SAP Presents a Generational Opportunity to Re-Negotiate Your ERP Contracts
The confluence of SAP’s Digital Access outcome-based license model, a massive push for S/4HANA adoption, and the continuing growth of SAP’s cloud offerings present a once-in-a-generation opportunity for savvy enterprise clients to completely re-negotiate their entire license portfolio.
SAP just reported Q1 2019 earnings and revenues and they knocked it out of the park!Of particular note is the accelerating cloud business, growing at 46% YoY and with SAP promising a more profitable cloud business for the year overall. SAP customers should take note and realize that part of the increased profitability will stem from higher prices (think renewal time here).
SAP’s Integrated Strategy
Pricing is only part of the story. SAP has been hard at work integrating its massive cloud portfolio, built via acquisition, into the S/4HANA core and expects this process to be largely complete by Q2 2019.
SAP’s CEO Bill McDermott says it best: “Let's step back for a moment and look at the big picture for SAP. The facts are we have an incredibly strong core business with a market-leading retention rate in our support business demonstrating tremendous customer loyalty. We have a high-growth cloud portfolio powered by some of the best M&A in the enterprise software industry. These cloud businesses have years and years of runway for continued growth. We have an incredible franchise with 72% of our revenues now coming from highly predictable revenue streams. This is due to our strong cloud and solid on-premises support businesses.”
SAP is projecting cloud gross margins to reach 75% by 2023, up from 63% in 2018…customers should expect to pay more for these services from SAP…customers must also demand a much higher ROI and value creation component to accompany the expected increases in price.
S/4HANA adoption, per SAP, is now at 10,900 customers, which is a 30% increase from 2018. SAP has about ~41,200 customers so they have penetrated ~25% of the legacy customer base, at least on contract (not all of these customers have implemented S/4HANA). This leaves a massive 75% of SAP’s customer base to be migrated to the new S/4HANA model by 2025 when SAP currently plans to terminate ECC support.
SAP Customer Strategy
Considering that SAP’s strategy is clear in terms of integrating cloud solutions such as Success Factors (HCM), Ariba/Fieldglass (Spend Management), Concur (TEM), Qualtrics, and Callidus Cloud (CX) into the S/4HANA core, there has never been a better time for SAP clients to do a reset on the many complex license agreements. Many of these agreements contain substantial shelfware accumulated over many years, from which SAP offers no relief on support payments.
Why would a migration to S/4HANA create such a compelling opportunity to re-negotiate previously intractable license and support agreements?
In order to make the move to S/4HANA, the typical upgrade supported under SAP’s Enterprise Support is not an option. S/4HANA requires net new licensing under a separate product SKU structure. In other words, SAP starts with an expectation that customers will be purchasing a new license to run S/4HANA.
Recommendations
SAP customers considering the “road to Hana” must take a holistic approach to negotiations with SAP that consider three critical, interrelated areas that are important to SAP:
- S/4HANA and C/4HANA adoption, preferably in the cloud (but on-premises is an option).
- SAP License Model – SAP clients should proactively decide which license model yields the greatest flexibility and value for their enterprise: user-based, outcome-based, or a customized-license model.
- Embrace SAP’s cloud offerings to turbo-charge negotiation leverage, if these solutions fit the organization’s strategy and technology roadmap.
Bottom Line
SAP is going to be driving harder bargains and raising prices. SAP has formalized and implemented a robust customer audit program. SAP customers need to assume an offensive, proactive posture in negotiations with SAP starting now.
Want to Know More?
SAP S/4HANA and HANA Licensing Series Part I – The Forced “Upgrade”
SAP S/4HANA and HANA Licensing Series Part II:HANA DB Hype?
Explore the Secrets of SAP Software Contracts to Optimize Spend and Reduce Compliance Risk
Indirect Access of SAP Systems May Cost You Millions
SAP S/4HANA – Software Reviews