January 2016, IDC #EMEA40942916

P A R T N E R S P O T L I G H T

Creating the Platform for Digital Transformation: The SAP-Red Hat Partnership

Sponsored by: Red Hat

Philip Carnelley January 2016

THE DIGITAL TRANSFORMATION IMPERATIVE

IDC predicts that within the next two years, two-thirds of Global 2000 enterprise CEOs will put digital transformation (DX) at the center of their corporate strategy. The percentage of enterprises with advanced DX strategies and implementations will more than double within five years. This scale-up of digital business strategies will drive everything that matters in enterprises' IT investments.

IDC segments organizations into two camps — Digital Thrivers and Digital Survivors. Digital Thrivers are proactive rather than reactive, driving their own agenda rather than being driven by external forces. They are able to exploit the 3rd Platform — the digital technologies of cloud, social, mobile, and Big Data, and the allied acceleration innovators like the Internet of Things (IoT), cognitive systems, and 3D printing — to radically change their business model and processes to create sustainable competitive advantage, to enter new markets, or to provide new value propositions. We see manufacturing companies morphing into service organizations, retailers becoming banks, and technology companies becoming healthcare service providers or auto-industry players. Startup companies like Uber, Airbnb, or indeed Amazon have shaken up decades-old industries that thought they had settled down into stable middle age. Today, no company can afford to assume that its competition will remain static, or that its business model will remain unaffected in the coming years.

IDC has created a model to measure organizations' readiness for this transformation — a digital transformation maturity model. Our research shows that the majority of organizations in Europe, and indeed around the world, are in the earliest two stages of DX maturity. Most are what we would classify as Digital Explorers or Digital Players. Few can yet call themselves Digital Transformers or Digital Disruptors.

There are many moves that organizations can and indeed must make to position themselves to execute on a digital transformation program and to develop their DX maturity. These will include transforming strategy and leadership, process, workforce transformation, and customer experience.

A critical strategy element for organizations positioning for DX is to base their operations on the right technology platform — one that allows them to fully exploit these transformative digital technologies. SAP and Red Hat are two companies that have recognized the importance of digital transformation to their customers and are articulating — individually and in partnership with each other — how their offerings can support a customer's DX agenda. Indeed both have publicly recognized the importance of IDC's Digital Transformation Maturity Model and can explain to customers how their own offerings map on to the elements of IDC's model to assist with the DX journey. The fact that they are partnering together in this will, in IDC's opinion, make it easier for their customers to follow a DX agenda.

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FIGURE 1

IDC's MaturityScape Digital Transformation Stage Overview

Source: IDC, 2016

DIGITAL TRANSFORMATION — A CEO-LEVEL AGENDA

IDC research shows that digital transformation is a key priority for most organizations around the world. That is, transforming products and services, business processes, and relationships with customers, partners, and employees by exploiting digital technologies, in particular the "four pillars" of the 3rd Platform of computing (cloud, social, mobile, and Big Data analytics technologies).

Private and public sector organizations alike are grappling with how to address the impact of these technologies on their decision-making processes, their operations, product rollouts, promotions, and, most importantly, how they engage with their customers. They can see disruptive newcomers shaking up formerly staid, mature markets — like Amazon in retail, Uber in taxi services, Airbnb in hospitality, or Zoopla and Rightmove in real-estate sales. Retailers, banks, utility companies, and auto manufacturers are nervously looking over their shoulders at companies like the U.K.'s Atom Bank (an app-only approach to banking), Google, Facebook, and Apple (rumored to be considering entering the auto market). Forward-thinking CEOs know that they don't want to be "Uber'd." They want to take advantage of the new mega-trends and technologies: the Internet of Things (IoT), robotics, 3D printing, hyperconnectivity, cognitive systems, cloud-stored data, and real-time analytics/decision making.

IDC predicts that within the next two years, two-thirds of Global 2000 enterprise CEOs will put digital transformation at the center of their corporate strategy. The percentage of enterprises with advanced DX strategies and implementations will more than double within five years. This scale-up of digital business strategies will drive everything that matters in enterprises' IT investments.

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Today's customers continue to expect more and more from their suppliers. In the consumer domain, for example, people now expect to be able to engage with their suppliers over multiple channels: for instance, to view a product on their mobile, to check an order on the Internet, and return the delivered goods to their nearest store — seamlessly. They also want to shop around: an IDC survey in the U.S. found that one in five shoppers said they had bought goods on a mobile while in a competitor's store. Such trends reduce margins and force firms to compete ever harder for business through better customer service, sales, or marketing. Suppliers need to reappraise their internal and customer-facing processes to embrace omni-experience.

