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Customers looking for alternative SAP pricing models

Some customers are pushing SAP to consider alternative pricing models as a way to cut costs, such as basing licenses on consumption. SAP says it’s given some thought to the idea.

Some customers are calling for alternatives to traditional SAP pricing models, such as consumption-based models in which companies pay only for how much they use their SAP software.

One of those is Don Whittington, chief technical officer for Florida Crystals, a maker of sweeteners and sugar substitutes based in West Palm Beach, Fla.

Whittington pointed to virtualization and cloud services provider Virtustream, which touts a consumption-based option for customers, as an example of where traditional payment structures are changing. VMware, another virtualization vendor, is also reportedly flirting with giving customers the same kind of choice. Perhaps the same could apply to SAP on-premises applications, Whittington said, adding that SAP licensing issues can sometimes become an obstacle to faster deployment.

“The perpetual nature of the old model -- it’s somewhat monolithic -- is that you put it in place and you use it for a number of years. I think as we move into a virtual environment, it will be more of a try and buy [format],” Whittington said. “So you can bring it up, host it, and if you like it, then you keep paying. Then you would pay as you go. It’s more of a consumption-based model. If we’re using it, we pay, and when we stop using it, we stop paying. If we use more, we pay more.”

And Whittington isn’t alone. It’s something that other SAP customers have expressed frustration over -- given the perception that the software is too expensive compared with how much they’re using it, according to Duncan Jones, an analyst with Forrester Research Inc., based in Cambridge, Mass.

“They don’t feel like they’re getting full value for money,” Jones said.

Could consumption-based SAP pricing work? 
The problem is that alternative, consumption-based SAP licensing models are harder to construct than they sound, according to Jones. Though paying for actual usage per user as opposed to more traditional licenses can sound attractive, it has a number of downsides, he said.

Users may feel reluctant to use the system they’re supposed to be using to do their work if they know every minute they spend using the system is affecting the company’s bottom line, Jones said. “You feel like every time you log into SAP, you’re going to be charged a dollar a minute, and think ‘I won’t actually do this task in SAP; I’ll actually create something on the side, some kind of Excel spreadsheet.’ So, in a way, you’re discouraging use of the system. It could stimulate negative behavior, counterproductive behavior.”

One option that customers often gravitate to is the “concurrent user” approach in which a given number of users can access the system at any one time. But that, too, has flaws, Jones said.

“My experience with concurrent users is that it’s a nightmare,” he said. “If everyone happens to log in at the same time, half the people can’t get in. We see silly situations where people are coming in early to log on to the system before everyone else starts work; otherwise, they can’t get in or they’re staying logged in even when they’re not using the system.”   

That contradicts users needs -- and preferences -- for a system they don’t have to log in and out of, Jones said. “We want ‘always on,’ ” Jones said.  

Jones suggested that companies focus more on getting the right number of the right kind of SAP licenses and making sure employees are getting the most out of the system.

“Have that as a one-time discussion about the kind of business you are and the way you want to use SAP,” Jones said. “Rather than having something that’s measuring actual [usage] that creates a huge data-gathering exercise.”

Gateway: A hybrid model
While many acknowledge that SAP would be loath to forgo up-front on-premises license revenue in favor of something paid out over time, SAP Gateway is one example in which SAP has switched to consumption-based pricing, at least to a degree.

Gateway is an open-standards-based framework that developers can use to more easily connect non-SAP applications to SAP applications. It also makes it easier to access SAP applications from mobile devices.

Going with a consumption-based model for using Gateway makes sense, according to John Appleby, a business analytics and technology capability lead at Bluefin Solutions in London. In that case, you could have thousands or millions of customers from outside a company’s ERP system accessing data within the system. Appleby cited the example of a utility company’s customers accessing the system to get utilities reports, he said. Licensing all those customers doesn’t make any sense, he said.

“With Gateway, [companies] pay by usage,” Appleby said. “I suppose they’re already there for that group.”

But even that model relies on licenses, according to Joe LaRosa, vice president of revenue strategy and pricing at SAP. With Gateway, companies license a certain number of transactions within a period of time and purchase a license for another set of transactions if they reach their original number before the time is up. 

“It’s kind of a hybrid,” LaRosa said. “It’s not really pure consumption-based model.”

What does SAP think? 
SAP acknowledges at least some customers are interested in pursuing alternative, consumption-based pricing models, according to LaRosa.

“It is something that comes back to me from our account executives, from our contracts and legal department, or from talking to customers. To be honest, it ebbs and flows,” LaRosa said.  

The idea has some merit, he said, but some company chief financial officers are reluctant to embrace the idea because of the potential that costs could vary widely from month to month, making forecasting and budgeting difficult.

“There seems to be the potential concern, especially from the CFOs, that they really don’t want to be signing up for a ‘blank check,’ ” LaRosa said.  “Now all of a sudden the CFO is faced with much higher bills than he thought he was going to get, then he’s off on his budget, and he doesn’t look good to anybody.”

Charging according to usage might make sense if the pool of users is fairly limited -- as opposed to spread out across departments and geographies, making the potential for usage fluctuations even greater -- and if usage fees are somehow capped by the company without limiting employees’ ability to get work done. That kind of structure would also have to be fair to SAP as well as the company, LaRosa said.

That’s a lot of ifs. But is it something that SAP is working on or might become an option for its customers in the future? It’s something SAP has discussed in very general terms, LaRosa said, “but I don’t see us making a significant change to our application licensing model anytime soon.”

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