- UpperEdge
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SAP customers have been significantly impacted by COVID-19 which has resulted in the acceleration, delay, or flat out cancellation of their strategic programs. Not only have some paused investments in SAP and the related implementations, but many have been wondering how they can cut or avoid costs during these tough economic times.
SAP’s Ambitions to the Street
Before we get into how SAP customers can cut costs, I thought it would be prudent to discuss SAP’s drivers and how it has already insulated itself from an economic downturn like this one.
- Increase Revenue – As with most companies, SAP is focused on increasing its overall revenue with an objective of €35B by 2023. However, unlike the Microsoft’s and Salesforce’s of the world, SAP is playing catch up in the cloud revenue category where they are looking to increase to over €15B by 2023.
- More Predictable Revenue – Along with increased cloud revenue also comes an important by-product for most organizations in the software space, more specifically, predictable revenue, which has become an important indicator of each software company’s long-term success. SAP has targeted 80% predictable revenue for 2023 which will come largely via increasing on-premise maintenance with additional purchases and expanding or upselling current customer cloud footprints.
- Higher Margins for Cloud – A number of SAP’s announcements in the last year have been targeting increased SAP margins. As part of its special Capital Markets Day, SAP went as far as to release the margins across the various areas of its business and indicated they are targeting 75% cloud gross margins by 2023.
SAP’s Insulation From an Economic Downturn
Knowing strong economies don’t last forever without a downturn, SAP has preemptively protected itself to the extent possible to insulate it and continue marching toward its ambitions to Wall Street. Unlike many businesses, SAP has a strong contractual ability to maintain its existing business and to push for additional revenue. While many companies would like to cut costs from their largest investments, it isn’t always so easy given the protections SAP likely already has within your agreement.
On-Premise:
- Non-Terminable Appendices/Software: As many companies who have SAP software know, it’s all or nothing with SAP, meaning they will not allow you to terminate individual appendices or software products. In order to terminate, you have to terminate the whole enchilada. This is how SAP maintains its 93% renewal rate for its on-premise maintenance, which is often referred to as SAP’s “lifeblood.”
- Maintenance Fee Increases: Sometimes an afterthought to negotiations, many companies do not focus on maintenance protections when negotiating with SAP. However, negotiating maintenance protection is critical for long-term predictability because SAP’s standard language allows them to increase maintenance costs. This is certainly a potential lever for SAP to use to increase predictable on-premise revenue given the current environment.
- Audits of Utilization: SAP typically can audit customers on an annual basis to confirm utilization and any compliance gaps, which are normally resolved or paid for by the customer within the quarter the SAP audit report is issued. While we certainly experienced more of a lull in audits in 2019, SAP audits have already heated up in 2020 and we expect this to continue to be the case with projects being delayed or cancelled – and SAP needing to make this anticipated revenue up elsewhere.
Cloud:
- Non-Terminable Subscriptions: Many companies may be doing a self-diagnostic on items they are not leveraging and they can terminate to save cash, such as SAP’s travel and expense solution, Concur, which is likely dormant and may have a lot of uncertainty around it given the potential permanent impact to travel as a result of COVID-19. However, SAP’s subscriptions are non-terminable so customers will have to ride out the rest of their subscriptions and SAP will be able to maintain that revenue stream.
- Locked Subscriptions: While some cloud vendors allow for a reduction in subscriptions for strategic partners, SAP is not willing to impact this predictable piece of revenue. Therefore, SAP’s customers will likely have a tough time reducing their subscriptions to cloud solutions like Concur, despite the current travel environment. Even if SAP does play ball, customers are also surprised to hear that they have minimum requirements for each cloud solution which are sometimes significantly higher than customer requirements.
- Renewal Increases: Similar to maintenance fees, companies often put less emphasis on downstream renewals than they should. As a result, many companies do not have long-term predictability relative to renewals of their subscriptions because SAP’s standard language allows them to increase subscription costs. This is certainly a potential lever for SAP to use to increase predictable cloud revenue given the current environment.
How Can You Cut or Avoid Your SAP Costs?
While SAP has certainly put up its own protections, like everything with SAP, you can cut or avoid costs with the correct stage-crafting, executive engagement, and negotiation strategy. In our experience, customers that need to save money should consider the following strategies:
On-Premise:
- Leverage Exchange Rights: Despite a tough economic environment, companies still have additional requirements, whether they be driven by internal IT and business stakeholders or by SAP as a result of an audit or indirect/digital access. In order to help limit the costs associated with these additional requirements, companies should think about leveraging commercial protections like exchange rights to cut the additional costs.
- Terminate Shelfware and Maintenance: SAP’s maintenance is licensed based on your net license fee spend but fails to consider your utilization. The easiest way to cut your on-premise spend is to cut your shelfware and associated maintenance, which is ~30% on average based on our experience. While SAP doesn’t allow for unilateral terminations of shelfware, we have seen them offer programs and provide creative alternatives such as converting licenses to cloud as a means by which to terminate shelfware. In the event SAP doesn’t cooperate, companies may choose to contemplate 3rd-party support or commit to long-term maintenance with SAP in exchange for a reduction in maintenance costs.
Cloud:
- Renew Early/Renegotiate: While SAP doesn’t allow customers to terminate or unilaterally reduce cloud subscriptions as previously noted, they are flexible and willing to be a good partner with the right stage-crafting. When you have the correct executives engaged on both sides, SAP has been willing to renew early to lock down predictable revenue into the future and has even been willing to write down business below their expectations. In our experience, the key measure of success has been to ensure the write-down of your subscription doesn’t mean your deal’s competitiveness also suffers resulting in you paying more than you have to.
- Obtain Renewal Protections: As part of any negotiation on any of SAP’s cloud subscriptions, renewal protections are paramount and result in real cost avoidance. Customers often overlook SAP’s willingness to provide predictability to customers across their cloud investments. Therefore, we recommend customers negotiate best-in-class cloud renewal protections in order to avoid additional costs come your next cloud renewal and the renewals that come over time.
In the world of cutting and avoiding costs to keep cash on hand, it is clear SAP has put protective measures and language in place to prevent erosion of existing business. However, we would urge SAP customers to consider these strategies to directly impact your SAP on-premise and cloud software costs.
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