By: Christian Klein and Hala Zein
Shaking up the software industry by changing decades-old models.
SAP is shaking up the industry and raising the bar on software licensing practices by tackling ERP licensing for the digital age with new licensing practices, new rules of engagement for usage and compliance, and a new pricing model — all developed jointly with our customers, user groups, analysts, and influencers. Read about our journey of transforming ERP licensing for the digital age.
Old Licensing Models Not Fit for the Digital Age
For more than 40 years SAP has been helping companies run mission-critical business processes across all industries. Our ERP software* is at the heart of our customer’s business — the digital core behind their success. Customers have been finding new ways to extend the use of their digital core by giving access to business partners and consumers via third-party applications, and they are increasingly connecting to automated systems, IoT devices, and bots. It is exciting to witness all these digital age advances and how our customers are using enterprise software to transform their businesses. However, pricing models for enterprise software designed in the 20th century have remained relatively the same across the industry and are not optimal for this new type of digital access, which the industry has coined “indirect access.”
SAP’s ERP pricing model was designed for when our customer’s employees were expected to log directly into the SAP ERP to use it, and it was centered on identifying and licensing every individual using the software. This user-based pricing works well for direct human access because it is predictable and well understood. However, it is not easy to apply when the ERP system is used indirectly (e.g., by a user logging into another application that then uses the power of SAP Digital Core to execute the business process) or digitally (e.g., when a device or a bot uses the system, and not a human user). This has led to ambiguous interpretation of use and to unproductive discussions over what counts as users. The ambiguity has also led to inconsistent sales and audit practices that have ultimately shaken some of our customers’ trust.
Journey to Modernize ERP Pricing
At SAP the customer voice matters; when customers speak, SAP listens. We’ve heard loud and clear that businesses need certainty and that the current license model does not address digital access such as IoT devices and bots. They need predictability over their license commitments, transparency on their use, and consistency of sales and audit practices.
To address these concerns, we took an unconventional industry approach and we collaborated closely with user groups, customers, industry analysts and other stakeholders. Together we developed a “first-of-its-kind” outcome-based model for indirect digital access.
Our journey began over a year ago, and a major milestone was announced at SAPPHIRE NOW in 2017. We introduced a pricing model based on valuable outcomes delivered by the ERP system. This outcome-based approach eliminated the need to count individual users or other parties accessing SAP ERP via a third party system or interface for the two most common indirect access scenarios: order-to-cash and procure-to-pay. In addition, we announced that indirect static read** would be free of charge. That said, these 2017 pricing changes were our first step in the longer journey of modernizing our licensing policy, as it did not address every indirect access scenario, such as IoT devices, bots, or intelligent systems.
A New Pricing Model Fit for the Digital Age
In SAP’s legacy pricing model, both direct human access and indirect digital access are primarily licensed based on users. SAP has developed an outcome-based pricing model that differentiates between direct human access and indirect digital access. This new model is designed to address every conceivable indirect access scenario for the digital age. It was designed to provide customers the business certainty and predictability on their license commitment.
Indirect Digital Access ERP Pricing
The predictability of this new model begins with nine document types that represent system records of the most valued business outcomes from the ERP system. Use of the ERP system through indirect digital access will be licensed based on the initial creation of these documents, and the document license value is based on the total number of documents created. Let’s highlight elements of this model that customers will appreciate.
Outcome Focused. SAP is counting only nine document types that address the most valuable business outcomes. All other document types are not charged for.
Based on Value. Pay for system activity. The new model eliminates the need to count “users” accessing the ERP system and addresses concerns around access by IoT such as devices, bots, etc.
We also looked at many sources of data and models to come to the conclusion that not all documents are valued equally. Hence, our model has two different weights corresponding to their value. The most valued used documents are weighted at 100% (multiplier =1), and documents of lesser value and more frequently used are weighted at 20% (multiplier = 0.2).
Flexible and Transparent. What goes towards that total number of documents licensed?
- Onetime create cost. SAP counts and charges for the creation of documents triggered via indirect digital access. All other operations, post-creation, on the document are included in the onetime create action cost.
- Read, update, delete included. All read, updates, and delete actions on the document via indirect access do not incur a charge.
- Interchangeable document capacity. The total number of documents licensed applies to any of the document types created, regardless of type.
Built-in Volume Discounts. Will I get a discount if I buy more? Of course, there is always a discount in matters of software sales. In our new model, we will offer tiered pricing where the higher the number of create document transactions, the lower the cost per document transacted. This model works well for all industry use cases from high volume businesses to low volume businesses
Measurable. Our new pricing model design goal was to provide an objective measurement of use, and to further support this, SAP plans to provide customers with tools to monitor and measure their ERP use. Customers should be able to manage their entitlements and consumption of licensees, and there should be no surprises during an audit.
What does this all mean? At this point, we’d like to point out the implications of this new indirect digital access ERP pricing policy with regards to some highly discussed topics.
