Negotiating your SAP S/4 HANA licencing.
Negotiating your SAP S/4 HANA licencing is probably one of the best opportunities you have to renegotiate your SAP contracts and maximise value from your investment in SAP software. In this transaction customers should be aiming to acquire the correct product mix, optimise CAPEX spend and ensure annual maintenance and cloud subscription fees are optimised to actual business requirements.
SAP is of course very keen to accelerate the transition of customers to S/4HANA and currently offers two primary licence migration frameworks to help customers do this – namely Product Conversion and Contract Conversion. Product Conversion involves converting existing licences to the equivalent S/4 solutions on a product by product basis gradually over time and can involve running BusinessSuite and S/4 solutions in parallel. Contract Conversion on the other hand involves swapping the entire existing contract value for a new S/4 HANA bill-of-material and may involve the use of compatibility packs for BusinessSuite solutions that don’t yet have an S/4 equivalent.
Here is a quick point-by-point overview of both models:
• Customer keeps their existing contracts and master agreement
• Can only convert products already owned to the S/4 equivalent
• Requires line-item product mapping
• Customer is entitled to up to 100% credit, but it may be less
• The maintenance Base may never be reduced
• You can’t down-size when converting to the S/4 equivalent product
• Named users are not converted (with some industry specific exceptions)
• Can continue using BusinessSuite applications in parallel until 2025
• Conversion of the whole existing contract into a new S/4 HANA agreement
• Customer migrates to new S/4HANA Software Use Rights, Prices and Conditions
• Shelfware can be traded for new S/4HANA solutions
• Credit is limited to 90% of the new S/4 contract maintenance base
• Maintenance Base will increase by a minimum of 10%
• You cannot reduce your maintenance base
• Named Users are converted to the new S/4HANA Named User types
• Can still use BusinessSuite applications until 2025 but they will be licensed under the new S/4 price list material number.
It is no surprise that SAP has introduced two conversion frameworks that heavily favour themselves commercially. Maintenance revenue accounts for around 45% of all annual revenue (SAP Q3 results – 2020), and SAP will vigorously protect their maintenance base. A notion which has been a constant thorn in customers’ sides when looking to reduce, optimise or right-size their licensing costs. The obvious downside with these models is that if, like many SAP customers, you are today over-licenced it means sadly bringing this with you and continuing to pay at least what you did previously in maintenance fees or equivalent cloud subscription costs.
Are there any benefits to the Conversion frameworks?
The primary benefit is the value of the conversion credit itself. For example, if you want to migrate to Oracle Fusion ERP, Oracle certainly won’t be offering 90% credit for your old SAP licences. In saying that though if you are significantly over-licenced on SAP and want to right-size, moving to a new vendor might be a better option. This can be true in some cases, but you are typically looking at the TCO over a 5 to 10 year period in order to realize the ROI. If this is the time that will define your next 25 years ERP strategy, then looking at the 10 year TCO might not be such a bad idea when considering the best path. Furthermore, if your existing SAP inventory utilisation is high (i.e. right licenced) and your ideal S/4HANA bill-of-material is higher in value than your existing inventory, then these frameworks become quite favourable. Contract vs Product conversion then boils down to how S/4HANA will be implemented and rolled out.
How does it work for Cloud Subscriptions?
Similar idea. You can avail of cloud conversion credit when migrating from a perpetually licenced on-premise solution to cloud service subscription-based product. Typically, the conversion factor is 1.5 or 150% of the on-premise cost base. There is no credit for the perpetual licence (i.e. the CAPEX part). The credit is for the OPEX portion (i.e. the annual support cost). If for example your annual maintenance fees for BusinessObjects software were €100k and you were migrating to SAP Analytics Cloud, your annual subscription would need to be at least €150k per annum. It is possible to negotiate this to anywhere between 1.2 and 1.5 – although this does depend heavily on the overall commercials of the deal being negotiated.
When should customers start looking at considering the licencing aspect of their S/4 migration?
ASAP! Licencing should be considered as early as possible as this will help develop the business case and identify favourable commercial opportunities. In order to identify the optimal S/4HANA contract you have to think of it in terms of “if we were to buy S/4HANA today, net new, what would be the optimal bill-of-material in order to optimise CAPEX spend and OPEX costs?” That in essence should be the target for the new contract. One that actually fits the needs of the customer, not SAP’s balance sheet.
It is important to accurately measure the software you are actually using and to what extent. User licencing should also be optimised so each user in the new contract is assigned the cheapest compliant licence type that corresponds with their use of SAP. One of the biggest sources of over-licencing with SAP is the over-licencing of named users. Measurement of software usage and digital access is best performed using a Software Asset Management tool like samQ License Optimizer for SAP®. It can also be used to actively optimise licence consumption and used to map existing licences to optimised S/4HANA licences, providing critical licencing insights into the planning and negotiation process.
Customers need to identify what they currently have that they don’t need (Shelf), what they have that they want to take (Convert) and what they need that they don’t have (Buy). The latter is done by performing demand analysis, identifying demand for new software solutions that will transform and streamline future business processes. Then we need to account for Digital Access considering whether the legacy model (User/Package) or the Digital Access Licencing Model will be more cost effective or simpler based both on today’s indirect usage and future innovations.
You need to consider the on-premise cloud mix and the scope of cloud product conversions that need to be accounted for in the new contract. The HANA database also needs to be chosen, the primary choice being between Runtime and Enterprise versions. The Runtime licence allows only the licenced SAP applications to run on the database, with some restrictions on data integration at the database layer. Runtime is licenced as a % of the SAP application value licenced to run on the database. The Enterprise version allows SAP and non-SAP applications, offers enhanced use rights for data integration, and is licensed on GB of data sold in blocks of 64GB.
Once you have taken these steps you will have an idea of what the optimal target S/4HANA contract looks like and you can consider which of SAP’s conversion paths is the most suitable for your business – or if another customer centric migration path could yield better results. If you do go down the prescribed vendor paths, the negotiations will most certainly be vendor led and you might not get the best deal. These paths might not suit your business commercially.
There are alternatives to Product and Contract Conversion available to SAP customers and it is possible to reduce costs while migrating to S/4HANA. However, this involves customers forging their own path and taking decisions that might upset the vendor. This can only be done by leveraging third-party expertise with intimate knowledge of SAP contracts and licencing models, and by leveraging data driven insights. That’s where VOQUZ Labs and samQ come in. Our experts are involved in hundreds of SAP licencing projects and negotiations every year. We leverage that knowledge along with samQ driven insights to help customers negotiate best-fit S/4HANA agreements.
Author: Jan Cook – Practice Director Advisory, UK – VOQUZ Labs
If you want to speak to Jan about SAP S/4HANA licence migration and contract negotiation, feel free to get in touch with him on the contact details below.
Jan.firstname.lastname@example.org,+44 (0)781 575 1873
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