10 Tips for Negotiating your SAP Contract
Negotiating your SAP contract is not a task to take lightly. If you fail to address indirect risks, you risk running into unnecessary costs and overpaying for the services you use.
Your contract renewal terms will have a major impact on your cost of ownership long-term. Vendors might push for inflexible terms, but you can secure a favorable deal with the right negotiation strategy.
That’s why this guide is here — we’ll break down ten critical steps to get the best possible SAP agreement.
What is SAP?
SAP (Systems, Applications, and Products in Data Processing) is a leading enterprise resource planning (ERP) software provider.
Its solutions help organizations manage business units, financial operations, supply chains, and human resources within a centralized system.
SAP offers cloud infrastructure, on-premise, and hybrid deployment options.
Licensing models vary, covering user types, indirect access, and service level agreements that define response times and technical issues.
Companies rely on SAP for contract management, analytics, and automation to optimize workflows.
Understanding SAP’s pricing models and contractual terms is important if you want to avoid unexpected costs and maximize cost-saving opportunities in your SAP environment.
Why is SAP Contract Negotiation Important?
SAP contract negotiation ensures that your company secures the right license type at the lowest possible unit cost.
Without a structured negotiation process, you risk paying for unused licenses or committing to multi-year commitments that do not align with your business goals.
SAP contracts include service level agreements, indirect access policies, and renewal terms that directly impact your cost of ownership.
Understanding these elements helps you minimize unexpected costs and optimize long-term expenses.
Key Reasons SAP Contract Negotiation Matters:
Avoid indirect access penalties that inflate license fee expenses
Negotiate renewal terms to prevent inflexible terms that increase maintenance costs
Secure cost-saving opportunities by reducing additional licenses
Ensure service level agreements guarantee acceptable response times
Align SAP agreements with future requirements to maintain operational flexibility
Now let’s explore our 10 best tips to negotiate your SAP contract with confidence.
1. Analyze Your SAP License Metrics
Effectively managing SAP licenses requires a thorough analysis of your organization's license metrics. SAP provides tools like the Usage Measurement Program (USMM) and the License Administration Workbench (LAW) (shown below) to facilitate this process.
USMM collects data on user activities and engine usage within individual SAP systems, while LAW consolidates this data across multiple systems to give you a comprehensive view of license usage. Regular use of these tools helps you identify any unused licenses, improve compliance, and optimize license allocations.
Many customers are unaware of indirect access compliance issues, which can lead to unexpected costs. By analyzing license metrics, you can detect such indirect usage and adjust your licensing agreements accordingly. On top of that, regular audits using USMM and LAW can uncover duplicate user accounts, which further reduces any unnecessary license expenditures.
Taking a proactive approach to monitor and analyze SAP license metrics ensures compliance and aligns licensing with actual usage. This practice can lead to significant cost savings and more efficient resource allocation within the SAP environment.
2. Optimize Named User and Package Licenses
Managing SAP licenses involves a strategic approach to both Named User and Package Licenses. Named User Licenses are assigned to individual users based on their roles and access requirements within the SAP system. These licenses can constitute approximately 40% to 70% of the total SAP contract costs, which makes their optimization crucial for cost management.
To optimize Named User Licenses, you need to regularly assess user activities so that license types make sense with actual usage. For instance, users with minimal interaction may only require an Employee Self-Service license, while power users might need a Professional User license (these and other types are shown below). Regular audits can identify inactive or duplicate users, allowing you to reallocate or terminate any unnecessary licenses and reduce costs.
Package Licenses, on the other hand, are based on specific metrics such as the number of employees, orders processed, or annual revenue. Understanding these metrics is vital, as exceeding them can lead to additional fees. By closely monitoring these parameters and adjusting operations accordingly, organizations can avoid unexpected costs and make sure they comply with SAP's licensing terms.
3. Address Indirect Access Compliance
Indirect access occurs when external systems or users interact with SAP data without directly logging into the SAP interface. For instance, if a third-party Customer Relationship Management (CRM) system retrieves customer information from SAP, this constitutes indirect access. These interactions can have significant licensing implications.
A notable example is the 2017 legal dispute between SAP and beverage company Diageo. Diageo integrated its SAP system with Salesforce, allowing customers to access SAP data indirectly. The UK High Court ruled in favor of SAP, with an initial demand from SAP for £54 million which was later settled for an undisclosed amount.
To manage indirect access compliance, SAP introduced the Digital Access Model in 2018. This model shifts licensing from user-based metrics to document-based metrics, focusing on the number of specific documents created or processed through indirect access. Documents include sales orders, invoices, and purchase orders. Transitioning to this model requires a thorough evaluation of current and projected system usage to assess its benefits.
Complying with SAP's indirect access policies involves proactive management and careful monitoring. Regular audits and a solid understanding of all third-party integrations are essential to avoid unexpected licensing fees and ensure adherence to SAP's licensing terms.
