Choosing Between S/4HANA On-Premise and Cloud: Making the Right Decision

Authored by Mr. Laeeq Siddique — Leading SAP S/4HANA Innovation & Strategy

S/4HANA On-Premise vs Cloud is one of the most important decisions businesses face when planning their SAP transition. Choosing between S/4HANA On-Premise vs Cloud affects your organization’s cost, scalability, control, and compliance. Although SAP strongly encourages cloud adoption, many enterprises still prefer the on-premise model. Understanding the pros and cons of S/4HANA On-Premise vs Cloud is essential for making an informed decision.

We will explore the historical context, challenges, and reasoning behind each approach to guide businesses in making the best choice for their needs.

A Detailed History of SAP ERP

To fully understand S/4HANA and its deployment options, it helps to examine the evolution of SAP’s ERP systems. It all started in the 1970s with SAP R/1, an ERP system designed for mainframe computers. While innovative for its time, R/1 lacked the flexibility needed by growing businesses. SAP quickly iterated with R/2, which offered enhanced functionalities and supported batch processing. These systems laid the groundwork for the biggest enterprise software in the world.

The real game-changer came with SAP R/3 in the 1990s. R/3 introduced the client-server architecture, which revolutionized ERP systems by making them more scalable and accessible. It allowed businesses of varying sizes to implement ERP solutions tailored to their needs. R/3 was a pioneer in enabling integration across business processes, providing a unified platform for managing everything from finance to logistics in one codebase technically.

Building on the success of R/3, SAP launched ECC (ERP Central Component) as part of the SAP Business Suite. ECC became the backbone of enterprise operations for almost two decades. Its modular architecture allowed businesses to implement only the functionalities they required, making it versatile and cost-effective. However, as data volumes grew and the need for real-time insights became critical, SAP decided to use it HANA database instead of giving business to Oracle or Microsoft for DBMS as SAP ERP use to work with them.

Enter SAP S/4HANA, introduced to address these challenges. By leveraging the in-memory database SAP HANA, S/4HANA offered unprecedented speed and real-time analytics capabilities. This new system was designed for the digital age, and it gave SAP full control and more business. S/4HANA also introduced a simplified data model, making it easier for businesses to manage their operations.

S/4HANA started with on-prem perpetual licencing to my knowledge but SAP started the cloud offering soon after.

The Case for On-Premise S/4HANA

While SAP emphasizes its cloud offerings, on-premise deployments continue to provide compelling advantages. One of the most significant benefits is data control. Industries such as healthcare, finance, and government often have stringent data sovereignty requirements. On-premise systems give organizations full control over their data, ensuring compliance with regional and industry-specific regulations.

Customizability is another critical factor. On-premise deployments allow businesses to tailor their ERP systems to meet unique operational needs. For example, a manufacturing company with specialized workflows can adapt S/4HANA to fit its processes seamlessly. This level of customization is often difficult or impossible to achieve with standardized cloud solutions.

Cost predictability also makes on-premise systems attractive. While the upfront costs for hardware and licenses are significant, these systems offer long-term financial stability. Businesses avoid the recurring subscription fees associated with cloud solutions, which can escalate over time, especially for large enterprises.

For organizations transitioning from SAP ECC, on-premise deployments often simplify the migration process. By leveraging existing hardware, licenses, and integrations, businesses can reduce disruptions and maintain continuity.

Challenges of On-Premise Deployments

Despite their advantages, on-premise systems come with their own set of challenges. One of the primary concerns is the initial investment required. The costs of acquiring hardware, licenses, and infrastructure can be prohibitive, particularly for small and medium-sized enterprises.

Maintenance responsibilities are another drawback. Organizations must manage updates, security patches, and system monitoring, which require skilled IT personnel. For businesses without robust IT teams, this can lead to increased operational strain.

Additionally, SAP’s focus on cloud innovation means that some new features and updates are prioritized for cloud platforms. On-premise users may experience delays in accessing advanced functionalities like AI-powered analytics or predictive maintenance tools or Joule (the SAP’s co-pilot). This delay can hinder competitiveness in fast-moving industries.

Why SAP Promotes the Cloud

SAP’s emphasis on cloud adoption is part of a broader strategic shift. Subscription-based models provide the company with a steady revenue stream, offering financial predictability compared to one-time license fees. Cloud solutions also align with SAP’s vision of standardizing business processes. By promoting cloud adoption, SAP can streamline updates and deliver innovations more quickly.

For businesses, the cloud offers distinct advantages. Scalability is one of the most appealing features. Cloud deployments allow organizations to adjust resources based on their needs, making them ideal for growing businesses. Integration capabilities are another benefit. Cloud solutions easily connect with other SAP tools and third-party applications, enabling seamless workflows.

However, businesses must critically evaluate cloud recommendations. Many SAP partners receive financial incentives for cloud sales, which can result in biased advice. It is crucial to assess whether a cloud deployment truly aligns with organizational goals.

