Understanding SAP's new cloud extension rules

Profile picture for user gonzodaddy By Den Howlett August 6, 2013
Summary:
SAP's extended cloud apps swap terms are coming under scrutiny. Some of the terms may not be acceptable but customers should not recoil in horror. It's all about understanding the landscape.

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SAP's new on premise to cloud licence swap/extension terms are coming under the microscope. We have seen a set of the rules and at first viewing, they are both reasonable and onerous.

The biggest problem comes under terms 3 and 4 of the general criteria. Contrary to what SAP implies in its claim that this new offer provides flexibility, it adds inflexibility. Here is how:

3. The transaction assumes an expanded investment with cloud solutions from SAP, given the substantial added value from this new hybrid scenario.
4. The contract term for a new cloud subscription is five years.

In other words, SAP is both anticipating increased spend plus period lock in. I fail to see how this is 'more flexible.'

We regularly see situations where customers actively choose long contracted periods so that they can achieve a degree of cost certainty. On the recent NetSuite earnings call, CEO Zach Nelson said that he is seeing more multi year deals but noted these came from large customers. At Workday, co-CEO Aneel Bhusri often mentions the fact their customers prefer multi-year deals. What we never see is an insistence on this kind of term as it applies to cloud. Note that it is common for customers to sign long term deals on data center and related services, that's not the same as applications.

In the eyes of some, this flies in the face of the pure cloud model where the expectation is that you should be able to dial resources up and down as circumstances dictate. Our view is that Amazon's model - which is very much geared to an no-demand model of this kind - makes a certain sense for some business applications but only up to a point.

I can readily make the case for core functions like financials and HR admin being contracted for long periods based upon the fact that business only makes wholesale systems changes every 10 to 15 years. What I find much harder is making a blanket case for all apps to fall into that contracted term arrangement.

Similarly, I don't see how a simple licence swap amounts to 'added value' as SAP claims. For me, any decision to go with cloud has to be based upon a matrix of factors with a bias towards getting more out of the proposal than I already have. Cost is a part of that equation as well so I will want to be very clear what I am getting for any additional spend.

There are other problems as well. Luke Marson says:

I can understand why Fred gets bent out of shape but Luke's point is valid.

Another couple of terms buyers need to watch for:

7. An up-to-date license audit report, at maximum six months prior to the cloud extension request, is required.
8. In addition, SAP reserves the right to conduct additional license audits after the partial termination to confirm that software usage is terminated.

We are aware that SAP has become much more active on licence audits in recent times, much to the consternation of some customers who have extensive and complex landscapes. If you are in that situation then it will be worth undertaking a cost comparison exercise. As a side note: it is always worth checking the landscape to ensure that you don't have excessive shelfware or that you are not 'illegal' in some application areas.

There's other uncertainty:

12. Certain products are eligible only for full termination. This would still constitute a partial termination within the overall SAP landscape. Please contact your account executive for further information.

Hmmm...not helpful. We often see situations where AEs don't have all the information they need in order to provide customers with best advice.  This can lead to confusion.

It's not all worrying news:

13. Licenses for software subject to replacement with cloud solutions from SAP will be replaced in
descending order, starting with the highest total discount first.

This is good news but again, a degree of caution is required. You may well find yourself facing a complex spreadsheet of different cost matrices where it becomes unclear that you're comparing apples and apples. On the other hand, I see scope for negotiating better discounts in return for a long period plus extended application use - but only if it delivers higher value than I am already getting.

Verdict

  1. SAP is clearly feeling its way in cloud licencing and so while these initial terms may seem onerous, they have to be viewed in context. If you believe your landscape is sufficiently stable to warrant a five year commitment then you should also lock in cost certainty. 
  2. Too many cloud model comparisons fall short. They often fail to take into account the many cost components inherent in on premise landscapes. If you are undertaking a swap exercise then it is important to bear this in mind, noting where you can release savings that can be properly reattributed to the cloud landscape as well as more general release for internal projects. 
  3. However - we see the rise of situational applications of the kind we posited the other day as becoming the new norm. That requires a different model where you might deploy, expand and retire applications. In those circumstances, the SAP model will not work. 
  4. SAP is building out HANA as a platform, which in turn should attract developers who can accommodate customer needs in the last mile of requirements. Some of those applications will be long running, especially those that fill industry vertical white spaces. Others will be relevant to problem solving in the moment. Quite how SAP licences under these circumstances is unknown. 
  5. The terms I have highlighted are 'general criteria.' They do not substitute for specific contract terms which are always negotiable. 

P.S. - what we often term as 'legacy' vendors will all be faced with this problem. It is not exclusive to SAP.

Disclosure: at the time of writing, SAP is a premier partner.