Cost Drivers in SAP Engine Licensing
Cost Drivers in SAP Engine Licensing
SAP engine licenses can represent a significant portion of an enterprise’s SAP spend, and their costs can escalate rapidly if not managed. Make sure to read our SAP Engine Licensing Overview article for insights.
Unlike fixed named-user licenses, engine license costs scale with business usage, meaning that as your business grows or changes, so do the fees.
This article explores why SAP engine licensing costs may unexpectedly increase and the factors that drive these fluctuations.
We will also explore strategies to anticipate future cost drivers, assess licensing risk, and create buffers in your budget and contracts.
Understanding these cost drivers – from organic business growth to technical changes – enables IT leaders to plan effectively and avoid budget surprises.
We’ll illustrate examples where costs tend to spike (such as for SAP Payroll, HANA database runtime, and SAP CRM) to ground these concepts in real scenarios.
Business Growth and Volume Expansion:
The most straightforward cost driver is growth in the underlying metric on which an engine is licensed. If your business metric increases, you may outgrow your current license entitlement and need to upgrade to a more comprehensive one.
For example, consider SAP Payroll Processing, which several employees have licensed.
If a company’s headcount rises from 8,000 to 12,000, and its license was for up to 10,000 employees, it must buy an additional Payroll engine volume to cover the extra 2,000 employees.
This growth might come from hiring, M&A, or expansion into new regions, but the result is the same: more employees processed, resulting in higher costs.
Similarly, engines licensed by transaction volume (such as orders or invoices) will experience cost increases as business throughput increases.
A retailer using SAP Global Trade Services (licensed for several trade documents) will incur higher fees as its import and export transactions increase annually.
Even success stories, such as doubling sales revenue, can trigger higher costs if an engine is tied to revenue or sales volumes (for instance, SAP’s Incentive Administration or certain CRM sales engines might scale with revenue or the number of sales transactions).
To manage this, organizations should incorporate license scaling into their growth forecasts. If your strategy calls for doubling business volume in 3 years, proactively model what that means for SAP engine licenses, and ideally negotiate pricing or tiered increases in advance.
Many companies are caught off guard because the license cost doesn’t remain static, unlike the business itself.
Essentially, engine licenses turn certain business KPIs into IT costs. Whenever those KPIs (such as headcount, order count, and revenue) increase, a portion of the gain must be allocated to larger license entitlements.
Read Avoiding SAP Engine License Overuse.
System Expansion and New Implementations:
Beyond organic growth, deliberate IT and system changes can drive new engine costs. Deploying additional SAP functionality often means licensing new engines or expanding existing ones.
For example, a company running only core ERP decides to implement SAP CRM to improve sales processes – this is a new engine (or set of engines) that adds to the overall license cost.
Or, an organization activates SAP Extended Warehouse Management (EWM) to manage distribution centers. If they were previously just using basic warehouse management, this introduces an engine license measured by warehouse volume.
Another scenario is geographic expansion: rolling out SAP to new subsidiaries or plants can increase engine usage.
Perhaps you start using SAP Material Ledger (an engine for actual costing) in more plants as you expand manufacturing—suddenly, your material ledger documents double, and you need more capacity.
Identifying these projects early and assessing licensing needs as part of the business case is important.
One particularly challenging area is SAP S/4HANA upgrades, as transitioning from ECC to S/4HANA can alter how certain engines are licensed or introduce new ones.
For instance, S/4HANA has some embedded functionality (such as basic EWM or TM, as discussed earlier), but if your usage exceeds the embedded scope, you’ll need the full engine license.
We’ve seen cases where companies assumed certain capabilities were “included” after migrating to S/4, only to be told later that they needed an additional license for full use (e.g., advanced warehouse or transportation features).
Each new module or system integration (such as adopting SAP Process Orchestration or adding SAP BW/4HANA for analytics) can be a separate engine with its metric (documents, data volume, etc.), thereby adding to the cost.
Therefore, system expansion needs a licensing impact assessment.
Make it standard procedure that any SAP project (new module, new integration, major increase in user count) includes a review of which engine licenses are affected.
This allows you to include potential license fees in the project budget or negotiate them beforehand rather than being billed unexpectedly at the next audit.
Read Measuring Usage for SAP Engine Licenses.
Indirect/Digital Access and Integrations:
Integration with third-party systems is a known minefield in SAP licensing.
The infamous 2017 court case involving Diageo highlighted how allowing a non-SAP front-end (Salesforce) to indirectly create SAP transactions led to a multi-million-pound license claim for SAP CRM and SAP ERP engines.
