SAP addresses the questions on its licensing and auditing news – an influencer event analysis

SAP addresses the questions on its licensing and auditing news – an influencer event analysis

Hot on the heels of SAP’s major licensing and audit announcements, a group of analysts and influencers pressed the issue in person.

Published on 25th April 2018

On April 1, SAP publicly announced changes to its licensing and auditing practices. Coined as “Project Trust,” these announcements are a direct response to the PR nightmare and customer trust issues invoked by SAP’s prior approach to the now-notorious concept of “indirect access.” (IA)

These announcements had two main components:

Last week in its New York City offices, SAP’s leadership, including all of its cloud presidents, conducted an SAP Influencer Day, intended as a dialogue on SAP’s strategic priorities heading into Sapphire Now in June. A smaller group – including myself and diginomica colleague Phil Wainewright – remained for a day of discussions with the team responsible for SAP’s licensing announcements. Needless to say, the talks were spirited.

The licensing day included group and 1:1 sessions which hit on how these announcements will impact SAP sales, auditing, and user licensing. We also honed in on the challenges SAP will face going forward. ASUG, “North America’s SAP User Group,” made a thirty minute NDA presentation on their views.

Dialogue with users groups and externals has been central to these changes

I’ve seen loads of misconceptions about SAP’s announcements on social media. That’s understandable when you consider after last summer, SAP went publicly silent on this topic, giving the unfortunate impression they were making very little progress.

CEO Bill McDermott set the right tone at Sapphire 2017 in his keynote by vowing SAP would address indirect access and regain customer trust. Soon after Sapphire Now, SAP released an underwhelming and tone deaf white paper, explaining new policies on the three most common “indirect access” scenarios, which SAP calculated as 80 percent of the problem: order-to-cash, procure-to-pay, and indirect static read.

Though the document was a step forward, I was disappointed with the communications around it. I got the impression SAP considered the matter closed; communications fell off. Adding to the sense of disconnect, SAP’s handling of pricing questions during the fall TechEd season at public press sessions was also inadequate.

It’s understandable that external frustration would mount between the July 2017 white paper and the announcements on April 1, 2018. But fortunately for SAP, their understanding of these issues – and policies to address it – took a big step forward during the year.

One crucial factor: dialogue with key user groups around the world, including but not limited to DSAG, ASUG, UKISUG, and SUGEN, the “umbrella” user group which many regional user groups are a part of (after years of relative quiet, SUGEN has found its voice on this topic, from our video last Sapphire Now to their strongly-worded comments on April 1).

Diginomica was one of the external groups SAP spoke with (repeatedly) on this topic during the last year. How SAP’s momentum developed is open to some debate, but we do know this:

ASUG takes heat for not being vocal enough on issues for SAP customers. I’ve told ASUG’s leadership repeatedly I believe they should be more public in their concerns rather than their usual approach of airing out issues on the private channels and influence councils, etc. But that doesn’t take away from the comment made by SAP’s Hala Zeine last week (Zeine has led the licensing overhauls from SAP’s side).

Every time we met, they held the mirror; they told us how many zits we had on our face. ASUG and other user groups improved the model.

I bore witness to this in December, when we had a phone meeting with Zeine and her team. To be honest, I was dreading the meeting. I didn’t want to hear the same assurances and half-measures. Instead, I heard concrete plans on licensing and auditing, and: a much more sophisticated understanding of customer concerns.

The work is unfinished – three priorities ahead

That said, the April 1 news is not the end of the story for SAP – not even close. I’ve recommended SAP shift from an “addressing a problem” mindset to a “seizing competitive advantage” mindset, turning licensing from a tedious-but-necessary conversation to a source of market edge. Inherent in that shift: you never quit on this topic. You keep pushing and improving and the work is never done. I believe SAP is clear on that now, but time will tell. There are three main issues on the hot burner:

Issues for SAP to tackle

Our discussions surfaced issues for SAP to tackle. Here’s a partial list:

1. Will document-based pricing prove to be price neutral and effective?

To decide on the model for document-based pricing, SAP debated several options, including number of documents, dollar value of documents (pricing by value of transaction), and line item based pricing. SAP has chosen line item based pricing.

Line item pricing has the advantage of addressing a range of scenarios, including a wholesale sales order with numerous line items. EDI, still a common method of data integration for SAP customers, can also be priced in this document model, though customers must do the full new contract conversion option to include EDI.