In some cases these changes can truly transform a business, for example, from bricks-and-mortar only to omni-channel, entering new markets or even moving from a product manufacturing business model to a services-led, repeatable revenue stream, much more "sticky" to customers and potentially much more lucrative. IDC predicts that by 2017, 75% of "product-oriented" companies will gain more than 50% of their revenues from services.

Examples of where this type of transformation is happening right now include the following:

The Hamburg Port Authority needed to dramatically increase its container handling capacity, yet was unable to expand physically. The organization implemented a mobile business cloud based on a real-time data platform for smart logistics, saving truck waiting times and improving throughput. Real-time information lets shipping agents view the availability of containers at the docks and work with terminal operators on collection schedules that reduce waiting times. By assigning new orders before the trucks reach the terminal, transport companies can optimize their capacities and the port can make better use of available parking spaces. And, drivers also receive timely information that lets them know which routes to choose and how long they might have to wait at a destination.

Electronics manufacturer Philips launched a "connected toothbrush" that gathers data from opt-in customers and delivers the information back to them via a mobile app. The company is delivering a subscription service to consumers who are provided with advice and feedback on whether they are using the product effectively. It also indicates when parts should be replaced based on usage. Perhaps most interestingly, Philips is looking to bring in third parties as part of the value proposition, such as dental insurance providers.

Rolls-Royce has moved from selling aero engines to selling "thrust time" where engines are rented out on an hourly basis. Today, most Rolls-Royce engines send telemetry data to its offices, where reportedly around 4,000 engines are monitored under the company's TotalCare program, for scheduled and predictive maintenance to minimize downtime. Some four-fifths of Rolls-Royce aero engines are now "sold" in this way.

U.S. railroad companies are able to implement a new, mobile solution allowing trains to detect and react to unsafe conditions in real time, reducing the risk of accidents due to human error. The Positive Train Control program is to be implemented across most of the U.S. rail network in compliance with a federal law passed in 2008. Train companies were supposed to be compliant by December 2015, but this has proven challenging. A new solution from Meteorcomm, a company providing real-time data communications infrastructure solutions to the railroad industry based on 3rd Platform technologies, is now available to make this more feasible.

Spanish bank BBVA has set up a digital banking unit to deliver a seamless customer experience across new digital channels alongside the traditional ones. The digital banking unit is also making significant investments in building out application programming interfaces (APIs) so that its new digital capabilities can be exposed and leveraged by other stakeholders in the ecosystem. The objective here is to create a seamless customer experience across all its channels as the banking unit creates new, easier, and more attractive business processes for areas such as account opening, money transfers, and loan origination to fend off competition from new entrants.

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It's worth noting that DX is not just something for large, global players but is equally important for small and midsize services and manufacturing companies. IDC is seeing a democratization of the technologies involved, and often smaller companies are best placed to spot an opportunity in the market they can exploit, with the agility to change quickly to capitalize on that opportunity.

DRIVING DIGITAL MATURITY

To implement digital transformation of this scale and profundity requires a great deal of readiness and ability — what IDC calls digital maturity. This means putting in place the right platform, governance, culture, and skillsets, allied to having the right business goals.

IDC has developed a model for digital maturity to offer guidance on strategy and to allow organizations to benchmark different facets of their organization to assess that maturity. Much more information on IDC's Digital Maturity model is available on the IDC website and in many of its publications, but in summary, IDC's Digital Transformation MaturityScape Benchmark comprises five key dimensions:

Leadership

Omni-experience

Information

Operating model

WorkSource

Each dimension is targeted at a key aspect of DX mastery and can be assessed independently as a measure of the relative maturity of a specific aspect of business functionality and performance. Each dimension also falls naturally under the domain of certain business leaders, including CEOs, CIOs, CMOs, CFOs, COOs, and line-of-business (LOB) management, but digital transformation is a "team sport" that requires collaboration across all business domains.

The model allows organizations to be placed on a five-point scale, along each of these dimensions and in summary. The model and its five-point scale is summarized in Figure 1, shown earlier.

Perhaps unsurprisingly, IDC's research in this critical area of business has shown that the majority of European organizations are still at the early stages of digital maturity — Ad Hoc and Opportunistic (as shown in Figure 2). The final section of this paper gives guidance on how organizations can think about ways to improve their digital maturity.

