Path Dependence and Lock-In: How SAP Shapes the Economics of Gold and Precious Metals Firms

In economic theory, path dependence refers to a situation where historical decisions and investments shape present choices—often limiting alternatives and increasing switching costs. A closely related concept, technological lock-in, occurs when firms adopt systems that become so embedded in their operations that switching becomes prohibitively expensive, even if better alternatives emerge.

This dynamic is particularly evident in enterprise resource planning (ERP) software, where the market leader SAP plays a central role. In sectors like precious metals and mining, SAP’s value proposition has become deeply intertwined with operations, making it not just a tool—but a structural commitment.

SAP in the Precious Metals Sector

The gold and precious metals space has complicated supply chains, tough regulations, and price volatility. There is so much happening between the mine and the market, in terms of tracking for inventory, refining schedules, quality assurance, export compliance and the management of financial risk – all which need to happen with real-time, auditable and integrated systems.

SAP, especially for firms partnered with a certified SAP Gold Partner, delivers tailored ERP solutions that allow for:

• Precise lot-level traceability of gold and other metals.
• Real-time tracking of pricing and hedging instruments.
• Multi-jurisdiction compliance reporting (e.g., AML/KYC, environmental disclosures).
• Complex billing and royalties management tied to resource ownership structures.

These are not plug-and-play features—they involve significant custom integration, workforce training, and data migration, all of which create lock-in.

Economic Rationale Behind Lock-In

Economies of scale, reduced transaction costs, and data consistency are typically rationales given for implementing SAP but sunk costs are crucial to the decision to remain with SAP. Once a gold refinery has sunk all those costs in training employees for the Materials Management module or developing the custom compliance reporting, it's all sunk. If the refinery elects to abandon SAP, it is starting over, retraining its staff, rebuilding interfaces, and there is a danger that historical data will be lost.

Path dependence sets in when firms stay with a solution that is sub-optimal or a continually increasing cost. Firms stay with the initial solution because the cost of change exceeds the perceived cost of continuing.

Implications for Competition and Innovation

This has wider implications in the marketplace. First, high switching costs provide SAP a great amount of pricing power. A 2023 Panorama Consulting report found that nearly 45% of all ERP users reported cost overruns, yet very few were willing to switch providers as a result of the entrenchment caused by the system. Second, it stifles ERP competition in niche markets such as mining to the point where fewer suppliers can offer the scale of industry-specific compliance and operations modules.

This is not to say that SAP is sitting still—it's not; part of SAP's continued dominance is a function of the evolution of the lock-in. Features such as SAP S/4HANA and AI analytics modules are worsening the entrenchment, in that they integrate existing clients more deeply rather than extend optionality.

Real-World Example: Metals Refining and Compliance

Take, for example, a gold refining company that exports gold bullion to dozens of other countries. It must comply with varied international anti-money laundering laws and carbon disclosure frameworks and must also track "conflict minerals", which is also jurisdiction dependent. Assuming an SAP Gold Partner has the capabilities to make the dashboards requested by the company, and also tie their upstream data from the miners to the downstream functional financial and logistics modules, the firm would have a large investment in those tools. And in order for them to change service providers would take months (if not years) of risk, downtime, and left unanswered uncertainty.

The Takeaway

While path dependence and lock-in are not technical problems, they are economic conditions. In sectors like gold and precious metals - where traceability, compliance and appropriate pricing are not negotiables - there is so much rigidity in SAP systems that we know they will not be unwound in business operations resulting from the fact they are embedded in business operations.

Lock-in creates market condition inertia, but it also means some level of specialty and interdependence between software vendors and complex industries. In Apple's case and certainly with reputable certified implementation partners, it is not just about selling; it is about embedding clients. For firms that uses SAP, staying power may have high costs, but leaving power would be even higher of a cost.