In the case of a customer that orders only twenty planes a year, that big ticket item is broken down into parts, which also fits the line item model. Sonja Swann, GVP, Global Head of Pricing and Commercialization at SAP, spoke to a sales order example:

We debated this a lot internally, I will tell you, on whether we should based on the number of orders, based on the value of orders, for example, or based on the number of line items. It’s not an easy debate. There are customers who would prefer number of orders. There are customers who would prefer number of line items and there are yet also customers who would prefer the value of orders. There is no perfect pricing model, I think we can all agree that.

Having considered all the different options, we felt that counting the line items is the best approach that addresses the different industries that we deal with.

In the case of a bulk order subject to change, additions, and cancellations, those changes would not be charged – only the initial line item creation. For industries with demand spikes like retail, SAP’s response is that the nine document types are interchangeable. You can use whatever combination of document types up to the limit. Each year, you license for a number of documents, for example one billion. That amount replenishes each year. If you exceed that by one million documents, e.g. a retailer during a busy holiday season, you can buy one million more. If that demand spike will be annual, you can speak to SAP about adding that one million to the renewing amount each year, as an incremental cost.

SAP knows it has work to do defining industry practices for documents. However, we were also told that SAP’s industry solutions themselves have almost no indirect access issues, because they are not priced on user-based licenses.

I see two big concerns with the document-based model. One is that SAP must ensure that examples of paying a huge amount more for transitioning to the document model are addressed. We are already hearing potential examples of this. SAP will need to intervene and assess the pricing there.

If the document-based model is cost prohibitive, this all breaks down. There is one huge caveat here: customers who have not been properly licensed in the past for their indirect usage will have to address that from a go-forward angle. SAP will not pursue back maintenance as stated above, but it will look to price properly going forward. SAP’s document-based pricing is based on the premise that the customer always owns the data, but when it moves through an SAP system in a way that takes a forward action, then a price for that processing is invoked. As Zeine put it:

We at SAP clearly felt that our entire pricing philosophy is based on the fact – which is what the company believes – is that the customer owns the data. It’s their data and we’re helping them process that data.

If SAP is not careful, this will leave a sour taste for those customers who were told they were sufficiently licensed for their SAP usage in the past. If they can roll that usage into a document-based model that is cost neutral, no problem. But if they are paying more – even if SAP considers that to be fair based on their actual usage – that’s going to feel like a slap in the face for customers who felt they were licensed for their usage, and were told that by their account rep in the past. These are solvable problems but they are not insignificant.

2. SAP must now address how their partner ecosystem approaches indirect access with the same diligence.

One of the most potent issues that surfaced during our talks was the future of licensing with partners. Analyst Josh Greenbaum argued that partners are at a disadvantage to SAP’s own price list in this pricing plan.

SAP partners that are on the price list are covered by this plan, but only a fraction of SAP partners are on the price list. Greenbaum made the case that there is another class of valuable SAP third party partners that deserves some type of new partner class that gives them a more equal playing field with SAP’s own solutions (because everything on the SAP price list, including SuccessFactors and other SaaS offerings, is not subject to IA licensing considerations).

SAP is in a bit of a no-win situation on this point. The company believes that supporting end-to-end options across SAP software is the right thing to do, so they don’t want to charge for data access to Ariba and Hybris and so on from SAP ERP. I believe SAP is also correct that if they starting charging for IA licensing into these solutions, customers would be unhappy about being “double charged” for that access (I just talked to an SAP Microsoft customer who is upset with Microsoft for trying to charge for access between Microsoft products).

There’s been some social media debates on whether SAP not charging for access to their own third party apps on their price list is in fact illegal. I asked SAP’s licensing and pricing leads about this in New York and they are confident they could withstand a legal challenge on this front.

But this isn’t really about legality in my view. It’s about two key points:

Some third party solutions – I won’t name any here – are based on a user/data hybrid model. In other words, they have one licensed SAP user, and within that user, they might process ten sales orders, or a thousand, externally from SAP. That “hybrid” model is not a fit with the document-based pricing plan. It’s also not a fit with SAP’s new view that all system activity should be visible and measurable. They want to provide that kind of visibility to customers in the future. If you’re a partner that fits that description, I’d suggest that change is on the horizon.