For businesses evaluating cloud solutions, the integration capabilities of SAP BTP can help businesses scale confidently while managing costs. Learn more about how SAP BTP Pricing works here

Clearing Misconceptions About On-Premise Availability

A common misconception is that SAP no longer supports on-premise S/4HANA deployments. This is incorrect. On-premise licenses remain available and are actively supported. SAP has committed to supporting these systems until at least 2040, providing long-term assurance for businesses that choose this option.

The misconception often stems from sales tactics. Because cloud solutions align more closely with SAP’s strategic goals, sales teams, and partners may prioritize promoting them. Businesses should engage directly with SAP or consult independent experts to obtain accurate information.

Future Roadmap for S/4HANA

SAP’s commitment to innovation ensures that both on-premise and cloud customers have access to evolving technologies. The company has outlined a roadmap that focuses on enhancing integration, advancing AI and machine learning, and streamlining operations through automation. On-premise customers can expect continued support, but SAP’s faster innovation cycles are more pronounced in the cloud. Businesses should plan for periodic upgrades to stay competitive, regardless of deployment choice.

Key Considerations When Choosing

Deciding between on-premise and cloud requires a thorough assessment of organizational needs. For industries where data privacy and compliance are critical, on-premise systems are often the best choice. Conversely, businesses seeking rapid scalability and access to the latest innovations may find cloud solutions more suitable.

A Step-by-Step Decision Framework

1. Assess Business Requirements
   • Identify your operational needs, focusing on data privacy, compliance, and scalability.
2. Analyze Costs
   • Conduct a detailed cost analysis, considering both short-term and long-term expenses.
3. Evaluate IT Capabilities
   • Determine whether your team has the expertise to manage on-premise systems or if managed services would be more effective.
4. Engage Stakeholders
   • Involve key decision-makers across departments to ensure alignment.
5. Consult Experts
   • Seek advice from SAP consultants and independent experts for an unbiased perspective.

Addressing Common Questions (FAQs)

• Will moving to the cloud limit customization? Cloud solutions are less customizable than on-premise systems, but they often provide sufficient flexibility for standard business needs.
• Are there hidden costs in cloud deployments? Subscription fees can add up over time, especially with additional services or features.
• How does the hybrid model work? The hybrid approach allows businesses to keep critical operations on-premise while leveraging cloud technologies for innovation.
• What happens to existing customizations when moving to the cloud? Customizations often need rework to fit within the cloud framework. However, private cloud models under RISE can accommodate a higher degree of customizability.
• Is data migration from on-premise to cloud seamless? While SAP offers tools for data migration, businesses should prepare for potential challenges, including data mapping and validation.

Cost Breakdown Analysis

For on-premise systems, the upfront investment includes hardware, software licenses, and setup costs. Maintenance and IT staffing also add to the total cost. Over 10 years, these costs stabilize, offering predictability.

Cloud deployments have lower initial costs but ongoing subscription fees can accumulate. Businesses must also consider costs for additional services, such as enhanced support or extended storage. A detailed cost analysis should compare these factors to determine the best financial fit.

Cloud costs on your mind? Dive into SAP BTP pricing for a clear picture of what to expect.

Exploring a Hybrid Approach

For businesses looking to combine the advantages of both on-premise and cloud, a hybrid model offers an ideal solution. Core operations can remain on-premise, providing stability and control. Non-critical functions, such as analytics or customer engagement, can be managed through cloud solutions to leverage new technologies.

SAP’s Business Technology Platform (BTP) facilitates this approach by enabling seamless integration between on-premise and cloud systems. This allows businesses to enjoy the benefits of both without significant disruptions.

Enhanced Hybrid Model Explanation

A successful hybrid model requires a well-planned strategy. Businesses should identify which processes benefit from on-premise control versus those that thrive in a cloud environment. For instance, critical data-intensive operations like financial reporting might remain on-premise, while customer-facing applications could be moved to the cloud. Ensuring a robust network infrastructure and leveraging tools like SAP Cloud Connector can streamline this dual approach.

Final Thought

The decision between S/4HANA on-premise and cloud is not a one-size-fits-all choice. Each option has its strengths and challenges. On-premise systems provide control and customizability, making them ideal for regulated industries and businesses with unique operational needs. Cloud solutions, on the other hand, offer agility and innovation, appealing to organizations focused on scalability and rapid adaptation.

By understanding the historical context, carefully evaluating their requirements, and considering hybrid strategies, businesses can make informed decisions that align with their goals and ensure long-term success.

About the Author:

Laeeq Siddique is a seasoned SAP Technical Consultant with extensive expertise in SAP S/4HANA, BTP, and advanced SAP technologies. With a proven track record of delivering innovative solutions across industries, he excels in streamlining processes, implementing seamless integrations, and guiding teams toward achieving exceptional results in SAP implementations.