Pricing - a key challenge for SAP as it makes ready to RISE
- There is a once in a generation opportunity for SAP to address pricing complexity and value delivery. These are our thoughts on the topic.
While we will have analysis covering the SAP RISE event, there are enough hints as to what SAP will say for me to jump to what I consider one of the key elements SAP has to get right in order to persuade customers that what they're putting out is worth the consideration. That element is pricing.
Opening the black box
SAP software pricing is something of a black box. I don't know anyone who can explain precisely how SAP arrives at some of its contract figures. Even the great Michael Doane, with whom I spoke at length shortly before his death acknowledged that while it is some time since he looked in-depth at SAP pricing, it was always a convoluted discussion. Based on past history, there has always been an element of value-based pricing which in recent years became much more obvious with the introduction of the still-not-fully-formed digital access model, an outgrowth of the much-hated indirect access charges that in turn led colleagues like Brian Sommer to accuse SAP (among others) of wallet fracking which Sommer summarises as:
Instead of sand, water and pressure, technology vendors use a trilogy of litigation, auditing and unfavorable contract terms that put pressure on their own customers. Specifically, vendors are:
- Launching excessively frequent and ambiguous usage audits
- Producing unfavorable audit results that can ‘disappear’ with more spending
- Demanding new document or document line-item pricing on top of subscription fees
- Requiring long-time maintenance paying customers with perpetual product licenses to re-buy the solutions. What was all that maintenance money going for if not to improve the solutions?
Customers are often surprised by the magnitude of these cost demands and the extent that vendors will go to get into their corporate bank account.
Nothing much has changed in that regard but you should be able to tell from the Microsoft/SAP announcement that there are implications for pricing. For example, we expect that in any deal between vendors that there will be an element of price negotiation so that the lead vendor can go to market with a bundle that makes economic sense. Simply having a price book pass-through makes no sense. In this case, SAP can legitimately offer Microsoft scale up volume as it has approximately 30,000 ECC customers that have yet to make an S/4HANA decision.
The SAP and Microsoft position
You can argue that since Microsoft Azure is the clear preferred, but not only, an infrastructure provider for SAP landscapes, that customers will naturally gravitate towards Microsoft. But that's far from a done deal and, in any case, Microsoft will want to at least get those initial SAP POCs as a way to 'land and expand.' That fits with SAP's strategy which has always been about selling customers more of what SAP has to offer. And, in fairness, that is also reflected in a recent DSAG survey that indicates an appetite to increase SAP budgets among 43% of respondents:
But it is on the licensing topic where things get interesting. According to the survey:
22 percent of participants said they were opting to keep their current licensing model, i.e. a product conversion. A further 12 percent want to keep their current licensing model for now and then switch to the S/4HANA licensing model via contract conversion at a later time. 13 percent are making the switch directly. However, 39 percent of companies haven't yet made a decision about the transition. "The high proportion of companies that haven't yet made a decision could be due to uncertainty as to the right path forward. Switching to S/4HANA involves changes in both the product and licensing metrics," says Jens Hungershausen. A license conversion also brings with it multiple challenges for customers, so more flexibility in licensing would be desirable.
It is not clear from the various statistics reported by DSAG how well that 39% is aligned to the 17% of respondents who are deferring an S/4HANA decision for at least three years but it does mean significant numbers of customers are at least open to discussion on the topic but want to see what SAP offers.
In my mind, this opens the door to a significant opportunity for SAP to reset and clarify its business model in a way that offers a win-win for everyone. At least on the licensing side.
When indirect access became a serious topic of conversation, SAP's position evolved over time to a point where it was possible to envisage a consumption-based model. In reality, that's what the digital access model attempts to achieve. However, SAP still hasn't managed to get all the technical components in place to make that workable. Park that for a moment and think about the logical endgame for the upcoming Microsoft/SAP announcements.
Where's the focus?
You can imagine RISE signaling a shift that gets closer to a pure SaaS model - although that's not there technically and won't be there for some time to come. But as always in the world of SAP that comes with complications. Talking to customers, user groups, and consultants/SIs, it is clear that many SAP landscapes are at best messy and at worst a spaghetti soup that's grown over time. Technical remediation let alone licensing are genuine challenges.
For its part, SAP has endeavored to simplify and flex its model so that customers can mix and match basic per seat licensing among professional and occasional users. This has been welcomed by customers but it's not enough in a pandemic world.
