SAP Licensing Negotiations: Cloud vs On-Prem Deals – Cost, Flexibility, and Negotiation Tactics for Maximum Savings
Introduction – Why Deployment Model Choice Matters
Choosing between SAP cloud and on-premise deployments isn’t just a technical architecture question – it’s a major commercial decision that will impact your IT budget and flexibility for years. The wrong choice can lock your enterprise into years of higher costs or reduced flexibility.
As CIOs and procurement leaders evaluate new SAP contracts or renewals, the deployment model itself becomes a key lever in negotiations.
For an in‑depth overview of SAP negotiation topics, read our Ultimate Guide to SAP Contract Negotiations.
A cloud subscription versus an on-premises license isn’t merely about where the servers sit; it defines how you pay for SAP, how much freedom you have to make changes, and how much leverage you hold when negotiating with SAP.
In other words, the negotiation between cloud and on-premises SAP is about finding the model that best protects your interests while meeting business needs.
In this article, we’ll break down the core differences between SAP’s cloud and on-premise licensing models, compare total cost of ownership (TCO) considerations, and dive into specific negotiation tactics for each scenario.
The goal is to equip you with an insider’s perspective on SAP licensing model comparison – arming you with tactics to secure maximum savings and flexibility, whether you opt for a cloud subscription, a perpetual on-premises deal, or a hybrid approach.
Understanding SAP Cloud vs On-Prem Licensing Models
On-Premises SAP Licensing (Perpetual License Model):
In the traditional model, your company purchases SAP software licenses outright and retains ownership of them indefinitely.
You pay a large one-time capital expenditure (CapEx) cost for the licenses, often heavily negotiated with SAP for discounts off the list price.
Alongside this, you sign up for an annual support contract (maintenance fees usually around 20–22% of the license’s net price), which provides software updates and technical support.
With on-premise SAP, you are responsible for providing and managing the infrastructure – whether in your data centers or a cloud hosting of your choice (bring-your-own-license). You also control the timing of upgrades and have broad freedom to customize the software to your business processes.
In short, the on-prem model offers ownership and control: you can use the licensed software version as long as you want (even if you stop paying maintenance, you still have the right to run the last version you obtained). This model offers more autonomy, but it also requires a significant upfront investment and internal resources to manage effectively.
Cloud SAP Licensing (Subscription Model):
In the cloud model – such as SAP S/4HANA Cloud or RISE with SAP – you don’t buy the software outright; you subscribe to it as a service.
This means paying an ongoing OpEx subscription fee (monthly or annual) based on usage metrics (often per user or “Full User Equivalent”) for a fixed term (commonly 3 to 5 years).
The subscription bundle typically includes everything: the software license for the term, the underlying infrastructure (hosting on SAP’s cloud or a hyperscaler like AWS/Azure managed by SAP), and standard support & maintenance.
SAP takes on the responsibility for operating the system – handling updates, patches, and server management under an SLA – while you configure the software within SAP’s provided parameters.
The cloud approach shifts costs to a pay-as-you-go model, offering lower upfront expenses and faster initial deployment, but you trade some control.
Customization is more standardized (especially in multi-tenant SaaS environments), and you must adhere to SAP’s update schedule and cloud policies.
Crucially, if you stop subscribing, your rights to use the software end – the cloud model is about “renting” the software and services rather than owning them.
Leveraging Volume Discounts in SAP Deals
Key Commercial Differences:
From a commercial standpoint, the on-prem vs cloud choice affects how you pay and negotiate with SAP:
- Payment Structure: On-prem licenses are a one-time purchase plus annual maintenance, whereas cloud subscriptions are an all-in recurring fee. This means on-premises is front-loaded in cost, while cloud services spread costs over time.
- Support and Upgrades: On-prem maintenance is optional (but necessary for updates/support), and upgrades happen on your schedule (you can even delay them). In the cloud, support and continuous upgrades are built in – you’re always on the latest version, as SAP regularly pushes updates. This can be an advantage for innovation, but it requires readiness for change.
- Contract Terms: On-prem contracts grant perpetual usage rights. You aren’t time-bound – after the initial purchase, you could theoretically run the software for decades (with or without maintenance). Cloud contracts, however, are term-bound agreements – you commit to use (and pay) for the service for X years. Renewal of a cloud contract effectively constitutes a new negotiation point, where pricing can change. Also, on-prem deals can include clauses for flexibility (like swapping certain license types or dropping unused licenses from maintenance). In contrast, cloud deals focus on terms like user counts, service levels, and renewal conditions.
