Using SAP’s Goals as Leverage to Cut or Avoid Costs

At SAP’s dual in-person and virtual SAPPHIRE conference coming up in a few weeks, customers can learn more about SAP’s ambitions as well as its latest product offerings, specifically their AI strategy and RISE with SAP. SAP is also looking to move its customers to S/4HANA on public cloud infrastructures and bolster its reputation as a reputable cloud platform. But, if used correctly, these clear goals and ambitions can help customers lower SAP costs

Customers have an opportunity to re-assess their landscapes as well as consider cutting and avoiding costs moving forward. Thus, it is crucial to begin to understand what SAP’s goals and objectives are in order to use them at the negotiation table.

SAP’s Ambition for 2025

SAP is looking to execute its cloud-led strategy with the hopes of driving customers to the cloud through both new business and existing customers. Below are some of SAP’s expectations for the future:

• Increase Revenue – As expected, SAP is focused on increasing its overall revenue with an objective of €37.5B by 2025. Cloud revenue plays a major factor in their overall revenue target, accounting for €21.5B+.
• More Predictable Revenue– Along with increased cloud revenue, predictable revenue has become an important by-product for most organizations in the software space and an important indicator of each software company’s long-term success.  SAP has targeted a significant expansion of 86% predictable revenue for 2025.

A large part of this is associated with moving customers to the cloud or subscription renewals for SAP’s other cloud options like SuccessFactors and Ariba.  Another factor that plays into predictable revenue is customers who are currently under perpetual license agreements and pay annual maintenance for their SAP roadmap.

• Cloud Margins– As part of SAP’s first quarter in 2024, cloud backlog was up 27% (SAP’s fastest growth on record). Cloud revenue was up 24%, with 32% of Cloud Revenue tied to Cloud ERP Suites revenue growth. SAP CEO Christian Klein stated that the growth drivers in place are related to Business AI, cross-selling across the cloud portfolio, and securing new customers particularly in the midmarket.

SAP’s Plan of Attack

Knowing strong economies don’t last forever without a downturn, SAP has preemptively protected itself and continues marching toward its ambitions. Unlike many businesses, SAP has a strong contractual ability to maintain existing business and to push for additional revenue.

While many companies would like to cut costs from their largest investments, it isn’t always easy given the protections SAP likely already has within your agreement. SAP sees an opportunity to accelerate transformation with a heavy focus on moving its customers to the cloud, both at a large scale and at a rapid pace.

Here is how SAP plans to maintain a strong position in the market both from an on-prem perspective and a cloud perspective:

On-Premise:

• Non-Terminable Appendices/Software: As many companies who have SAP software know, it’s all or nothing. SAP will not allow you to terminate individual appendices or software products.  Instead, you must terminate your entire agreement.
• Maintenance Fee Increases: 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. SAP is targeting continuation of providing maintenance for Business Suite 7 until the end of 2027, with companies having the option to buy a maintenance extension until 2030 for an incremental 2% in maintenance fees.
• Audits of Utilization: SAP typically can audit customers on an annual basis to confirm levels of utilization and any potential compliance gaps. These are normally resolved or paid for by the customer within the quarter the SAP audit report is issued. It is important to maintain diligence by self-assessment as well as by understanding your entitlements and your metrics to make the audit risk less severe.

Cloud:

• Non-Terminable Subscriptions: Many companies may be doing a self-diagnostic on items they are not leveraging, which they can terminate to save cash.  However, SAP’s subscriptions are non-terminable. Therefore, customers will be forced to maintain their subscriptions so SAP has an ongoing 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. Thus, SAP’s customers will likely have a tough time reducing their subscriptions to cloud solutions.

Additionally, with some cloud subscriptions that SAP offers, customers may be surprised by the fact that there are sometimes minimum requirements for solutions that may be higher than your requirements.

• Renewal Increases: Like the maintenance fees, companies often put less emphasis on downstream renewals than they should.  As a result, many do not have long-term predictability relative to renewals of their subscriptions because SAP’s standard language allows them to increase subscription costs.  Because of this, SAP has the right to increase your subscription fee at the beginning of each renewal term and, therefore, increase their predictable revenue stream.

As SAP continues to push its customers to move to the cloud, it is imperative to understand not only your cloud landscape, but also to read between the lines and be aware of your contractual and commercial language within your agreements.

How Can You Cut or Avoid Your SAP Costs?

While SAP has certainly put up its own protections, you can cut or avoid costs with internal due diligence, executive engagement, and a strong negotiation strategy. In our experience, customers that are looking to cut SAP costs and save money should consider the following strategies:

On-Premise:

• Leverage Exchange Rights: Despite a tough economic environment, companies still have additional requirements, whether they are driven by internal IT and business stakeholders or by SAP as a result of an audit or indirect/digital access. 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 shelf-ware and associated maintenance. In our experience, customers are typically using ~70% of their on-premise software entitlements, which leaves ~30% of underutilized software. 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 the cloud. In the event SAP doesn’t cooperate, companies may choose to contemplate 3^rd-party support or commit to long-term maintenance with SAP in exchange for a reduction in maintenance costs.
• Conversion Credits: If you are an existing ECC customer looking to move to S/4HANA, conversion or migration credits are an important negotiation lever to consider. This will help you to avoid double paying for a license that may consist of the same functionality on both ECC and S/4.

Cloud:

• Renew Early/Renegotiate: While SAP doesn’t allow customers to terminate or unilaterally reduce cloud subscriptions, 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. If this is something you are considering, it is important to negotiate for more aggressive pricing and commercial terms.
• Negotiate for 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 to avoid additional costs at the outset of your next cloud renewal.

SAP has been able to survive throughout the pandemic and avoid major downfalls due to its ability to maintain predictable revenue by moving its customers to the cloud at a fast rate.  With its RISE offering in full swing for just over a year, the move to the cloud will only continue to intensify.  We urge customers to consider these strategies in order to cut back on your on-premise and cloud software costs.

If you’re an SAP customer attending SAPPHIRE looking to lower SAP costs and secure a Best-in-Class deal, schedule time to meet with UpperEdge’s CEO and Chief Advisory Officer at the conference! Reach out here to save your timeslot for a strategic discussion tailored to your goals.