SAP has recently announced incentives for customers to migrate or reallocate elements of their on-premise solutions to the cloud. Incentives include the ability to partially terminate on-premise software licenses and associated maintenance fees as well as discounts on cloud subscription fees based on level of past on-premise investment and future cloud investment. Historically, SAP has not allowed customers to partially terminate licenses and associated maintenance fees, so this is quite a departure from standard SAP policy. SAP is touting this announcement as a response to SAP User Groups’ complaints over growing license complexity.
While on the surface this announcement may be viewed as positive news for customers – and it certainly is for those customers that truly find value in adopting a cloud migration strategy – one must ask why SAP is so willing to depart from its long standing licensing policies and how SAP stands to benefit.
The answer to these questions can be found in a prior article we wrote. The primary rationale for SAP incentivizing customers to move to the cloud is the following:
- Consistent and predictable annuity revenue streams
- Elimination of defending maintenance and support value
- Built-in version adoption
- Self-help remedy for compliance and payment disputes
If customers find it difficult to negotiate with SAP today, we recommend considering how difficult it could become in the future. Cloud subscriptions are typically limited term agreements of anywhere from 3-5 years, and then the renewal is subject to a new negotiation. This is akin to negotiating with Microsoft at the end of an enrollment, but the difference with the cloud is that customers do not own the underlying licenses and will lose all access to the cloud solutions if not renewed. SAP customers should be internally assessing the viability of their alternatives and walking away from SAP in the future if they are unable to negotiate a fair renewal deal.
Additionally, SAP can significantly increase their fees once customers migrate to the cloud and integrate their SAP cloud solutions with their other cloud and on-Premise solutions. After all, why would SAP be so willing to break free from years of its strictly enforced policies unless allowing customers to do so would result in a better, longer term result?
As further support for our contention, consider SAP’s approach to Indirect Access the last couple of years. Customers that have been audited by SAP for years did not at any time receive compliance concerns from SAP regarding their use of the SAP Software. But once customers integrated their SAP solutions throughout their organization, SAP started claiming non-compliance issues as a result of Indirect Access. The incentive for SAP to heighten this issue was not present until organizations fully deployed and integrated their SAP solutions across their IT landscape. These actions demonstrate SAP’s ability and willingness to employ a similar approach with respect to their cloud licensing and pricing policies.
Organizations have many elements to take into consideration when determining their IT strategies. We strongly recommend organizations factor in the concerns we have raised above as part of their due diligence in determining their IT strategy.
We welcome your comments and discussion. At UpperEdge, we see our blog as a forum for communicating practical and actionable insights that are grounded in relevant experience. You may contribute directly to the discussion by commenting below. If you would prefer to discuss separately, please do not hesitate to contact our CEO, David Blake, at [email protected].