SAP Indirect Access new policies aid transparency, users remain uncertain

Profile picture for user gonzodaddy By Den Howlett April 9, 2018
Summary:
SAP has made substantial progress with indirect access. There is a way to go but many important questions that vex customers have been answered.

Indirect access SAP

Strap yourself in and grab a cup of your favorite beverage. This story is a long one.

After a year in which SAP acknowledges it has lost trust from customers, the company is rolling out a solution to the indirect access (IA) pricing issue under the banner of Project Trust.

SAP hopes this initiative will finally put this topic behind it. That's not going to happen any time soon. In reality, the earliest that existing customers can expect to understand the impact of the changes fully is likely to be in Q1 2019.

In full disclosure, SAP briefed Jon Reed and me on multiple occasions about this topic under non-disclosure arrangements for which we are not compensated. During those briefings, we have both commented upon and advised SAP in our role as buyer advocates.

In this story, I shall run through a brief history of IA, outline today's policy and provide comment based on the extensive discussions I've had with SAP, user group representatives, advisors, and users. In a follow up story, I shall talk about the future and what this means for pricing in the enterprise software market in general.

What is indirect access?

SAP Indirect Access
SAP's Indirect Access modality

Indirect access occurs when a non-SAP system triggers the creation of a process and documents inside an SAP system.

The most straightforward example is that of a sales order triggered by a system like Salesforce. Another example might be an EDI document triggered by an Amazon purchase. Another example might be where a third party project system creates a time sheet that is then processed inside SAP's digital core HR system.

IA may also arise where there are custom SAP Cloud Platform (SCP) hosted solutions that interact with SAP systems.

Indirect access does not arise where the customer uses SAP applications like Fieldglass, Hybris, SuccessFactors, Concur or Ariba.

Per-user licensing still applies where there are human-to-machine transactions.

What happened?

Until around six-seven years ago, IA to SAP systems was a non-topic. SAP claims that IA has always been part of contractual arrangements and therefore customers were on the hook for IA licensing costs.

Until now, SAP treated IA as requiring a per-user license under normal terms. If for example, a CPG business took in orders from 100 customers via an external system, each of those customers was treated as requiring an additional per-user license with all the maintenance consequences that go with it.

The problem is that this policy developed during a pre-digital age. It is easy to see how in modern systems landscapes, where we're talking about machine-driven data input, that the number of 'users' could explode. From SAP's perspective, that didn't matter. The contract says 'user' (with numerous and lengthy definitions), and that was an end of it.

To add spice to the problem, SAP account execs started to weaponize IA as a tactic aimed at force marching customers over to SAP HANA and SAP S/4HANA. The argument went something like this: "Move to HANA - S/4 (paying up for licenses there plus maintenance), and you don't get audited."

Applying audit pressure to push software sales and upgrades is not unique to SAP. Microsoft, IBM, and Oracle all have their variations on this theme. But the unsavory mix of audit pressure with indirect access confusion caused a deterioration of customer trust with which SAP is still reckoning.

Some colleagues view this exercise as the equivalent of shale fracking existing customers. Regardless, it is no surprise then that SAP was able to tout accelerating sales of its latest and greatest but was unable to show customers putting S/4HANA to productive purpose at any appreciable rate.

In other words, some customers were paying for a technology they may (or may not) use in the future, just to rid themselves of an unknown audit situation.

These tactics, which often came as an unwelcome surprise, brought deep resentment among customers who thought they had licensed in good faith, only to learn about hidden costs waiting to bite them at review time. But that didn't matter. From the outside, it seemed that SAP was determined to extract every ounce of spending it could from the existing customer base by whatever means possible.

In fairness to SAP, the practice of forced march spending was limited to a relatively few overly keen EAs but as we know, it only takes a few bad apples to tarnish an entire reputation, and when you count customers in the hundreds of thousands, as SAP does, then it just requires a handful of cases to emerge before people start thinking it represents the whole of the company.

