As enterprises adopt cloud technology and “as-a-service” applications, many often struggle to manage the transition from traditional on-premises IT infrastructure. Most IT organizations have significant investments in legacy IT infrastructure, and these systems often support mission-critical business processes. CIOs and IT managers can be reluctant to retire these systems – not just because of the resources invested in the technology, but also because of the complex and tedious process of transitioning to new products for critical business processes; especially in dealing with application integration which is made more challenging in a cloud to on-premise construct. As a result, the most common deployment model is hybrid in nature with certain "arms length" applications extensions (compensation management, indirect procurement as examples) running on the cloud and base ERP platforms running on premise.
Software providers are also struggling with this transition. Virtually all software vendors are at various stages in how they build, sell, and deliver their products. It is very challenging for companies with ingrained business models to move to new approaches. They must respond to market and customer pressures by offering cloud subscription approaches, but must be cognizant of organizational limitations and shareholder expectations which dictate the rate and extent of change. Most software companies are hoping that their cloud services offerings will bring in net new customers, however, companies such as Microsoft and SAP with large install bases are helping existing customers to chart a path to their cloud offerings. Over the past two months, SAP has made several announcements regarding changes to its licensing and maintenance policies for customers looking to transition from traditional on-premises IT systems to newer technologies, including cloud offerings, mobile platform and in-memory data systems. Key announcements include the following:
License/maintenance transition to cloud
In July 2013, SAP announced a new program for customers interested in transitioning from traditional, on-premises SAP implementations to new SAP "as-a-service" software solutions. Based on existing investment in SAP software, customers can reallocate elements of their installed on-premises solutions to the corresponding cloud solution from SAP. The program allows customers to replace their on-premises license and maintenance fees with a cloud subscription, assuming an equivalent or expanded investment in SAP cloud applications. These cloud offerings include technology from Ariba, SuccessFactors and Business ByDesign, and require a 5 year contract. As long as customers do not transition all of their SAP implementation to the cloud, the SAP cloud applications and any remaining on-premises SAP software can be fully integrated both from a support and an operational perspective.
This new program should help address concerns that customers of on-premise HCM and SRM have had with regards to the Ariba and Success Factors acquisitions. Because SAP offers HCM and SRM in the core ERP, many customers were upset because they thought (correctly) that planned enhancements to the core products would be shifted (or already in) to the SaaS applications. The feel like they were paying maintenance in anticipation of these enhancements and were now being asked to subscribe to something new. By allowing customers of on-premises ERP to shift licenses for HCM and SRM to the cloud, SAP is providing a more reasonable path to these capabilities.
License/maintenance transition to newer SAP technologies
As a follow-up to the July announcement, in August 2013 SAP announced an expansion of the cloud extension program. SAP customers can now replace their on-premises license and maintenance fees with a select set of new SAP solutions, including the SAP Mobile Platform and SAP HANA in-memory database. SAP has designed this program for customers looking to evolve their on-premise installations by replacing products they no longer intend to use with newer, updated SAP technologies. This program allows customers to retire licenses and maintenance fees for the components of the SAP landscape that customers want to migrate off of. Customers looking to take advantage of these transition scenarios should anticipate specific, tailored discussions with their SAP account team. There are no standard offerings as part of these programs. As a result, SAP customers will have to negotiate a customized replacement plan, depending on their current SAP investment and desired migration to new SAP technology. In addition, it's important to remember that customers will only be able to partially terminate existing license and maintenance obligations as long as the new investment will meet or exceed the original investment.
IDC believes that these new programs could be attractive for customers looking to transition from existing on-premises legacy SAP applications to SAP cloud products and new SAP technologies. These two programs can be useful for customers looking to move to the cloud at a slower or customized pace, without a drastic shift in providers or technologies - and potentially offering an easier transition from on-premises to cloud. Customers have the option of some on-premise, some cloud, and some new technologies - a more flexible procurement scenario than other software vendors have proposed. IDC expects most enterprises will pursue a hybrid strategy for the foreseeable future, so multiple license and deployment options will remain important, as will be mechanisms for transitioning in and out of these approaches.
Additionally, IDC believes that these programs can benefit customers looking to stay with SAP as a primary application provider for their IT landscape. There can be significant challenges associated with moving from on-premises implementations to cloud solutions, especially around the integration required with legacy systems and data sources. SAP has the opportunity to offer tailored services for customers migrating from existing SAP applications to SAP cloud offerings as part of these programs, potentially making the migration easier and faster.
However, IDC also anticipates that SAP will face some challenges as customers explore these new programs. In the case of both announcements, the lack of specific examples and detailed license/maintenance swap possibilities can leave customers guessing about how these new scenarios might apply to their IT landscape. While it's true that many details will depend on individual customer environments, SAP will have to carefully analyze each customer scenario to ensure a fair and accurate swap and transition. SAP might also consider publicizing some examples and potential swaps after customers have gone through the program for 6 months or so.
Potential Pricing Implications
There are some fundamental truths about licensing that have become more apparent as customers have recognized the cost and efficiency benefits of cloud-based services. While a lot of the discussion about cloud and software licensing focuses on subscription and pay-per-use models, the fact is that many customers have already invested in perpetual license assets and would like to take advantage of the cost savings of shared infrastructures.
SAP's approach allows customers to move to the cloud in a way that protects their investments in perpetual licenses. This will address the concerns of those customers that have existing assets that they would like to transition to the cloud. It also may help those customers and prospects that are trying to decide which licensing and deployment model they should invest in. SAP's new approach may make that decision-making easier by providing a future migration path to the cloud for those that aren't ready to take that step today.
However, one of the key reasons that companies choose cloud services over on-premises software is the cost savings associated with cloud. These savings come in part from the ability to eliminate or avoid the costs associated with the running the software on-premise. These costs can be significant, although the savings to the customer varies significantly. In addition, there is the expectation that cloud services are priced lower than their perpetually licensed counterparts. This expectation is typically met; most cloud services are priced lower than perpetually licensed equivalents. (For more detail, see Managing Business Model Transitions in the Software Industry, IDC #243075, September 2013).
SAP's approach assumes that the customer will actually expand their investment with SAP as they move to the cloud; SAP sees this as a fair share of the mutual benefits. Customers may not see it quite this way; most software providers are finding that pricing expectations are being dictated in the broader market by pure-play competitors. These competitive alternatives have become more function-rich over the years and have started to gain traction with enterprise clients.
SAP customers that take advantage of this new program will have access to innovative cloud modules which they can migrate to at their own pace. They can reallocate their existing perpetual licenses to the Cloud- but only if they continue to pay as much in cloud subscription as they are currently paying in maintenance. The customer has to sign a 5-year contract-- which is EONS in Cloud years---and at the end of that term has to re-up or they have no rights at all to the technology.
SAP's stated goal with this initiative is to provide customers with choice and flexibility. However, at the same time, SAP appears to be having its cake and eating it too. SAP gets to shift customers to the cloud without cannibalizing perpetual license or maintenance. Customers get to move to the Cloud but will continue to pay as much if not more than they already paid in maintenance to SAP-- their only savings comes from their ability to reallocate resources now that SAP is running their software.
IDC Industry Insights recommends that companies meet with their SAP account management team to explore their options, particularly if they are looking at human resources, procurement, mobility, or e-commerce. Further, enterprises should look for overall cost relief based on their existing forward looking investment plans, not on their existing cost structure. Any five year commitment should come with the ability to provision new users (above the minimum) in a predetermined and flexible way. Viewed in this manner, we expect most firms to see long term benefit.