Perpetual vs Subscription Licensing for SAP

SAP offers two types of software licenses: perpetual and subscription-based. Currently, the perpetual type is the most used type. Over the years, I have seen the emergence of subscription-based licensing in the SAP domain as a more serious contender to the standard perpetual licensing model.

I have witnessed many Organisation begin to consider new subscription-based licensing as they seek to identify the most cost-effective and management friendly licensing model to suit their business.

The new licensing model drastically differs from the perpetual model. In-depth knowledge of both models is needed when strategic decisions need to be taken and when negotiations take place. But what exactly are the differences and how do you choose?

Perpetual vs Subscription

What is the difference?

A perpetual license is an entitlement for an unlimited period of time. With perpetual licenses, the bulk of the investment is made when purchasing the software. At that moment, the fee to acquire the license is paid and the software can be installed on an on-premise basis. Just to be clear: the software license does not include the right to use future releases of the licensed software. This because the perpetual license does not contain access to maintenance and support services. You’ll need a separate maintenance agreement to organize this.

Annual fees, based on a percentage of the value of the software, need to be paid to cover maintenance and support for the licensed software. So, after the initial investment, a yearly recurrent additional cost needs to be taken into account as well.

Key Points

The scope of the software license often covers only a subset of the capabilities of the actually delivered software. Licensees are only entitled to use those capabilities they have actually licensed.

It is very easy for the usage of the software to exceed the functionality purchased if close attention is not paid to what has actually been purchased.

Subscription-based Model

So, what about the subscription-based model then? First of all: with this model, you only have the entitlement to use the software for a specific period of time. During this period, payment is done on a monthly basis. This payment allows you to use the software which is hosted at a remote location. Access to maintenance and support is included in the fee. You don’t need an additional maintenance and support agreement. Of course, since the entitlement is only valid for a specific period, licenses have to be renewed on a regular basis.

What are the advantages of the subscription-based model? Other than some generally well-known advantages (limited IT infrastructure etc.), the new model significantly lowers the barrier for new customers to get started with SAP software because of the low upfront capital cost. For existing customers, the new model gives them an option to transform their SAP licensing model from a capital expense to an operating expense model.

Moving Away From Perpetual Licenses

When moving from the perpetual to the subscription-based model, contract negotiation opportunities with both disappear and new ones arise. The conversion credit for old licenses is one of them. SAP used to give credit when exchanging old software for newer products or when buying more of the same. Buyers will need to transform this well-known mechanism, which lowered the net price of the new investment, into fresh mechanisms applicable to the subscription-based model.

With perpetual licenses, contractual negotiations had to be done well but only once. Tailored terms and conditions, specific or long-term related clauses which needed to be negotiated only once, will now need to be negotiated whenever the entitlement comes to an end. Of course, also here, buyers will need to come up with the appropriate mechanisms to avoid this re-negotiation situation. It will be exciting to see how organisations will work this out together with SAP.

“When moving from the perpetual to the subscription-based model, contract negotiation opportunities with both disappear and new ones arise”

Key Points

Understand the details of both models. Good decisions are possible, only when you understand the details and consequences of each model.

Think strategically and long-term based. Depending on the situation you’re in, and the strategic decisions which were made, one model can be more favourable than the other.

Align your long-term strategy with the appropriate licensing model which may even be a mix of the two with models choosing specifically to the different products or solutions across the estate. Like HR based cloud solutions for example.

Be prepared the change your negotiation strategy when changing the licensing model. As discussed above, the two licensing models request different negotiation strategy. Prepare yourself before you start discussions.

Take away message

Understanding all facets of the two types of SAP software licenses is key. Both the perpetual and the subscription-based model have their advantages.

Buyers need to prepare themselves and need to be wary. Speak to an actual SAP licensing specialist when (re-)negotiating agreements to make sure you get the best commercial deal and the best-fit licensing solution for your business.