Third-party or custom applications can drive use of SAP functionality behind the scenes (so-called indirect usage).
For example, an e-commerce website that is not directly integrated with SAP might still create sales orders in SAP ECC. Those sales orders count towards your engine metrics (such as SD documents) or trigger the need for SAP’s Digital Access document licenses.
If these indirect channels greatly increase transaction volume, you might exceed your license limits.
SAP introduced the Digital Access model to address this. Instead of requiring a named user for the external system, it allows licensing by document (such as multiple orders or invoices created by external systems). However, if your digital channels take off, you will likely see a cost spike in document licenses.
Consider SAP CRM again: suppose you integrate a call center system that dumps thousands of new customer contacts into SAP CRM. If SAP CRM’s license metric (in your case) is something like several customers or interactions, you will suddenly have a surge.
Another case is that integrating IoT devices that feed data into SAP Plant Maintenance could generate numerous maintenance notifications (an engine metric). Indirect access issues occur when usage originates outside the direct SAP GUI.
To mitigate cost surprises, companies should strictly govern integrations, ensuring that any data coming into SAP is accounted for in the license terms.
Use SAP’s estimation tools to quantify the creation of digital access documents. When considering a move to S/4HANA, assess whether switching to document-based licensing is economically viable given your usage patterns.
In some contracts, SAP might offer a certain number of free documents to encourage adoption of Digital Access, but beyond that, it’s chargeable. Architectural decisions (such as consolidating processes into SAP versus external systems) can thus have a licensing cost dimension.
The strategy should involve IT architecture and licensing teams to select an approach that meets business needs while minimizing undue licensing costs.
For example, some companies might offload certain high-volume processes to avoid the expense of using SAP engines. In contrast, others bring everything into SAP for integration benefits and accept the associated costs.
Performance and Technical Upgrades:
A subtle cost driver can be technical. SAP’s engines scale not only with business activity but sometimes with technical requirements.
A prime example is the SAP HANA database runtime license. If you run S/4HANA on-premise, you typically need a HANA database license. SAP often licenses the HANA runtime by the memory (RAM) allocated to the database (or sometimes by the number of CPU cores).
As your data grows or if you need to increase memory for improved performance, you may exceed your licensed memory. This triggers an additional cost because you’ll have to purchase extra HANA memory blocks. For instance, the initial S/4HANA deployment might be 256 GB of HANA memory.
Over the course of a couple of years, data volume growth or the addition of more modules (such as BW on HANA or additional company codes) means you now require 512 GB to keep the system running smoothly. Doubling the memory could double the database license cost if you haven’t accounted for that upfront.
Another technical driver is server upgrades. If an engine is licensed by CPU cores (some older metrics or specific products use this metric), adding more cores to your server for improved throughput may require additional engine licenses.
SAP Adaptive Server or certain processing engines historically had such metrics.
Also, suppose you switch from a legacy database to HANA. In that case, you might face new licensing (SAP gives some conversion credits, but HANA runtime is often pricier than older DB licenses, albeit more capable).
In summary, monitor infrastructure changes and data growth. Conduct regular sizing exercises for systems like HANA and plan capacity increases in advance, including license costs.
It can help to negotiate an upgrade band in your contract—e.g., a fixed price for an extra 100 GB of HANA memory if taken within 2 years—so you have predictability.
SAP’s sales team often likes to bundle such expansions during initial purchase or renewal, sometimes at a discount, because it secures future revenue. Use that to your advantage to lock in lower rates for planned expansions, rather than buying ad hoc later at potentially higher list prices.
Compliance Penalties and True-Up Costs:
One of the most painful “cost” drivers is finding out you’re out of compliance. If an SAP audit reveals that you’ve exceeded your licensed metrics for an engine, you will likely incur a true-up bill and potentially back maintenance on the overused portion.
This tends to be far more expensive than if you had planned the increase and purchased licenses normally.
For example, if during an audit SAP discovers you used the SAP Payroll engine for 12,000 employees while only licensed for 10,000, they will ask you to purchase the additional 2,000 employees retroactively. The price may not be discounted, and you may still owe maintenance fees from past years of overuse.
In worst-case scenarios, if indirect use was unlicensed, SAP might charge list price penalties or require switching to the digital access model moving forward.
Indirect access penalties (pre-Digital Access resolution) were notoriously large because SAP would say each external user or each document should have had a license.
Maintaining compliance is the best way to avoid this cost category because it’s essentially an unbudgeted expense.