Final thoughts – modern licensing is there for SAP to seize

Don’t look for SAP to put licensing front and center at Sapphire Now. The whole point of the April news (and talks) is to shift the focus of the Sapphire Now event. I don’t have a problem with that AS LONG AS SAP finds the will and fortitude to press on. With this exception: if SAP doesn’t have some kind of customer licensing panel at Sapphire Now, featuring customers who have worked on this new document model, that will be a big mistake.

I’d like to see ASUG hit on this topic in their keynotes. ASUG’s presentation at our event was informative and strongly worded. ASUG Board Member and customer Ron Gilson did a fine job. Unfortunately, it was the only slide deck of the day that was NDA. ASUG has plenty of resources on this topic for customers, including a licensing resource center; hopefully public comments at the annual conference will add to that.

Zeine spoke openly about trust and the road ahead:

Trust is not built by just saying you’re going to do it. Trust is built by actually doing it on a permanent basis and proving it every step of the way, which is why we were leading in now with the sales and audit practice, because this has to be done on a customer by customer basis. It’s also why we put in a conversion policy in place but, of course, we would have to convert customer by customer. I also believe as the metering gets put into place, some customers may say, “I’m going to wait and see. Is it really better for me, financially, commercially, to move?” They will not believe us for awhile.

One big concern for SAP is that Zeine has moved on from her current role. She’s been promoted to lead SAP’s digital supply chain management. When I asked her about it, Zeine was quick to emphasize that this has been a team effort, and licensing was hardly the only part of her prior portfolio management job. That may be the case, but Zeine was exceptional at communicating with externals and getting into the fray of difficult conversations. She won’t be easily replaced.

Swann has also been terrific. SAP handed these two a scorching hot potato and they have managed, through some duress and dealing with difficult/opinionated people like, say, the diginomica team, to forge something that may well serve as a bridge to a modern and better SAP.

It’s true that no large enterprise ERP product is priced as purely consumption-based. When I think about the licensing of the future, it should be:

SAP has a chance to press on with all three of these points, turning a self-inflicted PR and trust crisis into a competitive edge. SAP is now providing some of its auditing tools to customers, and sometime in the future – SAP declined to give a timeframe – the consumption dashboard will add another key piece towards these goals.

But I’m going to add another point to this modern pricing list. In the future of enterprise software, charging for data processing in back end systems is going to become a commodity. Charging based on external customer value and outcomes is the final piece of the puzzle.

For now, SAP has to protect the licensing income and not take a loss on the document pricing conversion, but this is a position of diminishing returns. Yes, there is value in data processing. But the real value is partnering with businesses to grab new markets. Take what Swann said about impact of this new plan on SAP’s industry solutions:

This doesn’t affect 99 percent of industry solutions at all, because industry solutions are not price based on the user metric. They are priced based on business metrics that are relevant for those industry solutions.

Exactly. Business metrics/outcomes on the one hand, and consumption on the other. Those are the cornerstones of future pricing models. Facilitating transactions is less valuable than helping a company earn those transactions by co-designing and implementing new digital models. I believe customers will feel the same way, and structure their budgets accordingly.

I’m not sure if SAP is completely convinced of the benefits of hitting on this difficult topic relentlessly until it becomes a win. Global issues like security, licensing, GDPR/data privacy are areas where SAP has a strong story. Most vendors shy away from these topics in their public discussions and keynotes; SAP shouldn’t.

SAP is not the only vendor that needs to be more transparent about pressurized sales tactics and audits. I’m not going to name names here, but if you jotted down a list of vendors with “legacy” install bases who are making cloud revenue transitions under the scrutiny of Wall Street, I’ve heard stories about all of them. Josh Greenbaum is researching that now. I look forward to seeing his published work, and how vendors are stepping up – or not.

SAP was upfront that the SAP Cloud Platform doesn’t fit into this pricing picture yet. SAP is working on that, and looking at options. This article is long enough so I’ll leave that hanging. Finally, some pesky savvy analysts brought up SAP Business One and SAP Business ByDesign, which are now part of the same business unit.

For now, SAP isn’t including either in their indirect access pricing models. We were told this issue has not come up as a widespread problem for either. But those are the kinds of questions you get when you invite a group of analysts/influencers to spend the day with you.

Source

Image Credit

Pixabay via Pexels

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