4. Negotiate Favorable SAP S/4HANA Conversion Terms
Transitioning to SAP S/4HANA (SAP’s business suite software) is a significant undertaking that gives you an opportunity to renegotiate your existing SAP contracts for better terms. Understanding SAP's licensing models is crucial, as SAP offers two primary approaches for conversion: contract conversion and product conversion.
Contract conversion involves a complete overhaul of your existing agreements, while product conversion focuses on transitioning specific licenses. Evaluating both options allows you to choose the path that aligns best with your organization's strategic goals.
Taking part in early and informed negotiations can lead to substantial cost savings. A proactive approach allows you to take advantage of SAP's desire to migrate customers to S/4HANA, potentially securing discounts or favorable payment terms. Also, understanding the total cost of ownership, including potential expenses related to integration and indirect access, helps avoid unforeseen costs.
It's also important to consider the timing of your migration. Delaying the move to S/4HANA can result in higher costs and resource constraints. A study revealed that 32% of companies migrating to SAP S/4HANA underestimated the total cost, which highlights the need for precise budgeting and forward planning. By planning ahead and negotiating effectively, you can mitigate financial surprises and ensure a smoother transition to SAP S/4HANA.
5. Secure Multi-Year Pricing Protections
Negotiating multi-year contracts with SAP can bring financial predictability and potential cost savings. However, it's crucial to address potential annual price increases that could be embedded within these agreements. For instance, some contracts stipulate a 10% annual increase in list prices over a decade, which can significantly impact your budget.
To mitigate unforeseen expenses, you need to negotiate price protection clauses. These clauses can cap annual price escalations or lock in rates for specific periods, so that your organization isn't subjected to unexpected cost hikes. Implementing such measures provides financial stability and helps with long-term budgeting.
You should also consider the implications of price fetch mechanisms in your contracts. These mechanisms allow for the retrieval of current market prices, which can fluctuate and affect your costs. Understanding and negotiating the terms of these mechanisms can help you manage price volatility and secure more predictable pricing over the contract term.
6. Eliminate Costly SAP Support and SLA Gaps
Managing SAP support costs and ensuring robust Service Level Agreements (SLAs) are critical for maintaining operational efficiency and financial control. In recent years, SAP has increased support fees for on-premises solutions, with a 3.3% rise in January 2023 and an additional 5% increase in January 2024. These adjustments, attributed to inflation and rising operational costs, can significantly impact IT budgets.
The graphic below shows how SAP support fees change according to system type:
To mitigate these expenses, you need to scrutinize existing SLAs. Make sure they clearly define response times, system availability, and support scope. For instance, SAP's standard SLA for cloud services guarantees 99.5% system availability, but this may not suffice for all business-critical operations. Negotiating customized SLAs that align with your organization's specific needs can prevent costly downtime and service disruptions.
Additionally, consider the long-term implications of remaining on legacy on-premises systems. SAP's strategy indicates a shift towards cloud solutions, potentially leading to reduced support and increased costs for on-premises customers. Weighing up the benefits of migrating to SAP's cloud offerings could give you better support options and more favorable SLA terms, ultimately leading to better cost management and service quality.
7. Assess Unused Engine and Add-On Licenses
Effectively managing SAP licenses requires a thorough evaluation of both engine and add-on licenses to identify and eliminate unnecessary expenditures. SAP engines are specialized modules that perform specific functions, such as SAP Payroll Processing, which is licensed based on the number of master records, or SAP E-Recruiting, which depends on the number of employees.
These engines often come with distinct metrics, and their usage can significantly impact licensing costs. Regularly reviewing these metrics helps make sure that your organization is not over-licensed or paying for underused engines.
A KPMG case study involving a media and entertainment company revealed that over 30,000 users had incorrect license types assigned, which led to potential compliance issues and unnecessary costs. By analyzing their SAP user population and adjusting license allocations accordingly, the company optimized its licensing estate, mitigated significant risks, and established a framework for proactive license management.
To help with this process, tools like SAP's System Measurement (USMM) and License Administration Workbench (LAW) can be used to collect and consolidate license data across multiple systems. Additionally, third-party solutions such as samQ License Optimizer automate license distribution based on actual usage and authorizations, ensuring a compliant and cost-effective SAP landscape.
Implementing these tools allows organizations to continuously monitor license utilization, identify unused or underused engines and add-ons, and make informed decisions about license reallocation or termination, ultimately leading to significant cost savings.
8. Align SAP Contracts with Business Expansion Plans
Lining up your SAP contracts with your company's growth strategies helps ensure that your software infrastructure supports and scales with your business objectives. This alignment involves anticipating future needs and negotiating terms that give you flexibility and cost-effectiveness.
One effective approach here is to negotiate bundled discounts when planning to expand your use of SAP solutions. For instance, if your business intends to adopt additional SAP modules or transition to SAP S/4HANA, securing a bundled package can result in significant savings compared to purchasing each component separately. This strategy is particularly advantageous for companies moving into cloud services or upgrading their existing SAP infrastructure.
It’s also important to incorporate scalability and growth forecasts into your SAP licensing strategy. By predicting future business requirements, you can negotiate licensing models that allow for seamless scaling. This proactive approach means your SAP environment remains adaptable and supports your long-term business goals without the need for frequent and potentially costly contract renegotiations.
