Sapphire Now 2018 - SAP's legacy licensing bows to an XaaS world

During the rise of SaaS and cloud computing over the past two decades, I've often seen established software vendors struggle to adapt licensing that was originally designed for the client-server era, if not earlier, to this new world.

These old-school licensing models assume a relatively predictable number of machines or users. They simply can't cope with the dramatic and frequent variations in numbers and types of users, processors or clients that we see in today's connected digital environment. SAP's issues with its indirect access licensing rules are typical of the kind of problem that comes up.

As I listened recently to one longstanding customer describing their SAP licensing landscape, a familiar image came to mind. Several years ago, diginomica contributor Brian Sommer, then writing for ZDNet, came up with the notion of Franken-soft, a nightmarish monster created by bolting new functionality onto the ageing body of a legacy ERP system. It struck me that it's exactly the same for the licensing. With each additional new SAP product or enhancement, a new licensing contract gets added to the original, so that over a span of a couple dozen years, a typical SAP customer ends up with a drawer-full of separate contracts, with no easy way to establish the licensing impact of adding a user here or upgrading some functionality there — let alone track the impact of multiple changes.

At this point I must confess I find myself horrified that this state of affairs can exist — and I'm not singling out SAP here, because I suspect the same is true of any established enterprise software vendor with licensing that dates back to the client-server era, or before. To me it seems unthinkable that any business could allow its customers to get into a position where they cannot easily assess or predict the cost of using its products. But of course, this was not the intention. This situation arose simply because the method for calculating the licensing got left behind as the technology evolved. It's a classic case of digital dislocation.

Painfully adapting to XaaS

It's an equally classic case of how vendors invariably underestimate the far-reaching impact of moving to an as-a-service business model. As I mentioned earlier, I've been a close observer of the rise of SaaS and cloud computing, and I've frequently found cause to shake my head in disbelief at the contortions established software vendors go through as they gradually — and painfully — adapt to this new way of doing business. As I observed as long ago as 2005, when I called this mindset SoSaaS, which stands for Same old Software, as a Service, people embark on the transition believing that it's simply a change of technology platform, or a bit of financial engineering to implement a subcription payment plan. It often takes them years to fully come to terms with the scale of the transformation required, and many, like the apocryphal boiling frog, risk leaving it too late to make the necessary leap.

This isn't a fate reserved solely for software vendors. The spread of connected digital technology is bringing the as-a-service model to every industry. Business leaders who fail to grasp the full scope of the transformation to Everything-as-a-Service, or XaaS (pronounced 'X-ass'), will face similar disruption — something we've called The XaaS Effect.

A replacement for legacy licensing

In SAP's case, it's all coming at once. An explosion in the interconnectedness of modern digital technologies. Customers who demand more flexibility and transparency than ever. Core products beginning to move towards an as-a-service model. Against this background, the furore over indirect access licensing isn't an isolated incident. It's merely a symptom of a much bigger transformation confronting SAP.

With its legacy licensing mechanisms clearly unfit for purpose, SAP has had to implement new systems that fulfil three key requirements:

• Licensing as code. The old systems were based on paper contracts that weren't designed with automation in mind. They need replacing with systems that implement licensing as a standardized set of parameters that can be manipulated by machines. This allows licenses to be reconfigured on the fly to adapt to changing circumstances, and also supports measurement, validation and reporting.
• Transparency. Once the parameters are unambiguously defined in ways that machines can execute them, it becomes far simpler to give customers reporting and dashboards that allow them to see for themselves what their licensing status is. Instead of licensing being so obfuscated that many customers genuinely didn't know whether they were correctly licensed for their usage, the new system should support customers in optimizing their licensing arrangements.
• Fair value. Customers must have confidence that the new licensing system results in them paying fair value for their usage. This is the most difficult to get right, even for cloud vendors. It's not always clear what you should measure, while pricing needs to be sensitive to the customer's desire for predictability, even when it's difficult to predict usage. All of this is further complicated when the existing customer base has been paying different sums under the old system because of its lack of standardization and transparency.

As we've reported elsewhere, SAP's chosen solution to all of this is to introduce a completely new licensing regime based on documented transactions. This can be measured programmatically and reported transparently, so it meets the first two criteria. Whether it's fair value is a far harder question to answer. One of the underlying assumptions is that there's a quantifiable value to a transaction that's created and documented in SAP. Perhaps more subjectively, SAP believes that value has a premium. Whether customers agree is something that only time will tell.

My take

The success of the new system depends much more on the bigger picture of how well SAP can make the cultural shift to an XaaS mindset. It is moving from a historic role as a product vendor, focused on maximizing sales of its products, to a new role as a connected service provider, focused on engaging with its customers to maximize their successful outcomes. Document-based licensing according to the number of transaction line items created seems as good a basis as any for measuring the fair value of an ERP platform. What will count is not the detail of the proposition so much as the spirit in which it is delivered and managed.