformation has provided enterprises with agility and resilience.
Germany’s strategic emphasis on digitization, and its close relationship with corporations like SAP who are able to provide access to innovative technology to companies of all sizes has allowed it to out-perform many other European countries.
From the perspective of those working in the SAP services sector, the disruption of the last few years has not only demonstrated the effectiveness of SAP systems for business resilience, but also acted as a catalyst for those customers and potential customers who required a little more encouragement to invest further in their business processes.
Now we have reached the stage where most SAP customers and many new ones are increasingly aware of the necessity of optimal ERP and there is a shortage of SAP talent to carry out projects required to bring corporations back to optimal operations.
The pace of technological change, including disruptive technologies like AI, coupled with SAP’s own modifications to its portfolio, places additional pressure on the situation, emphasizing a focus on a cloud-first approach.
It now appears that in order for businesses in Germany and elsewhere to maintain profitability they need to act, and their action requires skilled and experienced SAP consultants, leading to extreme demand for their services.
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