In summary, the story told by Figure 2 is that the majority of the European companies surveyed have yet to establish DX capabilities and expertise at the Digital Player level (i.e., repeatable maturity), and are still at the stage that IDC identifies as Digital Explorers (i.e., opportunistic). We also find that companies that have proactively and seriously committed to DX ("thrivers") exhibit a different set of traits from those that are still reactively and cautiously exploring DX opportunities ("survivors").

Underlying this headline data, IDC finds that some countries and industries are more advanced (on aggregate) than others in their digital maturity. A further research finding is that U.S.-based organizations tend to be more advanced in terms of digital maturity than their European peers.

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FIGURE 2

European Digital Transformation Maturity: Proportion of Organizations at Different Maturity Stages

Source: IDC European Digital Transformation Benchmark Survey, June 2015, n = 413

RED HAT AND SAP — CREATING A PLATFORM FOR DIGITAL TRANSFORMATION

Digital transformation is about leveraging a modern digital technology platform — what IDC terms the 3rd Platform technologies of cloud, mobile, social, and Big Data analytics to transform business operations and models. So, while it's by no means the end of the story, getting the right platform is an essential part of being able to implement a digital transformation strategy. Today's base platforms need to be dynamically scalable, open for multisource integration, and allow rapid application development and deployment, supporting new development approaches such as containerization. They must also be suitable for multiple deployment options — private cloud, public cloud, and hybrid.

Two companies that have very much recognized the need for organizations to adopt the right platform for digital transformation, and indeed have endorsed the IDC Digital Transformation Maturity Model, are SAP and Red Hat — in partnership and individually.

Furthermore, SAP has produced a mapping between its SAP HANA platform and the IDC digital maturity model, to help its customers to select the technologies they need to match their digital transformation maturity level and business goals.

0%

5%

10%

15%

20%

25%

30%

35%

40%

Ad Hoc Opportunistic Repeatable Managed Optimized

Digital Resister

Business is a laggard, providing weak customer experiences and using digital technology only to counter threats.

Digital Explorer

Digitally enabled customer experiences and products are inconsistent and poorly integrated.

Digital Player

Business provides consistent, but not truly innovative, products, services, and experiences.

Digital Transformer

Business is a leader in its markets, providing world-class digital products, services, and experiences.

Digital Disruptor

Business remakes existing markets and creates new ones to its own advantage, and is a fast-moving target for the competition.

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Both SAP and Red Hat also stress their dedication to simplification of process and architecture: IDC believes that reduction of complexity is a key strategy for CxOs to free up budget otherwise spent on maintaining current systems and processes, to repurpose it for digital innovation and to meet new business goals.

SAP and Digital Transformation

SAP's view is that its HANA platform simplifies digital transformation initiatives, while the S/4 HANA application suite with its simpler interface and data structures allowing a real-time view on business data improves agility in key processes. At SAP's TechEd conference in Barcelona in November 2015, the global president of the SAP Platform Solutions Group said the SAP HANA Platform was "the Digital Core" that could help transform an organization into a digital enterprise.

SAP HANA is a computing platform comprising database, middleware, and developer tools, offering database, application processing, and integration services on a single platform. It has had a considerable impact on the database world, particularly due to its use of in-memory storage for data processing and its native ability to handle poly-structured data. The same architecture provides libraries for predictive, planning, text processing, spatial, and business analytics.

One of the virtues of SAP HANA is that it allows transactional and analytical processes to run concurrently against the same datasets, helping to create what might be called a real-time decision platform, thanks to its rapid query response and bridging of operational data, analytical data, and Hadoop-stored contextual data. This can be used to rethink approaches to key business processes, such as rethinking the way a logistics company does product delivery scheduling and routing. Optimizing routing in real time has a large potential impact on a company's ability to offer and meet new customer-delivery SLAs, with using real-time updates available thanks to the spatial attributes. In fact, availability of real-time location data is a key enabler for a lot of digital transformation initiatives — for example, an insurance company offering car insurance charging based on GPS tracking of the distance traveled by a vehicle, and even the driving style of the driver, monitored by sensors in the vehicle.

Red Hat's Support for Digital Transformation with SAP

While it is not the only option, one of the primary platforms for SAP HANA comes from open source champion Red Hat, which offers a broad range of products under the open source model, including the Red Hat Enterprise Linux (RHEL) operating system and the Red Hat JBoss Middleware range of offerings for integration and process automation, together with development tools and storage systems.