Things started to change when the high profile Diageo and InterBev cases popped into public view, and once user groups became vocal. By that stage, SAP could neither avoid nor control the inevitable and sometimes vitriolic backlash against it.

Consultants and advisors were equally in a quandary because it became difficult to adequately advise customers considering alternatives in areas like CRM, non-strategic sourcing, and HR. This was especially true where customers were considering IoT projects where the number of connected devices that could trigger an SAP transaction was often unknown.

In our yearlong conversations with SAP, it is clear that despite the problems, the company was busy scrambling to find a solution that would be fair on all sides, handing this unenviable task to Hala Zeine, with whom I've had the most contact.

Today, SAP believes it has come up with a fair answer and the noises coming from SUGEN and other user groups are encouraging. But this is not a done deal, and there are many unanswered questions.

What's new about Indirect Access today?

SAP indirect access
IA capacity calculation example

Let's be clear up front: IA is not going away.

SAP still wants to be paid where it thinks it adds value. Whether that is real or imagined is a whole different story, but it does mean a fundamental shift in the way this topic is priced.

From here on out, customers will have the option of addressing IA by moving to a document-pricing model they can opt into at any time. The crucial thing to understand about the document pricing model is that the pricing is per line item per document - and only when a document is created. Amendments, reads, reprocessing, etc do not count towards a licensing calculation. (I get into the choices later.)

The line item approach overcomes the apparent pricing problem of what happens in, for example, retail where an end user customer may place an order for a single or few items while a wholesaler will place bulk orders for many line items.

The method of calculation is set out in the example shown at the right. I comment later on what this means and why there is still much work to be done.

What about the audit?

The much hated 'surprise' audit is going away. SAP has explicitly split audit and sales from one another. This means that while routine audits are a part of ongoing contractual obligations, EAs cannot initiate an audit because sales are not part of the audit organization and vice versa.

In closed conversations, SAP has made clear to me that while it believes the vast majority of EAs act with the customers best interests in mind, those who violate SAP's audit policy will be punished. If that means letting go of an otherwise rock star performer then so be it.

I have been told that SAP now has zero tolerance for practices that put the customer relationship at risk or which undermine the trust it has with customers. A good move.

The top-level user group response

Today, SUGEN, the SAP user group that represents a number of the world's regional user groups issued a press release. While the statement is broadly supportive of SAP's efforts at improving transparency, concerns remain.

“This model promises to clarify the rules for licensing indirect usage and bring a new level of transparency and simplicity to SAP licensing,” said Rob van der Marck, SUGEN Licensing Charter lead and VNSG.  “For customers looking to adopt new technology from SAP, predictability and transparency is key. Both the SUGEN team and SAP should be proud of the work they have done on the new model to hopefully deliver greater licensing transparency in the future.”

It is a good start, but the press release goes on to identify four areas of concern:

Although connecting third-party systems to SAP has resulted in licensing issues that were not imagined when many customers made their initial agreements with SAP, it should be noted the company has been aware of the challenges regarding indirect licensing for at least six years. In some cases, customers have in good faith connected SAP to third-party systems believing they were compliant due to a number of factors:

· SAP personnel being aware of a third-party system connecting to SAP and not raising a potential licensing problem

· SAP providing assistance for projects that involved connecting to third-party systems and not raising licensing implications

· The lack of any license type on the SAP price list for third-party system connectivity

· Audits having been carried out by SAP that did not highlight a problem

It is this good faith issue that continues to trouble SUGEN. Again, from the press release, Gianmaria Perancin, SUGEN chairman and USF (French SAP user group) is quoted as saying.

With this in mind, we urge SAP to publicly reiterate the promise it made to SUGEN in November 2017 when it said customers would be able to adopt the new model without incurring further costs if the business value/scope of their usage of SAP stays the same. This would go a long way to reassuring customers and rebuilding trust...

...Customers who believed they were compliant have rightly been concerned after the high-profile legal action SAP took against Diageo and InBev. SAP is moving in the right direction to make it easier to do business with it. However, expecting customers to talk to and trust account managers in an environment where SAP has admitted to having lost customer trust is asking a lot. If SAP publicly provided reassurances that customers won’t be asked to pay more for use cases and implementations that were undertaken in good faith, this would go a long way to encourage customers to engage with SAP proactively.