Just as there are winners and losers in the pandemic there are plenty of customers hunkering down. Our soundings tell us that when taken in the round, those middling customers - the potential SAP audience for S/4HANA going forward - have done two things:
- Focused on value delivery across short time scales, typically three months
- Looked for immediate cost savings. Unless it's business-critical it's gone.
SAP will rightly argue that its systems are core to operations but that still leaves open the question of what happens when businesses genuinely contract and no longer need the licenses they once bought? This is where we see the opportunity for SAP (and other vendors) to scale down as well as up. It is an opportunity because while customers may be scaling down, those same customers recognize the need to move forward with digitizing their business processes which, in turn, means additional spending. That cannot come with inflexible IT budgets so it doesn't matter if SAP says you can swap licenses around if it doesn't allow some way of releasing funds for development.
Model madness, messy landscapes
It is a question I have put to SAP in the past but which takes on much greater importance today as firms are faced with extraordinarily difficult choices around how they respond to rapidly changing conditions. Simply saying 'we have to spend more' isn't an appealing strategy or negotiating position.
On the other hand, I see the ability to scale down as a way of helping customers get to where they need to be while at the same time improving the customer relationship. As a customer, I may still go to the market for required functionality or processes, but if my core vendor has taken the time and trouble to help me get to a better starting point then they've earned a degree of trust that is otherwise hard to achieve. This is the core argument I've put to SAP.
The company's response is interesting. For some pieces of the puzzle, SAP will offer 'pay as you go' terms. That's a good start but again, it's not enough. What I really want is a set of terms that are as predictable as possible while having the benefits of consumption. The difficulty is that when you examine how this shakes out, customers end up wanting the best of all worlds and that's not useful from anyone's perspective.
In planning terms, the shift to S/4HANA opens the door to work this through in a different and arguably more useful way. When considering the S/4HANA shift, customers do have a chance to reset. Done right, an S/4HANA project provides improved, efficient, and automated business processes. In those situations, customers should end up with fewer required users touching technology-assisted manual systems. However, scoping that out is hard because going into an S/4HANA project, no-one is entirely sure what they're really looking at. Why?
As I've outlined above, landscapes grow over time, and in my personal experience, unless you're constantly monitoring what you're using (and the value it delivers) then it is all too easy to end up with the equivalent of shelfware. This is especially true in SaaS environments where the temptation to try one more thing and then three months later forget about it is all too great. Magnify that to a large enterprise over 10-15 years with on-premises, public and private cloud applications, and what have you got?
Having a baseline user count goes some way towards providing certainty but once that contract is signed, you're on the hook for those users, regardless of how they're sliced and diced. I want to see a situation where I can revisit that matrix and scale to my business reality, changing it at will if circumstances dictate. Vendors will hate that because it conflicts with the predictable revenue mantra that drives future revenue projections. But if you think about what's happened over the last year where there have been intermittent lockdowns then you can readily see why my argument makes sense.
Can it be done?
Where does this go? That's hard to tell. Now more than at any time I can remember, IT budgets are not just under scrutiny, but budget holders are required to justify every penny spent by an ever-watchful CFO. Vendors will argue that the pandemic has forced digitization as a net good as it pulls TCO down. I argue that TCO is table stakes. I still need genuine innovation that helps take the business forward and for that, the quality of the relationship with my chosen partners is paramount. Pricing plays a central element in that equation.
In SAP's case, we often bemoan the extent of SAP's functional portfolio as so vast that it's a wonder how anyone can understand it, But that same portfolio means SAP has opportunities to provide a better level of service to its customers. For its part, SAP has made integration a central plank in its own 'land and expand' strategy. It's not a completed exercise but it is top of mind inside SAP. Now is the time for SAP to get creative about how the consumption model, with which everyone has struggled for so long, works to everyone's benefit. The only question left then is to ask SAP how willing it is to take the inevitable investor risks that accompany those types of decisions. Again, I see opportunity.
Last Fall, SAP clearly signaled that its own business model transformation remains a work in progress and that it has plenty of work ahead of it. The market didn't like it but then I'd equally argue the market should have seen it coming at least six months prior if not before for reasons that are all too plain when you read the detailed financial reports. In recent reports, financial analysts are still grumbling about SAP's performance but without understanding the challenges SAP and its customers face. In my mind, those same analysts have fallen prey to laziness that reflects quarter by quarter thinking at a time when SAP has to think years ahead. If you're thinking long term then it is obvious you need to have a strategy that includes keeping customers happy. Relying on the idea that 'it's SAP, we can't leave,' is a fantasy but as SAP I can make myself more attractive beyond the feature, function, and service offering. In my mind, pricing is a differentiator customers will want to see brought into the discussion.