Choosing the Right SAP License Model
Introduction: Deciding between a perpetual license, a subscription, or a consumption-based model for SAP software is a strategic decision. The goal is to align the licensing approach with your organization’s financial preferences, technology strategy, and business plans.
No single model is universally best – the “right” choice depends on multiple factors and may even be a mix of models.
Below, we outline key considerations and a framework to help choose the optimal SAP licensing model.
Key Considerations
When evaluating SAP license models, consider the following dimensions:
- Budget and Cash Flow: Determine if your company prefers upfront capital expenditure or ongoing operational costs. Perpetual licenses require a large CapEx outlay (plus annual fees), whereas subscriptions or consumption models spread costs as OpEx. If the capital budget is tight or you want to avoid a big one-time hit, subscription/consumption can be attractive. Conversely, a perpetual purchase might yield lower TCO if you have a budget now and want to minimize long-term expenses.
- Cost Predictability: How important is a predictable budget? Subscriptions offer fixed recurring fees (predictable yearly costs), while consumption-based costs fluctuate monthly. Perpetual with maintenance is relatively predictable, but you must plan for periodic hardware refresh or upgrade projects. Organizations averse to cost variability might lean toward subscriptions for stability, or perpetual if the maintenance is steady. In contrast, those that can tolerate variance for potentially lower costs might use consumption-based for flexibility.
- Usage Duration and Horizon: Consider your time horizon for using the software. Owning a perpetual license can be cost-effective if you plan to use a system for a long period (say 7- 10+ years) without major change. Suppose the software is needed only for a project, or you expect to overhaul your landscape in a few years. In that case, a subscription or consumption model avoids sinking cost into a perpetual asset you might not fully utilize.
- Growth and Scalability: Anticipate how your usage might grow or shrink. A fast-growing company (or one with variable demand) may benefit from the flexibility of subscription or consumption licensing – you can start small and expand users or usage as needed. Perpetual licenses are less flexible; if you outgrow your licenses, you must buy more, but if you downsize, you can’t easily get costs back. For uncertain growth, a consumption model provides maximum flexibility (pay only for what you use), though potentially at a higher unit cost. You might negotiate better rates for stable or predictable growth with a larger upfront commitment in either model.
- IT Infrastructure and Control: Evaluate your desired level of control over the system and the availability of IT resources. Perpetual licenses typically go hand-in-hand with on-premise deployment (or customer-managed cloud), giving you full control over infrastructure and upgrades. Choose this if you have a capable IT team and need to control the timing of changes. Subscription usually means a cloud SaaS solution (especially with SAP’s offerings like S/4HANA Cloud) where SAP manages the infrastructure. This is ideal if you want to offload maintenance and are comfortable with the vendor controlling the environment. A subscription is likely more suitable if your organization has a cloud-first mandate or lacks a large IT staff. On the other hand, if you have strict data residency, customization, or integration needs that favor on-premise, a perpetual license might be necessary.
- Risk and Compliance Management: All models require license compliance, but the nature of the risk differs. With perpetual licensing, you are responsible for tracking usage (users, engines) and can be caught in an audit if usage exceeds entitlements. Subscription models include defined entitlements (e.g., number of users or consumed resources). Still, since SAP manages more of the service, some compliance aspects (like indirect usage) might be less of a surprise, though you still must ensure you don’t exceed contract terms. Consider your organization’s ability to govern usage. If you have mature software asset management processes, perpetual and consumption models are manageable; if not, a straightforward subscription with clear limits might reduce audit worries. Also factor in the risk of vendor lock-in: with subscription or cloud, once you commit, switching away can be challenging (data extraction, process change). Perpetual gives you more freedom to pause maintenance or switch support to a third party if needed, albeit you remain on SAP software.
- Strategic Alignment: Align the decision with your broader IT strategy and business objectives. For example, if your company strategy is to move everything to the cloud and adopt SaaS, then opting for subscription licensing (or RISE with SAP for a bundle) fits that direction. Owning licenses and systems might align better if cost ownership and building internal competencies are strategic (perhaps for a competitive advantage or compliance reason). Additionally, consider how each model affects your balance sheet and KPIs: some firms prefer subscriptions to avoid capitalizing software, while others might prefer an asset on the books.
