Why there’s never been a better time to reduce ongoing SAP costs In this blog article I look at opportunities available to SAP customers to significantly reduce their ongoing license costs and explain why now is the best possible time to negotiate. For the practical steps, Snow have created a guide on how to turn shelfware into S/4HANA credit Whether you’ve been to an SAP event in the past year, attended a user forum, or visited SAP’s website, you won’t have been able to miss it - SAP Business Suite 4 SAP HANA.
S/4HANA, for short, is SAP’s latest technology. But it’s also much more than that. S/4HANA represents a fundamental shift in how the mega vendor will generate long-term revenue streams. What is often less-discussed is what S/4HANA means for you, the customer. Not only in terms of technology; but in terms of an opportunity to reshape your relationship with SAP.
Without over-dramatizing things, it’s a once-in-a-lifetime opportunity. Why? Because SAP needs S/4HANA to be a success. It needs to demonstrate to investors that it has a business model that is not stuck in the era of on-premise perpetual software licensing. And because it needs to sell S/4HANA licenses, it is offering excellent deals to existing SAP customers to move fast.
And therein lies a huge opportunity for those existing SAP customers, who have typically seen their investments in SAP license increase year-on-year over quite significant periods of time. This is an opportunity to reverse that trend and focus in driving deals with hungry SAP account managers on the licenses and technologies you really need, not the ones you’ve been force-fed over recent years.
To understand the scale and opportunity of this shift, we must first look to the past.
A brief history of SAP’s technologies
Back in 1979, three years after the company’s inception, SAP released a product called R/2 which was a monolithic architecture built for mainframes for performing core ERP functionality. Then in the early 1990s they introduced R/3 which was a client server version of the product and became the foundation from which they had phenomenal growth.
Although no longer called R/3, “Business Suite” is essentially the modern guise of this product. To all intents and purposes, R/3 has basically had a twenty-five-year lifecycle. Now SAP are beginning a transition to a new platform - S/4, where HANA is the underlying database. The fundamental change is that the open architecture of R/3, with the ability to employ third-party databases within the system, is giving way to a more specific database that you’ll require as part of the platform – SAP’s HANA.
This is all being done with the promise of improved performance and scalability through in-memory databases. When SAP shifted customers from R/2 to R/3, it had a very small customer base compared to now but its mission was to rapidly migrate every single customer. That’s precisely what it did, and very effectively. Its ambitions are the same for S/4.
It wants to take its now hundreds of thousands of customers, in particular those R/3 customers with 10,000+ users, and ensure they move over to S/4HANA in a timely manner.
What’s in it for SAP?
The incentives for SAP are multiple. The faster it migrates everyone, the quicker it can stop focusing its investment in resourcing and maintaining R/3. So, in a perfect world, SAP would spend nothing on R/2 today and, 10 years from now, it won't spend any money on R/3. Consequently, all of its R&D and support investments can go into S/4.
The other significant factor is that, if customers undertake the move from R/3 to S/4, they are making a decision that signifies they will remain using SAP in the organization. The majority of these customers are making another lengthy commitment to SAP which represents a stable, predictable revenue for vendor. Moreover, S/4HANA revenue is heavily scrutinized by investors in SAP.
The faster they see adoption of this new platform, the quicker that is reflected in the share price for SAP. SAP as a stock needs a growth leg to the story despite its strong position and cash flow.” SAP is going to consider these customers as locked-in business for perpetuity, so it’s easy to understand why it makes financial sense for SAP to incentivise those customers willing to move quickly. But history has shown us that such incentives don't last forever.
That’s why this is a unique moment in time where companies that have no plans to leave SAP should consider taking advantage of this opportunity.
The double-whammy effect for you, the customer
The transition to S/4HANA requires the replacement of third-party database systems with HANA and there is a monetary uplift from doing this. SAP Enterprise support customers currently pay (by default) 22% of license costs in annual maintenance for the use of third-party databases within the architecture of their systems.
SAP has steadily over the past few years increased this amount from the 15% level in advance of its migration mandate. In lieu of paying an annual 22% of license costs for your database (typically Oracle), you will pay 15% of license costs for HANA*. Additionally, as an incentive to move to S/4HANA, SAP’s extension policies may enable you to apply unused SAP licenses against a credit for the new purchase.
A reduction in the software application value means reduction in overall maintenance to be paid on HANA. *Note that individual circumstances may vary
What does that mean in the real world?
Let’s take an example of an SAP customer with 10,000 users and $10 million of SAP licenses. During a proof of concept, Snow typically discovers around 20% of licensed users in an organization who have been inactive for more than 90 days.
Taking a conservative estimate and assuming that 10% of licenses are unused that amounts to $1 million of shelfware. If the customer decides to do nothing, they will have to pay $1.5 million in maintenance, $150,000 of which is completely unnecessary for the right to have HANA support that shelfware in perpetuity.
But if that $1 million of shelfware is traded in, it could be used as credit against HANA. In addition there would be no requirement to pay the additional $150,000 a year. This is an extremely rational decision to make because the alternative is to pay maintenance even though you have no need for the shelfware!
So, doing nothing is actually going to cost money. But if you do something, you will save upfront and save in the long run. We cover this more in the second blog of the series.
Negotiation – bringing the theory into practice
So the theory is all there. Your organization can make real and significant savings by taking advantage of the incentives from SAP. Right now represents the best possible opportunity to negotiate because we are also fast-approaching SAP’s financial year-end – a period where pressure on the SAP sales force to complete deals is paramount.
However, in practice, you would be ill-advised to go into a contract negotiation session with SAP without knowing, in advance, all of the required facts about your license position. SAP consists of a highly skilled team of negotiators and you need to be armed with the best information you have to get the most out of your negotiation. So that means you need to know precisely what you own, what have you purchased, and then precisely what are you actually using to determine your true shelfware position.
You need to be able to get down to a level of granularity to know precisely which licenses are unneeded and unused. When you commit to S/4HANA and ask for a new deal and renewal, you will need to know precisely what shelfware can be utilized as part of a contribution towards HANA.
You need to ensure that the licenses assigned to your users correctly matched to their needs so that any free licenses are guaranteed to be shelfware. Without this knowledge, some licenses which are still required will be surrendered, whereas some licenses which aren’t will still remain. This means a licensing imbalance which will be picked up at the next audit and which will have to eventually be paid for.
In the complementary eBook guide, I will explore more of the practical side of negotiation preparation – how to understand your license position, how to tidy up your estate, and remove duplicate licenses.