Philip Adams - SUGEN Core Leadership Team member and UKISUG added:

Without these reassurances customers will find themselves in a state of paralysis, unable to move forward as they do not yet know what the new licensing model will mean for them. Over the coming months we will be surveying customer organisations to see if their licensing positions are clearer, and what this means for their future plans and investments with SAP

Last Friday, I was briefed by Perancin, Adams and van der Marck where we talked about some specifics. Van der Marck said:

We should emphasize that for new contracts it is a clear, transparent model. There is still work to do but please let's emphasize these positive achievements.

Perancin said:

It is very important to understand that this is SAP's preferred model and we as SUGEN have given them feedback. This is not a co-construction with them or a collaboration.

I don't think we are at the end of the journey. The split between audit and sales is very important because audit can no longer be used as leverage in negotiations. Anything arising in audit is not counted into the financial target of the sales people. They are trying to restore the trust SAP has lost in the market so now the sales people will have to focus on the real innovation that SAP brings to the market. This means they have to look more to the future than to the past.

It is understandable that SUGEN sees these outcomes as positive and Perancin makes an excellent point about both clearing the decks and looking forward. But as always in this discussion, you get over one hurdle only to be faced with another.

Complex contracts, complex industries - a simple solution?

During the run-up to this latest iteration of SAP pricing, I asked about past contracts and industry specifics. There are difficulties on both counts.

While the pricing model example seems simple enough, it cannot be broad brush applied across the whole of SAP's customers. Each of the 25 industries it serves to support have very different business models with processes to match. That's why the industry verticals exist, albeit they have not cut as deep into industrial processes as SAP would like to think. Within industries, some businesses have their own highly differentiated models, some of which are pivoting towards services rather than merely being product based.

Then there's the issue of individual contracts. As Ms. Zeine pointed out in one conversation, having the definition of a Palm Pilot for which you're still getting a maintenance bill under an old contract that is still mostly valid doesn't seem fair despite the past efforts to define every possible means of access to SAP systems by different classes of user.

The TL;DR on this is that there are no shortcuts and that there will inevitably be negotiations that leave customers with choice (see image below) but no real certainty until they reach the end of the comparative pricing process.

The good news, as can be seen, is that SAP is NOT looking for back maintenance under any of the three proposed scenarios. This will be a massive relief to many.

options for SAP IA-2

Is the past the past?

At one point, there was some talk between SAP and myself about the possibility of an amnesty for customers who acted in good faith. That is not going to happen. However, Ms. Zeine made clear to me on several calls that the expectation is that customers can look confidently to the future.

But as Adams said:

We don't favor the use of the word 'amnesty.' That implies known wrong doing and that's not the case for the many customers who thought they were right-licensed and didn't know they'd got themselves into a situation SAP deems to be indirect on a change of business model. This has been the sticking point for us during these conversations and negotiations. We do know that customers remain concerned that they might be bringing up business models of which SAP was unaware and that might trigger this problem so the back maintenance position is not quite as clear as it might be. We continue to have dialog on that.

The best and most likely outcome is that SAP will not seek to get a backdated (and rated) license fee but will work with customers over the remainder of this year to understand the cost model going forward through the use of tools that monitor usage. That still means customers won't know their exposure until early 2019, but once that is worked through then, the costs should become both transparent and predictable.

This will make sense for those businesses that are undergoing business model transformation and see how S/4 HANA works to facilitate that. I've seen precious few of those examples and none that highlight the use of a new SAP pricing model. That should not surprise.

EDI - the elephant in the room

One area of deep concern to SUGEN is the EDI question. EDI has a history going back to 1948. Most large-scale organizations make extensive use of EDI documents and have done so for decades. It is stable, and even though it may seem prehistoric by internet standards, it works and is widely adopted. To my mind, it is clear that SAP is targeting Amazon as that company quietly transitions from e-commerce and infrastructure behemoth to one that provides enterprise-grade software. The question is what happens next?

