How to Break Down SAP Licensing Costs in Contracts
- Understand SAP Licensing Types: Identify perpetual vs. subscription licenses.
- Include User Counts: Define the number of users and usage types.
- Factor in Maintenance Fees: Include SAP support and updates.
- Account for Add-ons: Identify additional modules or services.
- Review Contract Terms: Ensure clarity on pricing, renewals, and penalties.
How to Break Down SAP Licensing Costs in Contracts
Understanding and effectively breaking down SAP licensing costs in contracts is a complex task that requires in-depth knowledge of SAP’s pricing structures and various licensing components.
SAP, a leading enterprise resource planning (ERP) software provider, offers various licensing models to suit businesses’ needs.
These licenses can vary significantly in cost, depending on factors such as deployment type, the number of users, and the scope of the solution being implemented.
Understanding how SAP license components are structured, how to evaluate them, and how various models and metrics affect overall costs is crucial for businesses to accurately assess and manage SAP licensing costs.
This article will explore the key elements that makeup SAP licensing costs and how businesses can break them down effectively in contracts.
Core License Components
SAP’s licensing model comprises several core components, each with associated costs. The most significant elements are the named user licenses and package and engine licenses.
Understanding these components is essential for evaluating the total cost of ownership for SAP software.
Named User Licenses
Named user licenses are among the most substantial portions of SAP contracts, often accounting for 40-70% of the total contract price. These licenses are tied to individual users and priced based on their roles and access levels.
The cost per user license can vary greatly depending on the user type, typically between $1,500 and $4,000 per user. The following are the most common types of named user licenses:
- Developer Licenses: Developer licenses are the highest-cost licenses, as they allow users to create, modify, and develop applications. These licenses are generally reserved for highly skilled users directly customizing and extending SAP applications.
- Professional Licenses: These licenses are designed for users who need access to a broader range of system functionalities. Professional users are typically business users who require full access to SAP’s core capabilities.
- Limited Professional Licenses: These licenses are no longer available to new customers but may still be relevant for organizations with existing contracts. Limited Professional licenses offer a restricted set of capabilities compared to full professional licenses.
- Employee Licenses: Employee licenses are typically the least expensive, designed for users who only need access to basic functionalities, such as reporting or viewing data, without the ability to modify or create content.
When assessing SAP’s named user licenses, businesses should consider the number of users needing access to SAP systems and the roles they will perform.
An accurate evaluation of the required user licenses ensures that companies avoid over-provisioning (and overpaying) for unnecessary licenses or under-provisioning and hindering their users’ productivity.
Package and Engine Licenses
Unlike named user licenses based on individual users, package and engine licenses are priced based on specific metrics tied to business processes or the technical infrastructure.
These licenses often constitute another significant portion of the licensing cost.
The key metrics used to determine the cost of package and engine licenses include:
- Number of Employees: The number of employees within the organization is often used to determine the cost of certain SAP licenses. The more employees an organization has, the higher the cost for the corresponding licenses. However, it is essential to understand whether the cost is based on full-time equivalents (FTEs) or actual headcount, as this can significantly impact the pricing model.
- Transaction Volume: In certain cases, the number of transactions processed through SAP systems can impact licensing costs. Businesses with high transaction volumes—such as those in retail or finance—may face higher licensing fees to accommodate the increased load on the system.
- Annual Revenue: Some SAP licenses are based on the company’s annual revenue. In this case, the cost will scale depending on the business size, with larger enterprises paying more for their licenses.
- Data Storage Volume: Certain SAP solutions, particularly those related to data analytics and business intelligence, are licensed based on the volume of data that needs to be stored and processed. Businesses should estimate future data storage requirements to avoid underestimating or overestimating costs.
- Processing Capacity: SAP also offers licenses based on the processing capacity required for specific systems or applications. This typically refers to the number of database records or transactions that SAP solutions must handle over a period.
Each of these metrics plays a crucial role in determining the cost of SAP licensing. Depending on the business’s size and requirements, certain metrics may have more impact than others, and businesses must carefully evaluate their specific needs to optimize their licensing costs.
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Deployment Models and Associated Costs
SAP offers two primary deployment models: on-premise deployment and cloud deployment. Each has its own set of cost structures and considerations.
On-Premise Deployment
The traditional approach uses the on-premise deployment model, in which SAP software is installed and managed within the organization’s infrastructure.
The key cost components for on-premise deployment are:
- One-time Perpetual License Fee: This one-time upfront cost grants the business perpetual rights to use the software. This fee can be substantial, especially for large enterprises requiring extensive functionality.
- Annual Maintenance Costs: Maintenance costs are typically around 22% of the license base and are charged annually. This covers support services, updates, and enhancements provided by SAP. While this is an ongoing cost, it is typically lower than the initial license fee.
- Hardware and Infrastructure Expenses: With on-premise deployment, businesses are responsible for purchasing and maintaining the necessary hardware, such as servers and storage devices. Infrastructure expenses can be significant, particularly for large organizations with high processing power and storage demands.