It’s a driver because a lack of governance or understanding can dramatically raise your SAP costs in a single audit event. The strategy to handle this is robust internal monitoring (as covered in other sections) and negotiating resolution frameworks with SAP.
In recent years, SAP has become a bit more flexible—for instance, offering a one-time conversion to document licensing for indirect access to avoid punitive backcharges.
Nevertheless, the possibility of a sudden cost hit due to compliance underscores the wisdom of anticipating usage (and slightly over-procuring if needed).
Strategies to Anticipate and Mitigate Costs:
To proactively manage these cost drivers, consider the following strategies:
- Forecast and Budget for License Growth: Align Your License Planning with Business Forecasts. If the business expects a 20% increase in orders next year, estimate the impact on relevant engine metrics (like SD documents, warehouse picks, etc.). Include the cost of additional licenses in the budget. Obtaining funding for expected growth is far easier than requesting emergency funds after an audit.
- Periodic License Health Checks: Conduct semiannual or annual internal license reviews, specifically focused on engine usage versus entitlements. Identify which engines are at risk of exceeding their limits within the next 12 to 24 months. For those who need to, formulate a plan: either curb usage (if possible, without affecting business) or purchase additional capacity. Treat it like capacity planning in infrastructure.
- Engage SAP Early: If you know a significant change is coming (such as acquiring a company, launching a new product line, or adopting a new SAP module), proactively contact your SAP account managers. Often, you can negotiate licenses in advance at a better rate, especially if you’re bundling it as part of a larger expansion or renewal. For instance, if you foresee doubling the number of employees in 2 years, you might now negotiate a pricing tier for the payroll engine to cover that future state at a discount. SAP may also offer promotions for migrating to new models (e.g., switching to Digital Access documents with some free volume included).
- License Flexibility in Contracts: When negotiating contracts, try to include flexibility for growth. This could be in the form of volume band pricing (e.g., you pay a fixed amount for 0–10k employees, then a known increment for each additional 1k) or burst capacity clauses (maybe allowing a 5-10% metric overrun temporarily as long as you true-up the next year, without penalties). Large enterprises sometimes negotiate “buffer” rights, especially if usage fluctuates seasonally. If SAP is not amenable to an official buffer, at least have clarity on the process for scaling up so you can execute it quickly when needed (like predefined unit prices for extra blocks).
- Monitor Indirect Usage Closely: As part of the risk assessment, catalog all third-party integrations with SAP. For each, determine if it falls under named-user licensing or digital access (or could be considered unlicensed use). Quantify the documents or data created. If you haven’t adopted SAP’s Digital Access license yet and have significant third-party interfaces, evaluate the cost of that model against the risk of an audit claim. You might purchase document licenses to legitimize a high-volume interface (avoiding a worst-case indirect access fine). SAP now even provides an Indirect Usage Detection report that can be run to identify such activities – use it.
- Optimize Data and Processes: Sometimes, costs can be avoided by optimizing how you use the system. For instance, archiving old transactions doesn’t reduce historical counts for metric purposes if the metric is “per year.” Still, if a metric is “current number of records” (like number of products for a PLM engine), then data cleanup can keep that count lower. Or, if you have an engine licensed by concurrent usage, ensuring sessions are closed and not unnecessarily held can avoid artificially high counts. These are small tactical moves, but they can help you stay just under a threshold and defer an upgrade.
- Review License Utilization: Not all cost drivers involve increases – sometimes you may be over-licensed. Periodically review if certain engines are being used or at your purchased volume. For example, you might be paying maintenance on an engine licensed for $100M revenue but only using $ 50 M. Consider a re-negotiation or license exchange (SAP’s License Exchange or Contract Conversion programs can let you trade unused licenses for ones you need). This doesn’t exactly reduce the current cost of an engine, but it can offset increases elsewhere by optimizing what you have.
- Maintain a Contingency Budget: It’s prudent for the SAP licensing budget to include a contingency (some percentage of total annual fees) for unexpected growth or changes. This fund can cover a true-up or a quick purchase if a metric is exceeded. Having a set-aside is far better than being forced to pull from operational funds unexpectedly. If each year goes without a surprise, that contingency could be used to pre-buy some growth licenses at year-end (essentially investing it back). Finance teams appreciate when IT acknowledges uncertainty and plans for it.
Examples of Cost Spikes:
Let’s briefly revisit our earlier examples with a cost lens:
- SAP Payroll: A company’s Payroll license cost grew 30% in one year because they acquired a smaller competitor and added 2,000 employees. The licensing team anticipated this and negotiated the additional employee band at a favorable rate during the acquisition planning. In contrast, another company had an unplanned hiring spree, exceeding its payroll users by 500. Since it wasn’t pre-negotiated, they paid the list price for those extra 500 in a post-audit true-up, plus back maintenance – a very costly outcome.
