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In today's interconnected world, Enterprise Resource Planning (ERP) systems are the backbone of global business operations, seamlessly integrating key functions such as finance, supply chain management, and human resources. As companies expand their global footprint, choosing the right SAP S/4HANA Cloud Public Edition system instance strategy for the Chinese market becomes crucial for operational success.
Marco_Valencia and I aim to guide businesses in making an informed choice between offshore and onshore ERP instances for their China subsidiary-based rollout of SAP S/4HANA Cloud Public Edition. We focus on critical aspects such as regulations, performance, and strategic alignment. However, given that regulations are continually evolving and may have varying implications based on the nature and sector of businesses, it is essential to seek specialized legal and technical advice to thoroughly understand Chinese regulations and decide on the best strategy. My colleague, @TeresaTD has published an informative post to introduce the Cross-Border Data Transfer requirements in China recently, which you may refer to. While SAP is not able to provide any legal advice, we aim to help you understand some of the strategies and implications you might encounter when making your decision.
Understanding SAP S/4HANA Cloud Public Edition System Instances
To kick things off, let's define what SAP S/4HANA Cloud Public Edition system instances are. These are complete environments (a 3-system landscape that includes development, test, and production systems including the HANA database, etc.) where software and data are hosted and managed. When it comes to deploying these instances to cover business requirements for Chinese subsidiaries, businesses usually choose between offshore and onshore options.
Now, we will compare offshore and onshore deployments, highlighting some of the benefits and drawbacks. This will provide you with a point of reference for evaluating options to meet the requirements of your Chinese subsidiary in SAP S/4HANA Cloud Public Edition.
Offshore Instances: Hosted in data centers located outside of China, companies often leverage existing global infrastructure to cover all group entities, including Chinese subsidiaries.
Offshore Instance – Central Single Instance (Public Cloud only)
Benefits:
- Cost-Effective: Significant savings by leveraging existing global IT infrastructure and economies of scale.
- Standardization: Ensures consistent management and processes across the enterprise via corporate template-based deployment, facilitating easier cross-entity comparisons and benchmarking.
- Seamless Governance: Centralized process ownership aids in maintaining uniformity and simplifies business process governance across entities, enabling more efficient global reporting.
- Intercompany Process: Out-of-box configured business processes to support cross-company transactions, reducing reconciliation efforts and improving financial closing times.
- Unified Reporting: Centralized data storage enables real-time, enterprise-wide reporting and analytics, providing a holistic view of the organization's performance with the ability to tailor reports for specific units.
- Master Data Harmonization: Easier implementation of global data standards, ensuring consistency in master data across all entities and facilitating more accurate group-level analysis.
Drawbacks:
- Potential Compliance Challenges: Potential changes in Chinese data residency laws can lead to legal complications or operational restrictions.
- Potential Latency Issues: Potential latency issues can hinder real-time operations and business efficiency in China, affecting the timeliness of data for decision-making.
- Data Transfer Restrictions: Cross-border data transfer limitations may impede real-time reporting and analytics capabilities for the Chinese operations.
- Maintenance schedule: Offshore maintenance schedule (Upgrades, Hotfix Collections, etc.) can overlap with Chinese business hours.
Onshore Instances: Hosted within China, often through local providers, these instances are tailored specifically to meet Chinese regulations and business requirements.
Onshore Instance – Federated Strategy (Public Cloud only)
Benefits:
- Regulatory Compliance: Ease of adhering to local Chinese legal requirements and data protection laws, reducing legal risks and potential penalties.
- Enhanced Performance: Minimal latency ensures efficient system performance and user experience, enabling real-time data processing and reporting.
- Localized Security: Better control with security measures tailored to local needs and practices, potentially reducing the risk of data breaches.
- Operational Autonomy: Subsidiaries can operate independently, addressing specific requirements and needs efficiently, including local reporting standards.
- Tailored Innovation: Align new innovations with localized business processes, allowing for agile adaptations to changes in the local Chinese market.
- Tailored Analytics: Ability to develop and implement analytics tools specifically designed for the Chinese market and regulatory environment.
- Minimized Disruption: Limited system downtime affects only impacted Chinese units, reducing disruptions to global operations and reporting. The onshore maintenance schedule, which includes upgrades and hotfix collections, is separate from other customer offshore operations.
