The SAP® Indirect Usage Time Bomb – Pt III
Embarking on a negotiation process with SAP is not necessarily the most fun experience you can imagine when contemplating your working week. The goal is to shift the relationship from one in which it might feel like SAP is dictating the compliance terms to a discussion where both sides of the table can achieve a decent outcome that meets their long-term objectives.
This blog is designed not only to help companies survive the compliance challenges of indirect usage and negotiations, but to begin to “take control of the narrative” with SAP going forward.
Start Early
The most important part of the negotiation process is the “pre-game” warm-up. This comprises achieving full transparency of your SAP deployment, understanding precisely how it is being used and having exacting and detailed knowledge about indirect usage across your deployment.Detailed knowledge of indirect usage involves drawing up specifically how SAP is interconnected to other third-party and bespoke applications within your enterprise.
I discussed this in more detail in the first and second blogs on SAP indirect usage. The second most important aspect of successful negotiations is to understand the priorities of the software vendor, in this case SAP, and what they will consider a ‘win’.
Surprisingly, in most cases it is NOT to gain the largest true-up cost as possible, as all licensing revenue is not treated equally. Moreover, the typical SAP account executive is looking at the account relationship over a very long multi-decade period and aiming to maximize company value over that time.
Having said that, there is always sales pressure in SAP’s large fourth quarter and this strongly influences the number and intensity of software audits carried out by them. Another crucial part of the preparation is to determine what the estimated value add is for a particular third-party or bespoke application. If the cost of the incremental SAP licensing dwarfs that of the value being delivered from the application, then one must look at the negotiations from a different set of lenses.
Finally, proper thought must be given for “horse trading” scenarios that are likely to be a feature of the negotiation process. SAP is well-known for using indirect usage compliance issues as a means to open up a more comprehensive set of horse trades which inevitably result in the customer spending more per year with the vendor.
As long as this incremental spending is part of the strategic trajectory for the customer, this can be a win-win.
Gaining an understanding of your exposure & achieving transparency is the best preparation
In the prior blog of this series, I illustrated how to use Snow Optimizer for SAP® Software to isolate and determine sources of indirect access within your organization.
At Snow Software, we advise that as part of the preparation you should develop a comprehensive architectural diagram of all interconnected parts in your global SAP deployment, and know what the non-SAP applications require in terms of SAP data access and functionality.
Consider the chain of activity for a 3rd party application integrating to SAP. For each application connected to SAP, one should identify each of the SAP users that are really the “interface users” used to funnel activity, the application that is the source of the activity, and all the users of that application.
For each of the application users, it has to be determined if they are just querying data from SAP or if they are actually updating data, and what sort of SAP license type they have been provisioned.
Based on the activities of the application, a proper license type will be determined by your internal SAM practitioners or a SAP/SAM consultant. By being prepared with this information, it’s unlikely that SAP can suggest that you require the most expensive license type across the board to be compliant.
In most cases, an indirect user is not accessing the SAP system at a level that requires a professional license, so this license would likely be “overkill”.
Given your insights into the applications and usage of your SAP system that you have discovered through comprehensive investigation, it may be prudent for you to carry out an overview, workshop or provide a briefing document to SAP in advance.
This is the strongest way to send a message about your intention for an amicable and mutually beneficial negotiation.
Plan your negotiating tactics
Thinking through various licensing scenarios is an important part of the preparation. One of the first tactics you should consider and ask for if not provided in their contract is information on “swap rights”, either for this particular negotiation period or for a longer duration of time.
This allows SAP customers to re-balance their licenses to meet their current and on-going needs. Many times companies are “over-licensed” with SAP in the aggregate (i.e. they have 4,000 more license than users), but they fall short on a particular license (i.e. they need 1,000 more professional license-type licenses).
By being able to swap some of their excess licenses of one type for another, the enterprise is better served and SAP is still receiving the same maintenance revenue annually. This is another win-win element of negotiations. With an indirect access compliance issue, this may well be the case. If it can be determined that approximately 1,200 users need an SAP license because they are accessing SAP through a non-SAP application and they do NOT have a license yet, this represents a true-up cost. If some excess licenses which will not likely ever be absorbed can be swapped and credited towards the 1,200 licenses required for these indirect users, some or all of the cash outlay for the true-up can be deferred or avoided.
Revenue “type” is important in the software world
Not all software revenue is considered equal.
That is at least the predominant thinking on Wall Street today. A company booking Software-As-A-Service (SaaS) subscription revenue is valued often at twice the consideration of a company booking recurring maintenance revenue from a perpetual license sold years or decades ago. Cloud and SaaS a big buzz words that play into the value of companies today.
The strategy of SAP, being a publicly-traded company with a value of approximately $100 billion, reflects this thinking, particularly around the composition of that future revenue. With mature companies like SAP, the prospects of new “green field” revenue from new customers is relatively low – everyone large and complex likely has an ERP system today. The prospects of their customer base purchasing a high-performance in-memory database from SAP, however is brighter.