- Flexibility and Lock-In: On-premise solutions offer more long-term flexibility. If budgets tighten, you can freeze spending (e.g., by dropping maintenance or deferring upgrades) and still keep your system running. With a cloud subscription, if you stop paying, the system becomes inaccessible – a strong form of vendor lock-in during the contract term. This difference becomes a pivotal factor when considering negotiating leverage and exit strategies.
Understanding these models is crucial before entering any negotiation with SAP.
You need to know not just the technical differences, but how each model impacts cost over time and the levers you can pull in a contract negotiation.
Next, we’ll break down the total cost picture and long-term financial trade-offs of cloud vs on-premise SAP deployments.
Negotiating SAP Support and Maintenance Fees
Total Cost of Ownership – Breaking Down the Numbers
Cost is often the first question executives ask when comparing SAP Cloud versus on-premises solutions.
What is the total cost of ownership (TCO) over the long run, and how do the cost components differ? The answer can be complex, but there are clear patterns:
On-Premises SAP – Cost Components: If you deploy SAP on-premises, your costs typically include:
- License Purchase Cost: A large upfront investment (capital expenditure) to buy perpetual SAP licenses. This could amount to millions of dollars for a global enterprise deployment, although the effective cost will depend on the discount you negotiate off SAP’s price list.
- Annual Maintenance & Support Fees: Every year, you pay SAP a maintenance fee (usually ~20–22% of your paid license value) for support, patches, and rights to new versions. This is an ongoing operating expense and generally increases slightly over time (SAP often ties maintenance hikes to inflation or a set percentage). If you purchase additional licenses later, the maintenance costs will increase accordingly. Conversely, if you decide certain licenses are not needed, you can potentially drop their maintenance in the future to save costs.
- Infrastructure and Internal IT Costs: Running SAP on-prem means you need to invest in hardware, data center resources, or cloud infrastructure (if hosting your licensed software on AWS/Azure, for example) out of your pocket. You also need basis admins, DBAs, and IT staff to manage the system, perform backups, monitor performance, and execute upgrades. These costs can be significant, but you have control over how efficiently you manage them.
- Periodic Upgrade Projects: Unlike the cloud, where updates are continuous, on-premise systems require periodic major upgrade projects (e.g., moving from one SAP version to the next) to stay current. These projects incur consulting and testing costs and are usually funded every few years as needed. You have flexibility in timing, but skipping too many upgrades could eventually leave you on an unsupported version.
- Indirect Costs & Risk: (Optional to Consider) On-premises solutions may also incur indirect usage costs or audits if your SAP environment integrates with other systems. While not a line-item cost upfront, it’s a factor that can lead to unplanned expenses if not managed, highlighting the importance of proper license compliance under the perpetual model.
Cloud SAP – Cost Components: In a cloud subscription scenario, the cost structure looks different:
- Subscription Fees: This is the primary cost – a recurring subscription charge that covers your entitlement to use the SAP software and associated services. It’s often billed annually (or quarterly) and is based on your user count or consumption metric. For example, you might pay a fixed amount per user per month or an overall annual fee for a package of SAP cloud services. These fees are operational expenses and are locked in for the contract term, with potential built-in annual escalations if not negotiated otherwise.
- Implementation and Integration: Transitioning to a cloud-based SAP solution still requires implementation services (often provided by system integrators) and integration with your existing systems. You’ll incur one-time costs for the project work to get the cloud solution up and running in your environment. This is similar in magnitude to an on-prem implementation project. Sometimes, SAP may bundle or credit some migration services as part of a deal; however, this is typically a customer-borne cost.
- Included Infrastructure and Support: The subscription fee includes what you’d otherwise pay separately in an on-prem model for hardware and basic support. SAP (and their cloud hosting partners) provide the data center, hardware, and standard monitoring/support within the subscription. You won’t see a separate bill for servers or basic SAP support – it’s baked into the subscription. However, if you require premium support or additional storage/capacity beyond the standard, these can be added to the subscription cost.
- Potential Additional Cloud Costs: Depending on your usage, you may incur extra fees for activities such as expanding user counts mid-term, exceeding certain resource thresholds, or purchasing add-on cloud services (e.g., additional SAP Business Technology Platform services or additional transactions in an SAP procurement network). It’s essential to carefully size and scope your cloud contract to avoid unexpected overages.
- Exit or Transition Costs: While not a cost during the subscription term, it’s wise to consider the potential cost of exiting the cloud service later. If, after your contract term, you choose not to renew, you may incur costs to extract your data and transition to another system (whether on-premises or with a different vendor). These aren’t usually spelled out in the contract, but from a TCO perspective, planning for a possible transition is part of the long-term cost picture.
