Have you heard of the “Adobe factor?” Adobe's successful transition from traditional license sales to a rental model has inspired many software vendors to follow their lead, leveraging the cloud as both a technology and a distribution platform.

The early versions of these pricing systems in ERP and CRM are found mainly in geographic regions where the cloud has wide adoption—so typically, more in North America than in Europe. However, with the high level of "cloud adoption" globally, rental or subscription models have become more common.

But evolution takes no breaks and today SAP announced a new pricing model which is the first of its kind. The German business IT giant will transform its payment model to pricing based on “indirect access.”

AN EASIER AND CLEARER MODEL, says Adaire Fox-Martin, a member of SAP's executive board of SAP SE, Global Customer Operations.

“This new model will make it easier and clearer for customers to use and pay for SAP's software licenses. It also distinguishes directly from human access to software and indirect digital use, while clarifying the licensing, usage and regulatory compliance rules," said Adaire Fox-Martin, a member of SAP's executive board of SAP SE, Global Customer Operations.

“Simpler and clearer,” claims SAP; but do customers agree? Generally, the change seems to have received positive reactions.

LOOKING FORWARD TO FEEDBACK on the continued trip is Geoff Scott, CEO of Americas SAP User Group.

"I think it is commendable to SAP to enter an open and thoughtful dialogue with its customers about licensing. We have made enormous progress in many important areas presented today, and more details and insights will follow in the next few days. I'm looking forward to receiving feedback as we continue this important trip together with SAP,” commented Geoff Scott, CEO of Americas SAP User Group (ASUG).

In the PLM space, Autodesk, Aras and Arena were forerunners, throwing themselves all-in on the cloud. However, companies with more traditional work setups, like PTC, have also come a long way in the transformation of their business.

Moving from the traditional model to a subscription model means that the large initial costs related to perpetual software licenses become redistributed and, in accordance with the rental models, spread out over time. This means that the actual cost depends on the length of the contract.

For users, this has generally meant that initial costs have been lower. However, analysts say that over time, the total cost reverses such that after three or four years on the subscription model, the costs are on par with or even exceed the costs of a traditional licensing scheme.

What SAP’s new disruptive model will bring to the table in terms of costs remains to be seen. It is the first of its kind in the business software market and addresses the challenges many customers have with pricing for indirect digital access.

But what is the difference between direct and indirect access?

Direct human access occurs when people log in to use SAP Digital Core using an interface delivered with or as part of SAP software.
Indirect digital access occurs when devices, bots and automated systems get instant access to SAP Digital Core. This also applies when people, devices or systems indirectly use Digital Core via non-SAP applications, such as custom solutions or third party applications.

IT’S NOT ONLY ABOUT MODERNIZNG PRICING, asserts analyst Ray Wang.

Analysts: The Challenge is to Create Business Value

The actual effect of the new model won’t be clear until it has been deployed on a larger scale. Ray Wang, principal analyst at Constellation Research, believes that the digital transformation has made every organization think about how they create business value for their customers.

“As companies change their business models from selling products to services, from services to experiences and from experiences to results, they also develop their pricing models. Business software vendors don’t only want to modernize their pricing to adapt to a performance-based pricing model. They also want to find models that allow customers to hold on to what they have, gain value for their existing investments and transform their new business models in a way that is fair,” Wang said.

PLM blogger Oleg Shilovitsky’s offered this conclusion in a recent post: “Companies will be innovating their business models to become more competitive and gain traction from customers. Some vendors will push it, and others will follow. Clear identification of consumable units is absolutely important to make it successful, and transparency is key in new business models. From my experience, engineers are sensitive to measurement of their work time, and companies traditionally prefer not to count users and buy site licenses for PLM. It will be interesting to see the business model transforming in the next few years.”

User Group Applauds New Solution

SAP has put a lot of effort into developing the new model in collaboration with its customers. In particular, user groups such as the SAP User Group Executive Network (SUGEN) have been involved. Their response to today's launch is positive—even enthusiastic.

Gianmaria Perancin, chairman of SUGEN and the French User Group (USF), thinks that the new pricing model is a really good idea.

"We applaud SAP’s launching of a new price model that is more transparent and easy for customers' future SAP usage. It needs to be done even more to show customers that the new model is also cost-neutral for their existing uses. Customers need to be assured that they will not receive new license fees, for example, through communications with SAP or ambiguous contractual clauses if they themselves feel that they are properly licensed.”

WE HAVE DEVELOPED A VISION FOR THE FUTURE, together with SAP, said Andreas Oczko, chairman of the German SAP User Group.

The German user group is also sharing positive reactions to the changes.

“The changes in price model, sales, license audit and compliance as SAP presented are the result of intensive workshops and discussions with DSAG. With the help of SAP's Board, we have developed a vision for future indirect use and formulated key elements in the new licensing model. This is an important first step towards removing obstacles to digital transformation. SAP and DSAG will continue to work together for an unprecedented price model for the Internet of Things (IoT),” commented Andreas Oczko, board member of Operations/Service & Support, and Deputy Chairman of the German SAP User Group (DSAG).

“Based on Trust and Openness”

Historically, the traditional model saw most customers pay for SAP's business system based on the number of users. But now, SAP's top management feels that developments in IT have changed these conditions. Adaire Fox-Martin claims that as more systems have access to SAP systems, customers' demand for alternative pricing models has increased.

"SAP is based on trust, empathy and openness to all customers, and that is not changing now when the market and customer demand change. After carefully reviewing processes and procedures for indirect access—and after extensive feedback—we are launching a new and modern engagement model for our sellers, delivering industry-leading clarity. We want to build lifelong customer relationships and will relentlessly continue creating innovations that provide the greatest possible value for all customers," said Fox-Martin.

Division Between License Sales and Auditing

SAP also introduced organizational changes that divide the licensing and auditing departments.

Customers and SAP have sometimes struggled to combine older commercial agreements with new requirements and digital processes. In discussions about purchasing new software, this has sometimes led to frustration.
The new organizational change is intended to allow work on sales and auditing to run independently such that everyone can collaborate more freely.
SAP also plans to offer features that allow customers to measure their use and license utilization on their own.

Through all of this, SAP claims that it has listened carefully to its customers and that the adjustments of price and payment models must occur sooner or later.

"We believe that adaptation was necessary after listening to our customers, especially in these times of digital transformation. By offering a new price and license model, we get greater clarity, predictability and consistency for our customers. I believe these three aspects will encourage our customers to continue investing in digital business models”, said SAP COO, Christian Klein.

The New Offers

So, what does the new model bring to the table? How will it affect customers who want to continue with the existing model?

Generally, the new model includes SAP's digital core, SAP S/4HANA and SAP S/4HANA Cloud. SAP's "classic" ERP solutions are also included.
Existing customers can choose to continue with the current model or switch to the new document-based pricing model—whichever suits them best.
Conversion offers are available to help customers who choose to switch to the new pricing model.

While it is still unclear how these changes will affect SAP’s customers, similar models have been successful in tangential markets. Plus, the fact that an open and earnest discussion about the somewhat labyrinthine licensing schemes of SAP has borne fruit, is already undeniably a good thing.