- SAP HANA Runtime: An electronics manufacturer discovered that its HANA database for S/4HANA was reaching capacity due to rapid data accumulation. They needed to move from a 256GB license to 512 GB. Because they had discussed this with SAP at the initial contract (knowing IoT data from machines would grow), they had a fixed price for the increment. They executed that, and the cost was manageable. A different firm didn’t plan well and had to upgrade their HANA license on the fly, resulting in a budget overrun since memory licenses were not cheap and hadn’t locked pricing.
- SAP CRM and Digital Access: A telecom company integrated a new mobile app with SAP CRM, causing a huge increase in interactions (creating service orders in SAP). They didn’t realize each app user indirectly needed to be licensed or that the interactions counted. In the subsequent audit, SAP pushed them to adopt Digital Access and pay for documents. The immediate cost spike was significant (in the millions) as they had to license hundreds of thousands of document transactions. This could have been mitigated by an earlier transition to an appropriate license model and possibly redesigning the frequency of app interactions with SAP. The lesson learned was to incorporate licensing considerations into the integration design. They later implemented caching and batching to reduce the number of separate SAP transactions triggered by the app, thereby reducing document counts in the future.
In conclusion, cost drivers for SAP engines are closely tied to the evolution of your business and systems. By understanding these linkages and planning, you can turn what might be nasty surprises into predictable, budgeted investments.
Recommendations:
- Incorporate Licensing into Business Planning: Treat license capacity like any critical infrastructure. When projecting growth (e.g., employees, orders), include the cost of scaling SAP engines in your financial models. Communicate with finance and business units that “if we achieve X growth, SAP costs will likely increase by Y” – this aligns expectations and secures funding in advance.
- Negotiate Growth-Friendly Terms: Aim for terms that accommodate growth during your next SAP contract negotiation. This could be tiered pricing (where the unit cost decreases as volume increases) or an upfront purchase of an anticipated higher usage band at a discount. Emphasize to SAP that you want a partnership as you grow. For example, locking in a larger Payroll band now might get you a better per-user rate than buying small increments later.
- Create an Early Warning System: Leverage your license monitoring to flag potential overages well in advance. If you see a metric climbing rapidly (say, you’ve reached 80% of your licensed vendor count in SAP SRM), trigger an internal review. Decide whether to curb usage (perhaps by removing old vendors) or purchase more. Early warnings give you time to decide on the most cost-effective approach, including consulting with SAP about temporary solutions.
- Evaluate Cost vs. Benefit of New Implementations: Before green-lighting new SAP functionality, perform a cost-benefit analysis that includes licensing. Ask questions like “Is the value we get from SAP EWM worth the ongoing engine cost compared to using the basic warehouse or a third-party solution?” Sometimes the advanced SAP engine is worth every penny; other times, a lighter solution might suffice. Don’t assume the technical decision is the end – weigh the license cost into ROI.
- Maintain License Compliance to Avoid Penalties: Ensure continuous compliance to prevent punitive costs. It’s far cheaper to buy needed licenses proactively than to pay audit penalties. Use internal audits and conduct true-ups annually (voluntarily) if you have exceeded your limits, rather than waiting three years and owing three times the maintenance. SAP tends to be more cooperative if you self-disclose overuse and purchase the required licenses voluntarily, rather than being forced.
- Educate Stakeholders on Cost Implications: Business leaders often make significant moves (acquisitions, new product launches) without being aware of the SAP licensing impacts. Make it a practice to educate them. For instance, explain to HR that doubling headcount will increase IT costs, including SAP HR/Payroll licenses, or to Sales that a new sales channel feeding SAP will carry an engine cost. Awareness helps stakeholders include these in their plans and avoids the perception that “SAP costs exploded out of nowhere.”
- Review and Optimize Periodically: Conduct a strategic review of your SAP license landscape at least annually. Identify potential cost-saving areas – perhaps a certain engine is no longer used fully and could be downsized. Also, identify where you are close to limits – plan for those. Engage an independent licensing advisor if needed to identify inefficiencies or explore better licensing options (for example, consider an all-in-one cloud subscription to cap costs if they’re growing unpredictably, or vice versa, moving to on-premises might be more cost-effective if you’ve stabilized). The key is not to let the licensing drift; actively manage it as part of the IT strategy.
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