The CIOs of SAP customers need to pay close attention to the vendor’s announcement earlier today with details on how it intends to modernize its software licensing model. Please don’t think that “software licensing” is an esoteric topic that you can delegate to someone a level or two down in your organization. It isn’t. There is a lot to applaud in today’s SAP announcement, but the proposals in it could have far-reaching implications for you. CIOs need to understand and act on the threats and opportunities of SAP’s new commercial model:

  • Fail to act and you will face large financial obstacles to your digital transformation . . . SAP’s new model could make it prohibitively expensive to integrate your non-SAP applications — such as CRM, eCommerce, and ePurchasing — with your ERP platform. That may prevent you from following the eclectic sourcing strategy that Forrester recommends. SAP’s customers’ CIOs must fight for their right to choose alternatives to SAP’s SaaS add-ons if they want to.
  • . . . but a robust negotiation could create a platform for an improved long-term SAP relationship. SAP has done a lot of work to prepare this new model, including getting a lot of input from its user groups. It should be the basis for a fair, sustainable agreement — but a lot depends on the details of how SAP applies it to particular situations. Early adopters will have the chance to mold the model to their advantage, but only if they prepare a strong negotiation strategy that gives them the upper hand in the discussions.

I know the advantages and flaws of SAP’s new model, because I implemented a similar one at QAD 15 years ago.

SAP’s proposal is to charge for use of its software by third-party applications by counting the documents created in SAP. Documents could be sales order lines, field service tickets, manufacturing jobs, and so on. This is a much simpler, fairer approach than its previous approach, which relied on various creative arguments to claim that the users of the 3rd party application were in some way “accessing the SAP software”. It is fair for SAP to monetize this use of its software, and there is no perfect way to do that, so the ‘per document model’ is the best option.

However, I must admit to a few PTSD flashbacks when I speak with SAP about it, because I tried to implement a very similar model when I was at QAD 15 years ago, and still bear the scars. I know from personal experience that there will be several issues that SAP will have to resolve with customers over the next couple of years, including:

  • What exactly is a document? QAD focused on manufacturing companies, but we still had the problem of adapting our model to very different companies, such as high-volume CPG, complex configured medical devices, and sequenced schedule automotive parts manufacturers. SAP sells into an even wider range of industries, each with its own concept of what represents an “order.” For instance, does a year-long contract with a utility company that bills monthly count as one document or 12? Can SAP really charge the same for a retail POS transaction, an oil production contract, and an approved invoice fed in from a P2P application?
  • How do we grandfather in existing customers? SAP’s central team has devised two options that it hopes will be fair, but everything will depend on how sales implements them. One option involves rebuying the software you want under the new pricing model and then getting a credit for what you already own. At QAD, that approach didn’t work for high-volume companies, because the new model was prohibitively expensive. They told us clearly that “We wouldn’t have bought QAD had that been the price at the time,” so we converted them at their actual order-per-user ratio. Based on its track record, SAP won’t be as customer-friendly, which is why all customers should start preparing now for their own conversion negotiation.
  • How much will the new per-document license cost? SAP’s pricing team told me that it has worked with a lot of customer data to set the price point in line with the price per user and expects the change to be cost-neutral for most customers. That’s good news. However, that’s merely the list price, which leaves a lot of room for salesperson interpretation and discretion because of how SAP handles discounting.

What It Means: One very good aspect of SAP’s announcement is that its leadership has recognized that the Indirect Access scandal was a sales execution problem more than it was a licensing one, and has therefore implemented several improvements to its compliance process to help it regain customers’ trust. I’m confident that it wants to implement a model that is fair to both sides, and implement it via good-faith negotiations. But that shouldn’t prevent SAP customers from seeing the risks and acting now to mitigate them. Start preparing your negotiation strategy now, including the incentives you can offer SAP and the walk-away threat if it doesn’t offer you a fair conversion. Please contact your Forrester account manager if you’d like to learn how we can help you prepare and execute such a strategy.