Insights: The New Era of SAP Cloud Subscriptions

The era of on-premises software solutions is ending as many software vendors — including SAP — are changing their business models to cloud and subscription options only. Who can blame them? Cloud and subscription models are much more lucrative than old-fashioned on-premises solutions, and they bring in more mid- and long-term profits.

In a typical example, a software vendor would offer on-premises solutions as a one-time purchase with a yearly maintenance fee, usually with an initial investment of 100% and about 20% yearly maintenance. Subscriptions, however, come with a yearly payment calculated over a mix of the initial investment and maintenance over a fixed timeframe, e.g., 4 or 5 years. This means that the customer is paying the same purchase amount for the first 4 or 5 years, but after this time, the customer does not own any license entitlements anymore and the subscription starts paying off. The difference could be 20%-25% more profit per year for the software vendor.

Like other vendors, SAP is not immune to the lure of extra profit. They may employ special tactics to convince you that cloud and subscription options are the best path forward for your organization. They could:

SAP is already speeding up the cloud transition process for customers. They’re now offering fewer credits for conversion from old contracts into their new cloud-based world, and they will keep lowering these credits by 10% per year. This means that waiting with the transition to either S/4HANA, S/4HANA Cloud or RISE with SAP will start costing you significant money — approx. 10% of the contract value per year!

This new directive could also impact those customers who only did a product conversion for their transition to S/4HANA. While these contracts keep their validity for on-premises installations, changing them could become more expensive in the future. Switching to RISE with SAP, for example, would not be possible based on old contracts and would require a transition to new contracts.   

Customers now really need to think about their current situation and where they want to be in the next 3-5 years. No matter what the customer specific answer might be, changing the contracts in 2024 might not be a bad idea at all. If you want fast support and clarity about license optimizations, contractual questions, cost estimations or any other factors for the different licensing options, contact us to support you in the shortest timeframe for your next SAP journey.