Drawbacks:
- Higher Costs: Increased deployment, operational and maintenance costs, including potential duplication of systems and analytics tools.
- Integration Issues: Complexity in integrating with other SAP S/4HANA Cloud Public Edition systems and potential cross-border data flow restrictions, complicating group-level reporting and analytics.
- Fragmented Financial Planning: Financial consolidation might face complications due to the fragmented systems, requiring additional effort to ensure data consistency and accuracy.
- Intercompany Process challenges: Intercompany processes may not be supported out-of-the-box, requiring additional custom integration among instances and potentially leading to reconciliation discrepancies.
- Master Data Inconsistencies: Challenges in maintaining consistent master data across separate instances, potentially leading to discrepancies in reporting and analytics at the group level.
- Reduced Global Visibility: Separate instances may limit real-time visibility into Chinese operations for global management, complicating decision-making and performance monitoring.
Key Considerations for Choosing Your SAP S/4HANA Cloud Public Edition System Instance
Organizational Unit Set-up
Understanding the organizational unit design versus the deployment model (offshore and onshore) is important to analyze carefully, as simplifying organizational units can also simplify intercompany processes and aid in decision-making.
Business Scale and Growth
Small to medium enterprises (SMEs) might favor offshore instances for immediate operational efficiency and cost benefits, whereas larger corporations could consider a hybrid approach. This hybrid approach leverages both onshore and offshore systems to balance costs, performance, and compliance as they scale, and to comply with changing regulations.
Geopolitical and Economic Factors
Geopolitical tensions, such as trade policies and international relations, can heavily influence the decision. Emerging trade restrictions may suddenly make offshore instances more problematic. Staying agile and well-informed on these factors ensures better strategic alignment.
Vendor Capabilities
Assessing the ERP vendor’s infrastructure and support capabilities within China is crucial. A reputable vendor with established local support can ease deployment and maintenance burdens, ensuring smoother operations. For example, technology providers like SAP support customers' compliance efforts by delivering technical features and functionalities that help adhere to applicable laws. Executing an onshore instance strategy with SAP will require a new contract with SAP China; we advise you to check with your current account executive.
Practical Steps to Making the Decision
Assess Your Current and Future Needs Conduct a thorough assessment of your needs, encompassing current operations, compliance requirements, and future growth projections. Engage key stakeholders from various departments to capture a comprehensive view.
Consult with Experts
While SAP maintains a strong focus on China Regulatory Compliance, their information should not substitute for legal or regulatory advice. Always seek independent legal and regulatory advice tailored to your specific needs. Consult with ERP experts, including local and international consultants, for tailored advice. Their experience can uncover hidden challenges and opportunities.
Review Case Studies and Success Stories
Analyze case studies from similar businesses that have successfully managed ERP rollouts in China. These real-world examples offer valuable lessons and strategies for your decision-making process.
Conclusion
As of today, September 2024, most of our public cloud customers running operations in China currently follow the one global offshore instance approach, but several others are exploring the local onshore instance option. So choosing between offshore and onshore SAP S/4HANA Cloud Public Edition system instances for your China Subsidiary-based rollout is a multifaceted decision influenced by compliance, performance, and strategic factors. Onshore instances often offer better compliance and performance but come with higher costs and complexity. Offshore instances can be cost-effective but can face compliance and latency challenges. The best choice depends on your specific business needs, growth plans, and the geopolitical landscape. Consult with your ERP experts, run pilot tests, and thoroughly assess your requirements to create a customized solution that ensures both legal compliance and operational efficiency.
We would like to thank Jan Musil, Jens Fuchs, Khaled Musilhy , Janusz Smilek, Chi Song and Bert Schulze for their review and feedback on this blog.
Some sources for reference
Data Security Law of the People's Republic of China
Personal Information Protection Law of the People's Republic of China
China issues regulations on cross-border data flows
Getting to know about the Cross-Border Data Transfer (CBDT) Requirements in China
How to allow two affiliated companies to participate in a single intercompany process
How to transfer stock between different legal entities of a coporate group
Integration Architecture Guide for Cloud and Hybrid Landscapes
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