December 11, 2013
Many of you will be in the midst of a negotiation with SAP at the moment, because SAP does about 40% of its license deals in the October to December quarter. It’s a sourcing cliché that software companies give their best discounts at their fiscal year end, but just because you are making a purchase in month 12 doesn’t mean that you are getting a good deal. I see a lot of SAP proposals and contracts, and I’m often surprised by the gulf between the actual deal on the table and what I would consider to be an acceptable proposal – one that sets the relationship up for mutual success, balancing price, flexibility and risk.
Buying software from powerful providers such as SAP is very different from buying hardware, services and non-IT categories. Unfortunately, many sourcing professionals seem to think that they’ll look weak if they engage expert help to coach them during a negotiation, but it isn’t a question of haggling skills, it’s a question of deep, current market knowledge. Unless you have that, you risk:
· Buying shelfware. Your most important goal in any negotiation is to create a commercial relationship that maximizes your program’s chances of success. A vital part of that in the SAP context is to phase purchases in line with deployment. SAP’s licensing guide states that “you don’t have to take a “big-bang” approach, but can start with the package and named user licenses your organization needs today and add more functionality and users as your needs change.” In practice, too many sales reps ignore this principle and aggressively push customers to bulk buy ahead of real need. Bulking up the deal with stuff you aren’t ready to implement will fund the new Porsche that the rep has ordered from Santa, but it risks undermining the ongoing relationship, by reducing the incentive for SAP to help you find ways to get value from its software.
· Paying too much. Some buyers think that there is a linear relationship between the deal size and discount level, with a small margin for extra negotiation. It’s not that simple. There are many factors that SAP considers when deciding what price to offer, so each large deal is unique. Very few buyers, even experienced ones, understand these factors sufficiently well. That is why there is often a wide disparity between what uncoached clients have paid for their SAP software and what their better-advised peers have achieved.
· Accepting dangerous license metrics. SAP uses over 30 different licensing metrics for its various products. They generally represent good ways to approximate the likely business value of the product concerned, but many also create risks of unexpected extra costs at a later date. For example, SAP licenses its GRC module based on the customer’s revenue, which can be a good metric, unless you get an unexpected spike due to say a change in exchange rates, commodity prices or accounting policies. The most dangerous metrics are those related to processing power, such as SAP’s Hana units, because they put you on a data inflation cost escalator that you can never escape.
Bottom-line: Negotiating with SAP in holiday season presents unique opportunities and challenges for sourcing professionals. General negotiating skills alone will be insufficient to secure the best possible overall deal that balances price, flexibility and risk. You also need deep knowledge of how SAP works, and strategic software sourcing to put the negotiation in the right context.