Linux is a very suitable platform for running SAP, and Red Hat's version, RHEL — together with its associated middleware and development tools — is increasingly popular in the enterprise for running SAP systems, including SAP HANA, using its specially developed Red Hat Enterprise Linux for SAP HANA. Red Hat provides enterprise-standard support services and its engineers are SAP-certified and work closely with SAP on joint development projects, Red Hat being a SAP global co-innovation lab member, and member of the SAP Benchmark Council.

"We [SAP and Red Hat] are looking the same way."

Mathias Kaldenhoff, Head of Business Development Platform Solutions, SAP

"SAP HANA is the heartbeat of the digital platform."

Mathias Kaldenhoff, Head of Business Development Platform Solutions, SAP

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Red Hat believes that one of its key virtues with respect to the digital transformation agenda is the openness of its offerings. Much of today's leading-edge platform development is taking place in the open source arena — such as Big Data technologies around the Hadoop ecosystem and new development approaches like containerization. Furthermore, some organizations' procurement rules — particularly some government organizations — mandate the use of open standards where possible. Thus Red Hat technologies can be part of an infrastructure standardization program: another aspect of simplification, part of an organization's strategy to reduce cost and increase agility through reduced complexity.

IDC predicts that by 2018 enterprises with strategic DX initiatives will expand the number of external "data pipelines" feeding intelligence into their organization by at least three- to five-fold, and will expand the delivery of their own monetizable data to the marketplace by 100-fold or more. Enterprises' ability to innovate will grow (and shrink) in proportion to their data supply.

Thus integration is a business-critical capability, linking the "digital core" of the ERP system to both complementary transactional systems and to external data sources, particularly in the Big Data context, or to external events and transactions. For instance, core marketing systems may need to link to social media data, HR systems to partner databases for hiring purposes, or commerce systems to external catalogs.

Consequently, one of the primary ways that this partnership can be seen to benefit companies tackling DX is Red Hat's capability to link SAP and non-SAP systems through the Red Hat JBoss Middleware/connectivity offerings. While comprehensive in their scope, SAP systems (or any ERP systems) alone are not sufficient for the DX agenda, and they must fit into a wider delivery ecosystem.

A related aspect of Red Hat's offerings which is increasingly relevant in the DX context of mobile-enabled, cloud-centric business processes is its reputation for strong security.

FIGURE 3

Red Hat and SAP — Typical Configuration

Source: Red Hat

"We help customers in their modernization journey: much of today's technical innovation is based on open source, but it needs to be enterprise-grade."

Dirk Kissinger, Senior Manager, Strategic Alliances, Red Hat EMEA

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ESSENTIAL GUIDANCE

IDC believes that the pace of DX change will accelerate, particularly as the Internet of Things becomes more entrenched in the daily fabric of business and society. The proliferation of devices and the information that flows between them will require business leaders to increase their awareness of how their ecosystem is evolving on a continuous basis.

As a result, strategic planning cycles will continue to shorten. Dashboards and other metric-oriented analytic tools will become the default feedback systems that drive business model transformation "on the fly," even for well-established industries that today seem relatively impervious to the need for extreme agility.

At the technology level, there are as many as seven touchpoints with technology suppliers that CIOs need to consider when deciding if the platform is fit for purpose in the DX context: networks, hardware, storage, operating system, database, middleware, and of course applications. Thus choosing and designing the right platform for service delivery involves an entire ecosystem and holistic architectural approach, not a single supplier.

Some guidance IDC can offer to companies eager to improve digital transformation maturity, pertinent to the issues discussed in this paper, is that we see that more mature companies — which we term Digital Thrivers — behave in the following ways:

Seek to establish processes and systems that continually evaluate, understand, and extend the value of all ecosystem constituents.

Develop a culture of innovation and a hunger for driving disruptive ecosystem experiences, and facilitate this by automating and adapting responsively to customer experience needs.

Leverage digital technologies to conceive, create, adapt, and execute on innovative contextualized instantiations of ecosystem experiences that combine human and machine intelligence.

Develop and deploy an adaptive architecture and services that fluidly scale and adapt to business requirements.

Make an organizational commitment to continually amplify engagement of digital and physical continuous self-assessment and innovation that leverages input that transcends traditional ecosystem (customers, employees, partners, and things) boundaries.

Adapt to business needs, in alignment with customer, partner, and employee expectations.

Expand market awareness and brand management to leverage an assortment of digital connections, influences, impressions, and triggers that expand engagement beyond traditional ecosystem boundaries. Business performance hinges on delivering a compelling experience long after initial engagement.

Align with personalized and contextualized needs while engaging and listening like never before to all extended members of the ecosystems.

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