If SAP shows an adoption rate that is meaningful and accelerating, the stock will likely rise based around these prospects. If you want to put yourself into the strongest negotiating position, consider that the real opportunity to horse-trade is to accept that SAP wants to move you to SaaS revenue models (ie. HANA and other new licenses).
When negotiating with ANY software vendor, understand what is important to them as a company, and bear that in mind for your negotiation strategy and flexibility.
Consider the value of indirect usage
One critical part of the negotiation preparation is to look closely at each connected application and consider what the limit of value the application brings to the enterprise and if there is an alternative way to achieve the same outcome without the application.
If there is a reasonably accurate value calculation, then this plays into a hard ceiling for money your enterprise is willing to part with as part of the negotiation.
Case Example: Snow Software was working with a large global manufacturer of heavy machinery helping them prepare for an on-site audit with SAP around indirect usage. One application of interest was an application that allowed their dealer network to be able to validate a serial number.
By providing online access to this system, more than 5,000 dealers could now validate information 24 hours a day without a human in the process. When they looked at how much the older alternative cost, which was an outsourced 24-hour service based in India, it came down to approximately $100,000 per year.
That works out to about $20 per user in cost and became a negotiations point. A special license type was suggested at a very low cost per license that allowed read-only privileges to a very limited number of SAP transaction codes. This was an example of a win-win.
By being prepared, the customer proactively presented their case for a certain price level, and presented the non-automated alternative.
Set up active monitoring to remain prepared
You need to give SAP the evidence that you have control of this situation.
This means that you have processes and tools in place to assess your exposure, and you have a methodology for how to deal with unlicensed indirect usage.
By setting up advanced software tools that monitor prospective compliance issues periodically (i.e. weekly or monthly), and by having the ability to show full transparency of your usage data and licensing to SAP, they will walk away more comfortable that your future negotiations and annual LAW audit submissions will reflect the use of these processes and tools.
Once you begin pro-actively managing your SAP licensing – both direct use and indirect use – then SAP will have confidence that the self-audit data is a fair representation of your licensing usage. Consequently, they will see less financial merit in coming on-site and digging deeper into your SAP usage looking for prospective compliance violations.
This will go a long way to elevating the future discussions with SAP to a more longer-term strategic one.
Consider your five year plan with SAP
Mapping out with your SAP Architects and business unit managers the future requirements from the SAP platform and investment is critical to your success in negotiating your best negotiation strategy and outcome.
SAP has a vested interest in making HANA adoption more pervasive, especially within the ECC/ERP area rather than its predominant footprint in analytics.
If the inclusion of HANA or S/4 is on your longer-term road map, then SAP should be fully appraised of this in the negotiation process.
This way, a minor contract compliance issue around some indirect usage activity may well take a second seat to a more strategic on-ramp to HANA with a longer-term deployment schedule. Much thought should be given to the long-term objectives to be accomplished on the SAP platform as they set the tone for negotiations compromise for both sides on the table.
Target the win-win scenario
There is no doubt that SAP as a software vendor and your enterprise as a software consumer have opposed objectives to a large extent. The hallmark of a successful negotiation is to have both sides win some and lose some, to meet the strategic objectives both sides have in mind, and to come away bruised a bit but not bloodied or distraught. Historically, the battle was won and fought before either side sat down at the table.
SAP had all the negotiation experience and contracting/licensing expertise and the enterprise had a highly limited understanding of what was really being used within their global SAP system, how it was being used, and if the provisioning and allocations of SAP licenses was done in a compliant and cost-efficient manner.
SAP, not unlike other software vendors, would use this asymmetry to drive the negotiations process to an inevitable true-up of a meaningful amount and an ongoing step-up in annual operational costs due to the recurring maintenance costs or incremental subscription costs. With substantially more advanced Software Asset Management (SAM) solutions such as Snow Optimizer for SAP Software, the company has powerful analytical capabilities that now provide an order-of-magnitude greater of transparency and understanding.
Moreover, the same solutions can automate the ongoing and continuous SAP license optimization at lightning speed and with substantially greater accuracy than any human or software vendor can achieve. The playing field has been tilted now in favor of the SAP customer. Indirect usage compliance is a complex, time-consuming and frightening area for many enterprises today.
Some enterprises without advanced and automated tools are committing more than six months of each year just preparing for these more onerous audits and questions poised from SAP. It doesn’t have to be that way. Enterprises can achieve their long-term strategic objectives as a firm and their licensing needs by being pro-active in their preparation for SAP contract renewals and renegotiations.
If you’d like to discuss how Snow Software can help your organization to understand Indirect Usage across your SAP estate and deliver that win-win negotiation please contact us today.