- Users: No more counting users or trying to define what constitutes a user via indirect access. It doesn’t matter how many users are accessing the ERP system via a third-party application.
- IoT devices and Big Data concerns: Only if the IoT device triggers a create action in the ERP system will we count such transaction, all read, updates, deletes are included. Frequency or data volumes are inconsequential.
- Indirect Static Read: This new pricing policy for indirect digital access of ERP goes above and beyond the Indirect Static Read** policy introduced in 2017. By the new policy definition, SAP only counts and charges for the creation of documents by the ERP system triggered by indirect digital access, therefore eliminating the need for a separate Indirect Static Read policy for ERP.
Direct Human and SAP Application Access to ERP Pricing
Direct human access to the digital core continues to be licensed based on users. No change there.
Access to the digital core by an SAP application is included in most SAP application’s license. SAP applications refer to line of business and industry applications, as well as SAP Solution Extensions. This policy does not apply to technology solutions such as database, SAP Cloud Platform, middleware integration, etc.
Opting In to the New Indirect Digital Access Pricing Model
All new SAP S/4HANA customers will have the ability to license the new indirect digital access model from the beginning. Existing SAP ERP on-premise customers can choose the path that’s right for them. They can continue with their existing user-based pricing for indirect access, in other words they can keep their status quo and do nothing. Or they can choose from two options that include the new document-based license model:
- License Exchange. Customers wanting transparency for indirect digital access and wishing to remain with their existing contract may exchange the value of user and/or order licenses for Document licenses.
- Contract Conversion. Customers licensing SAP S/4HANA may convert their existing contracts to a simplified contract, and receive up to 100% credit for their prior investments, while having full flexibility to reconfigure their solution landscape based on current and future needs.
Consistent Sales and Audit Practices
Earlier we mentioned that the ambiguity of the legacy pricing model led to inconsistent sales and audit practices that ultimately shook some of our customer’s trust. While we believe that the majority of customer engagements are conducted in the right spirit of trust and customer orientation, the few exceptions were not acceptable.
SAP built its business on long-term, trusting relationships with its customers. To address this, we listened to extensive customer feedback and thoroughly reviewed our processes and practices around indirect access. As a result, SAP is introducing new organizational and governance changes to further consistency in our sales and audit practices.
Sales policy. To further transparent and consistent handling of customer engagements we’ve implemented a sales policy to address license audit and compliance situations. For example, we established sales behavior guidelines designed to have our SAP sales personnel inform customers about software usage rights, particularly in the context of indirect digital access, prior to a contract’s closing. We are committed to our customer’s trust and peace of mind and we are implementing governance guardrails, educating our teams to follow a consistent procedure, dis-incenting aggressive behavior, and we are also prepared to apply appropriate disciplinary actions when non-compliance to the new sales policies is uncovered.
Separation of license audit and sales. We are imposing a separation between license sales and license auditing, both from an organizational and from a process-governance perspective to promote objectivity and neutrality. Only the Global License Audit and Compliance (GLAC) organization will initiate, approve or terminate license audits.
Consistent and transparent audit procedures. The GLAC team will harmonize the end-to-end audit processes globally, from nomination to delivery of the license audit report. In each case, a customer will be informed of the scope, process and results of the audit.
Simplified license self-measurement and self-monitoring. We plan on making it easier for customers to self-monitor their license compliance by making available some of the tools used by our SAP license auditors. Our plans are to further enhance these measurement tools and improve their availability.
We believe that these changes will further global consistency of sales and audit practices to help customers get the best value from SAP solutions.
Predictable. Transparent. Consistent.
Our new licensing practices, new licensing rules of engagement for usage and compliance, and the new ERP pricing model address our customers’ concerns as they adopt digital technology. All together it is designed to provide a predictable, transparent and consistent approach to indirect access.
Special thanks to the SAP user groups (ASUG, DSAG, SUGEN), who tirelessly represented their user community in this process. We truly believe that this journey was more productive thanks to their engagement and contribution.
This has been a long journey working to transform decades old pricing policies that by all accounts are quite standard in the industry. SAP’s new ERP licensing for the digital age marks a major milestone that will shake up the software industry and raise the bar on software licensing practices, while putting customers first.
*ERP software in this context refers to legacy SAP ERP, SAP S/4HANA, and SAP S/4HANA Cloud.
**Indirect Static Read as defined in May 2017 is a scenario in which information has been exported from an SAP system (excluding SAP Business Warehouse or any third-party runtime database) to a non-SAP system pursuant to a predefined query that meets the criteria listed below. According to SAP policy, the use of such exported data in third-party non-SAP systems does not need to be licensed if the following criteria listed are met: 1) It was created by an individual licensed to use the SAP ERP system from which the information is being exported. 2) It runs automatically on a scheduled basis. The use of such exported information by the non-SAP systems and/or their users does not result in an update to the SAP ERP system’s processing capabilities.