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A Closer Look at SAP's "New Route to the Cloud"

by Marc Mosca

August 26, 2013

Marc Mosca, Research Analyst, Wellesley Information Services

Susan Galer’s August 6 post on Forbes’ BrandVoice provided SAP’s first detailed, public view of its recently announced cloud initiative for on-premise license-holders. The path, or extension model, allows customers to “reallocate investments to the respective cloud solutions from SAP, replacing the affected on-premise license and maintenance with a cloud subscription.”

This move has generated some discussion among SAP-watchers and in the Enterprise IT blogosphere, and there is perhaps some value in considering what this means for the future of SAP’s maintenance agreements and the CRM, HCM, and SCM on-premise modules.1

Beyond the theoretical debate, however, two features in the marketing surrounding SAP’s announcement immediately stand out and are perhaps more relevant to the IT decision-maker. The first is the initial statement in which SAP notes that it plans to grant extensions on a case-by-case basis. This statement is commendably transparent with respect to process, but the lack of certainty seems a strange addition to the announcement of a major initiative. The second notable feature is the continued use of forward-looking metaphors and language to describe the actual re-allocation solution. Though most commentators continue to call the solution a “swap,” SAP refers to the agreement precisely in their official statements as an “extension.” 

Dennis Howlett explains these features in his August 7 piece, “Understanding SAP’s New Cloud Extension Rules.” SAP is utilizing linguistic nuance to describe a solution that, while progressive, imposes several qualification criteria on the license-holder and so requires that the holder make a strategic trade if they wish to enter into the new agreement. Most notably, SAP’s general eligibility criteria “assumes an expanded investment with cloud solutions from SAP” and sets the contract term for new cloud subscriptions at five years. Thus, this is not a “swap” in the sense most commentators have used the word. A company’s move from on-premise licensing and maintenance to a cloud subscription is, in fact, an extension of its engagement with SAP and an expectation that the engagement will increase over time. Howlett also notes that SAP requires a license audit be performed no more than six months prior to the extension request and that SAP reserves the right to conduct additional audits after the extension is adopted.

The “New Route to the Cloud” minimizes overall financial risk to companies considering a migration as it allows them to adopt SuccessFactors, Ariba, Hybris, and SAP’s other cloud-based solutions in the near term without some of the limits imposed by their current licensing agreement. However, adopting this strategy will require customers to fully understand how their current system and future plans align to both SAP’s criteria for eligibility and the implied long-term engagement and investment. This may not match the colloquial definition of “swap” as it is used by commentators, but in presenting the option for long-term commitment and cost-stability in place of near-term market uncertainty, SAP’s cloud extension program certainly carries the sense of a swap, or more accurately, a forward contract for IT decision-makers seeking to gain visibility into future costs during this period of rapid change.

More:

SAP Maps Out Fast, Flexible Route to Cloud for Customer Innovation [Forbes]

Understanding SAP's New Cloud Extension Rules [Diginomica]

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1Is there? Here you can read Dennis Howlett on the general excitement surrounding licenses this summer. SAP is fairly upfront about the fact that these new options may not result in any real economic benefit for many of their customers. If so, the rate of change in the "mix" of revenues for the company seems likely to remain steady, rather than accelerate above current forecasts.

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