SUGEN doesn't know, and the suggestion is that SAP will wait to see what the market has to say on this point. However, Perancin insists that SAP must continue to be open to discussion:

SAP says it wants loyal customers but it has to be open and prepared to talk about these difficult areas and not to simply say 'this is the test, you have to pay.' Otherwise, the customers will go away.

Competition - the unanswered question

However, my unanswered concern comes in the form of issues around the competition. SAP is not alone in operating complex pricing models. Oracle customers, for example, have seen weird and wonderful Ts&Cs changes on this topic using metrics related to CPU usage. In this case, I wonder whether SAP is setting itself for anti-trust issues. Here's what I mean.

Let's say we have an existing SAP ERP landscape and the customer wants CRM. It might well put SAP in the shortlist. It will almost certainly put Salesforce on that same list or, perhaps Sugar. In a typical tech beauty contest, each vendor is on a level playing field, but that changes with the IA topic.

If the customer goes with SAP, then IA doesn't apply. But if it goes with a third party, then it is a near certainty that IA becomes a topic. How does that work in the context of a negotiation? Does SAP more or less give away its license for CRM in exchange for maintenance? Does Salesforce end up having to sacrifice license fees? How does the customer undertake a fair cost comparison, all other things remaining equal? How does it negotiate a fair price if it chooses a third party but is creating sales orders via SAP using digital methods?

This, I would suggest, is the pricing question of the digital age that so far remains unanswered. Period.

My take

As a step towards running simple, SAP should get credit for the work it has put in and the efforts made to develop an equitable solution. SAP should also get credit for making the clear split between audit and sales. How it works in practice is hard to tell because while an audit might trigger a change in approach, where is the dividing line between what you pay for right now and what you negotiate in the future?

Viewed from the POV of the net new customer, this model gets close to a consumption-based model of the kind that SaaS should have evolved into but which, in many cases, is still mired in per user seat pricing. This is true across the board, whether we're talking Salesforce, Workday, SAP, and pretty much anything in-between.

In that context, SAP is leading the way albeit from an incredibly messy position.

The industries discussion is one to watch. There are far too many unknowns here, as there are once you start diving into the individual contract positions of customers that may in some cases stretch back 25-30 years.

The fact SAP is giving customers a choice is welcome, and the fact SAP is developing tools (not available until the Fall of this year) with which to measure and monitor impact tells me that no-one knows what the dollar value of these changes is likely to be.

There will be industry-specific problems. I see seasonality in retail coupled with existential threats making it hard for retail organizations to place bulk orders for line item specific IA predictably but I am willing to be proven wrong. I also want to know how under and over buying will be managed.

Based on history, SAP doesn't look inclined to change its premium brand of champagne any time soon, but I suspect that once they start measuring, they will find this model needs a LOT of tweaking. Pure volume-based metrics of the kind SAP is proposing will require a mind shift by customers to one that recognizes the integral nature of SAP in a services-based economy. That means SAP is part of the cost of doing business and not an overhead.

During our conversations with SAP, we suggested to the company that while IA is not exactly the sexiest topic and one that will likely give marketers heartburn, SAP should work towards having customers talk openly about how this is working and the positive impact they see from this latest change. Whether SAP chooses to go this route and offers brave customers willing to discuss the problem a reasonable settlement remains to be seen. However, in our experience, customers buy from customers, and a steady stream of upbeat stories would make all the difference to SAP restoring its position of a trusted provider.

Finally, I can only imagine that Bill McDermott, SAP CEO is hoping this latest move puts IA as a SAPPHIRE topic on the back burner. I confidently predict he will be disappointed.

Endnote

ASUG issued its own statement

DSAG issued a statement

Both sets of statements, along with that from SUGEN are largely supportive of SAP's efforts on this topic. There is nuance and detail but this is a remarkably consistent set of messages from three of the most important UG contingents in the world.

Jarret Pazahanick brings together a number of the arguments back and forth with additional reading resources.