In summary, “choosing the right licensing model depends on factors like budget flexibility, infrastructure strategy, business growth plans, and the level of control needed over software usage”. It’s wise to weigh these criteria holistically rather than focusing on one aspect.
Read Named User vs. Engine Licensing in SAP.
Decision Framework
To decide on a model, follow a structured approach:
- Gather Requirements: Outline what SAP products and capabilities you need, the expected number of users, and any performance or integration requirements. Note any non-negotiables (e.g., data must reside on-premises or be accessible globally via cloud).
- Forecast Usage and Growth: Estimate usage metrics for the next few years, such as the number of users, transaction volumes, etc. Engage IT and business stakeholders to project high and low scenarios (for instance, best-case sales growth vs. worst-case). This will inform cost projections for each model.
- Compare Cost Scenarios: Work with SAP or a licensing expert to model the total costs of each option over a multi-year period (at least 5 years, maybe 10). Include license fees, maintenance or subscription fees, required hardware (for on-prem), and related operational costs. For consumption models, consider a range (if usage is 20% higher or lower than expected, what happens to the cost?). This TCO analysis is critical – often subscriptions look cheaper in years 1-3, but perpetual can win out over a longer period.
- Assess Intangibles: Some factors are not purely monetary. Rate each model on things like:
- Flexibility: How easily can you scale or adjust? (Consumption usually scores highest, perpetual lowest.)
- Vendor Dependency: Are you comfortable being tied to SAP’s cloud services, or do you need the option to run independently (perpetual licenses)?
- Innovation: Subscription and consumption models might give quicker access to new SAP innovations (e.g., new cloud features), whereas on-prem might lag until you upgrade.
- Support Timeline: SAP has announced end-of-maintenance dates for on-prem products (e.g., ECC support until 2027). SAP continually updates subscriptions (like S/4HANA Cloud). Ensure the model you choose will be supported for the required timeframe.
- Consider a Hybrid Approach: The decision doesn’t have to be all-or-nothing. Many organizations use perpetual licensing for some systems and subscriptions for others. For instance, you might keep your core ERP on-premises (perpetual) for now, but use cloud subscriptions for new modules like SuccessFactors or Ariba. Or vice versa: move core to subscription cloud but keep certain satellite systems on a usage-based model. Ensure your evaluation covers whether a mix of models yields a better outcome (and whether your organization can manage that complexity).
- Negotiation and Transition: Plan the negotiation or transition once you lean toward an option. Investigate SAP’s conversion programs and incentives if moving from ECC to subscription (like converting ECC licenses to a RISE with an SAP contract). If choosing consumption, negotiate initial discount tiers or a pilot period. If buying perpetual, consider locking in pricing for future expansions. The model chosen can influence negotiation leverage—for example, SAP may offer incentives for cloud subscriptions as they encourage that shift.
- Review and Adjust Over Time: Your decision now should be re-evaluated periodically. Business conditions change – for example, three years into a subscription, you might realize your usage is very stable and higher than expected, making a case to switch to a perpetual model or a larger subscription with better unit pricing. Or vice versa, perhaps a perpetual license isn’t being fully used, and a shift to consumption for that component could save money. Build in checkpoints (say, before renewal periods or major upgrades) to revisit the model decision.
Read Pros and Cons of Each SAP License Model.
Conclusion
Selecting the right SAP licensing model is a multi-disciplinary decision. It requires input from finance (for budget impacts), IT (for infrastructure readiness and skills), procurement, and business leadership.
You can develop a licensing strategy supporting your organization’s goals by carefully weighing cost implications, flexibility needs, risk tolerance, and strategic direction.
Remember that what’s right for one company might not be right for another – your industry, growth stage, and internal capabilities influence the optimal choice. Ultimately, the best model delivers the needed SAP functionality at the lowest risk and total cost of ownership over your planning horizon.