- Implementation and Customization Costs: Businesses often must invest in implementing and customizing SAP software to align with their business needs. The costs can vary depending on the project’s complexity, but they often include consulting services, training, and additional tools.
Although on-premise deployment requires a larger upfront investment, organizations with specific regulatory or data sovereignty requirements may prefer it. The flexibility of on-premise deployment is often cited as a benefit, as businesses retain full control over their systems and data.
Read about SAP agreements during merger and aquisitions.
Cloud Deployment
SAP’s cloud-based solutions, such as SAP S/4HANA Cloud, offer a different cost structure and several advantages, particularly for businesses seeking more predictable costs and lower upfront investment.
The key cost components for cloud deployment include:
- Subscription-Based Pricing: Cloud deployments are typically priced on a subscription basis, with businesses paying for the software monthly or annually. Subscription fees tend to be more predictable and are typically based on factors such as the number of users, usage volume, or functionality.
- Bundled Hosting and Software Licenses: Unlike on-premise solutions, cloud deployments often bundle the cost of both the software licenses and hosting services. This means businesses don’t have to separately invest in and manage the underlying infrastructure.
- Reduced Upfront Investment: Cloud deployment often allows businesses to avoid significant upfront hardware, software, and implementation costs. This can make it an attractive option for smaller businesses or those with limited capital.
- Predictable Monthly or Annual Costs: Cloud deployment’s subscription-based pricing model provides businesses with predictable costs, which can simplify budgeting and financial forecasting.
Cloud deployment is typically faster to implement and offers scalability as businesses grow. However, organizations may face higher long-term costs than on-premise deployments, particularly if they require more extensive usage or higher transaction volumes.
Cost Breakdown Structure
Breaking down SAP licensing costs is essential to understanding the total cost of ownership (TCO) and ensuring that businesses make informed decisions.
The key elements of cost breakdown include:
Initial Investment
For instance, the first-year costs for SAP S/4HANA typically range between $250,000 and $500,000 for a small- to medium-sized business. This initial investment covers the purchase of licenses, infrastructure (for on-premise deployments), and software implementation.
Ongoing Costs
Ongoing costs include maintenance fees (for on-premise deployments), subscription fees (for cloud deployments), and any additional services or modules required. These ongoing costs are critical for long-term budgeting and must be evaluated alongside the initial investment.
Hidden or Indirect Costs
Aside from the direct licensing costs, businesses should also account for hidden or indirect costs, such as:
- Training Costs: Businesses may need to invest in training for end-users and system administrators.
- Consulting Fees: Many businesses require external consultants for SAP implementation, customization, and optimization.
- Support Costs: Support costs can vary depending on the level of service required, such as 24/7 support or premium service-level agreements.
FAQ: How to Break Down SAP Licensing Costs in Contracts
How do SAP licensing models differ?
SAP offers both perpetual and subscription licenses. Perpetual licenses require upfront payment, while subscription licenses are based on recurring payments.
What’s the role of users in SAP licensing?
The number of users determines the license cost. Different user types, such as professional or limited users, impact the cost.
Are maintenance fees included in SAP contracts?
Maintenance and support costs are typically separate from the base license cost and are charged annually.
How do add-ons affect SAP licensing costs?
Add-ons, such as extra modules or features, increase licensing costs. Each add-on is priced separately.
What are the payment terms in SAP contracts?
Payment terms depend on the type of license. Perpetual licenses may involve upfront payments, while subscription models offer flexible payment schedules.
Do SAP contracts include future price increases?
Many SAP contracts contain clauses allowing for price increases after the initial term, often based on inflation or market conditions.
How does SAP calculate renewal costs?
Renewals are often based on the original licensing costs, with adjustments for inflation or agreed-upon price increases.
Can I negotiate SAP licensing costs?
Licensing costs are negotiable, especially for large contracts or long-term agreements.
What is the difference between “Named Users” and “Concurrent Users”?
Named Users are individuals assigned to use the software, while Concurrent Users can access the system simultaneously, regardless of their identity.
How do volume discounts affect licensing costs?
Volume discounts are often available for large contracts or enterprise-level agreements. The more licenses you buy, the lower the per-license cost.
What’s included in SAP’s standard support?
Standard support typically includes software updates, bug fixes, and basic assistance. Additional services may incur additional fees.
Is custom software development part of SAP licensing?
Custom development is generally not included in standard licensing and may incur additional costs for development or consultancy.
How can I ensure compliance with SAP licenses?
Regular audits and documentation are essential. Always monitor system use and check that it matches your licensing agreement.
What happens if I overuse my SAP licenses?
Exceeding the licensed number of users or system capacity can lead to fines or higher licensing fees. Regular monitoring helps avoid this.
Are there penalties for SAP license violations?
Noncompliance penalties include back payments, fines, or increased licensing costs for unlicensed usage.