9. Streamline Non-Coterminous SAP Environments
Managing multiple SAP contracts with varying renewal dates—known as a non-coterminous environment—can lead to administrative challenges and missed opportunities for cost savings. In fact, this can lead to a loss of 10-20%.
Each contract may have different terms, pricing structures, and expiration dates, making it difficult to maintain a cohesive licensing strategy. This fragmentation often results in inefficient license utilization and increased administrative overhead.
Consolidating these contracts into a single, coterminous agreement aligns all renewal dates, simplifying management and giving you more negotiation leverage with SAP. A unified contract structure allows for a clearer view of your SAP investments and drives better compliance tracking and more strategic planning.
This also allows the organization to negotiate more favorable terms, as the consolidated contract represents a larger volume of business. This approach streamlines administrative processes and positions the company to secure better pricing and service conditions.
To achieve this consolidation,you need to conduct a thorough audit of all existing SAP contracts and licenses. Identify overlapping services, underused licenses, and discrepancies in terms. Engage with SAP representatives to discuss the potential for merging contracts and aligning renewal dates. This proactive strategy will lower complexity while boosting operational efficiency and can lead to significant cost savings over time.
10. Tap Into SAP Competitor Quotes for Discounts
Enterprise Resource Planning (ERP) solutions share a competitive world, and SAP faces strong competition from companies like Oracle, Microsoft Dynamics 365, and NetSuite. You can see more examples here:
These alternatives often provide comparable functionalities, sometimes at more attractive price points. For instance, NetSuite offers cloud-based ERP solutions starting at $999 per month, which can be more cost-effective for certain organizations.
When negotiating with SAP, obtaining detailed quotes from these competitors can serve as a powerful bargaining tool. Presenting alternative offers demonstrates to SAP that you have viable options and can potentially motivate them to offer more competitive pricing or more favorable terms to retain your business. This strategy is particularly effective if the competitor's solution aligns closely with your organization's requirements and provides you with genuine alternatives.
Timing your negotiations can further increase your leverage. Engaging with SAP towards the end of their fiscal year, when sales teams are eager to meet targets, can increase your chances of securing favorable discounts. Combining this timing with competitive quotes can put you in a strong position to negotiate terms that meet your budget and operational needs.
Common Mistakes When Negotiating Your SAP Contract
Getting a good deal with your SAP contract isn’t always a walk in the park. Let’s take a look at some common mistakes and challenges here and how to steer clear of them.
1. Inadequate Preparation and Early Engagemen
Failing to prepare thoroughly and engage early in the negotiation process can lead to unfavorable contract terms. It's best to start planning at least 6 to 12 months before your contract renewal.
This timeline allows for a proper assessment of your current licensing needs, identification of cost-saving opportunities, and the development of a strategic negotiation approach. Early engagement also gives you more leverage and allows you to avoid rushed decisions and secure terms that align with your organization's objectives.
2. Overlooking Indirect Access Implications
Indirect access occurs when third-party applications interact with SAP systems, potentially leading to additional licensing fees. Many organizations fail to account for these interactions, which results in unexpected costs and compliance issues. To avoid this, thoroughly assess all systems that interface with SAP and find out how data is accessed and utilized. Implementing clear policies and monitoring mechanisms can help manage and mitigate indirect access risks.
3. Accepting Standard Contracts Without Negotiation
SAP's standard form contracts often contain terms that heavily favor the vendor, including unreasonable user restrictions, limitations of liability, and insufficient warranties. Accepting these contracts without negotiation can lead to significant operational and financial challenges. Make sure to meticulously review all contract provisions and negotiate terms that provide flexibility, clear accountability, and alignment with your business requirements. Engaging legal and industry experts during this process can ensure that the contract serves your organization's best interests.
4. Neglecting to Align Contracts with Business Objectives
A common pitfall is failing to ensure that SAP contracts support the organization's long-term business goals and expansion plans. Without this alignment, companies may find themselves constrained by inflexible terms that hinder growth or require costly modifications. To prevent this, integrate scalability and future requirements into the contract, allowing for adjustments as the business evolves. This approach drives operational flexibility and cost efficiency.
5. Underestimating the Importance of License Optimization
Many organizations make the mistake of not regularly auditing and optimizing their SAP licenses, leading to overpayment for unused or underutilized licenses. Named User Licenses, for example, can account for a significant portion of total SAP contract costs. Assigning high-cost licenses universally without assessing actual user needs can result in unnecessary expenses. Conducting periodic reviews and aligning license types with user roles and activities helps with cost-effectiveness and compliance.
Wrapping Up
Navigating SAP contract negotiations is a tricky endeavor but it pays dividends. Each decision shapes your organization's operational efficiency and financial health. Take some time to reflect on your current strategies: Are they really aligned with your long-term business objectives?
Think about the potential impact of overlooked contract terms on your future growth. Proactive and informed negotiation isn't just advantageous, it's essential. How will you take advantage of this opportunity to secure a contract that propels your organization forward?
