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

At SAP’s in-person SAPPHIRE conference, customers have opportunity to learn more about SAP’s ambitions as well as its latest product offerings, and specifically 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.

As we approach the light at the end of the tunnel with COVID-19, customers that have been impacted by the pandemic now 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

As part of their April 2022 business outlook, 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 €36B by 2025. Cloud revenue plays a major factor in their overall revenue target, accounting for €22B+.
• 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 85% 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 2022, cloud backlog was up 28%.  However, the current war in Ukraine reduced the backlog growth by 0.8%.  SAP’s gross margin for the next generation cloud delivery program was up from 1% year-over-year to 70% non-IFRS.  SAP will continue to target higher cloud gross margins in the coming years as well.

SAP’s Plan to Bounce Back

Knowing strong economies don’t last forever without a downturn, SAP has preemptively protected itself and continues marching toward its ambitions.  Unlike many businesses, they have 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 so easy given the protections SAP likely already has within your agreement.  SAP is using the COVID-19 pandemic as 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 bounce back 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.
• 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 Shelf-ware 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 shelf-ware, 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.

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