TCO Over Time – Crossover Points:
A well-negotiated on-premises deployment can sometimes appear more expensive upfront but prove cheaper over a long horizon. In contrast, a cloud deployment can be cost-effective initially but accumulate higher costs over time.
Many enterprises find that the 5-year TCO of a cloud vs on-prem SAP solution can be in a similar ballpark – SAP often prices cloud subscriptions to be competitive over a typical initial term.
In the first 3-5 years, the cloud may even come out ahead cost-wise due to the lower upfront spend and included infrastructure/services.
However, suppose you extend the analysis to 10+ years. In that case, the on-premises model often gains an edge in pure dollars: once the licenses are paid off, you’re mainly paying only annual maintenance (which, while substantial, can be more predictable and potentially optimized).
For example, imagine a scenario:
- A company pays $5 million upfront for on-premises SAP licenses and $1 million per year in maintenance. Over 5 years, that’s approximately $10 million total (plus possibly $1-2 million in infrastructure and upgrade costs). Over the past 10 years, approximately $15 million has been invested.
- The same company could subscribe to SAP Cloud for approximately $2 million per year. In 5 years, that’s $10M (in a similar range, depending on negotiated discounts), but in 10 years, $20 total if the annual fee remains constant (and possibly more if the subscription cost increases in later years).
This crossover reflects a common pattern: cloud services shift costs to an ongoing model, which, over time, can add up to more actual dollars spent if not carefully controlled.
SAP cloud TCO vs on-prem TCO, therefore, hinges on how long you plan to run the systems and how efficiently you can run on-prem yourself. It’s worth noting that SAP is aware of this calculus.
The company often offers incentives to sweeten short-term cloud economics (e.g., significant first-year discounts or migration credits for migrating from on-premises to cloud) and has been gradually raising on-premises support costs to narrow the gap.
Additionally, cloud deals can sometimes come with built-in cost escalators (say 3% per year), which need to be negotiated down or capped.
Bottom line:
Every organization should run its own multi-year TCO analysis for SAP cloud vs on-prem, using realistic assumptions about growth, required resources, and contract terms.
Look at 5-year and 10-year horizons. Include all costs (licenses, maintenance, infrastructure, staffing, upgrades, etc.) for on-prem, and all subscription fees and related costs for cloud.
This analysis not only informs which model might be financially better, but also provides ammunition for negotiation – if SAP’s cloud proposal doesn’t beat on-prem in the long run, you can use that fact to push for better pricing or terms (or vice versa).
The goal is to ensure you choose the model that offers the best value for your situation and to negotiate away any cost disadvantages before signing.
Renewal Flexibility & Contract Leverage
One often-overlooked factor in the cloud vs. on-premises deployment debate is how each model positions you at renewal time and what leverage you have over SAP as a vendor. Which deployment model offers greater flexibility at renewal time?
From an enterprise buyer’s perspective, on-premise and cloud put you in very different negotiating positions when it comes to contract renewals or extensions.
On-Premise – Flexibility at Renewal: In the on-premises world, there isn’t a “renewal” of your software license per se – you own the license perpetually.
The recurring negotiation point is your annual maintenance contract.
Each year (or multi-year cycle), you decide whether to continue paying maintenance on all your licenses, on some of them, or to potentially discontinue maintenance if it’s not delivering value.
This dynamic gives customers leverage:
- If SAP tries to raise maintenance fees or you’re not getting enough value, you have the option to stop maintenance on unused or underused licenses. By providing notice, you can shelf those licenses – you won’t get updates for them, but you also stop paying maintenance on them going forward, immediately reducing cost.
- In extreme cases, if the relationship with SAP sours or budgets force it, you could even drop maintenance entirely and still legally run your SAP software (you just forego support and future upgrades). This “nuclear option” is not ideal for the long term, but it exists as leverage – SAP knows that customers can potentially turn to third-party support providers or run the system as is if pushed too hard.
- On-premises customers also often negotiate flexible use clauses in their contracts, which can be beneficial at renewal time. For example, you might have a clause allowing you to swap a certain percentage of license types for others (to realign with usage patterns) or to reduce user counts without penalty if you had previously had excess shelfware. Not all contracts include these, but savvy enterprises insist on them during the initial negotiation, giving themselves the ability to adjust course later.
All this means that on-prem licensing can offer greater flexibility when it comes to adjusting your spend or walking away.
You are never forced to “renew or else lose the software” – a powerful position to be in. SAP’s sales teams are aware that on-premises customers, especially those with already invested licenses, can’t be easily forced into a new deal, which can make SAP more willing to negotiate discounts or concessions to keep maintenance revenue flowing.
Cloud – Flexibility (or Lock-In) at Renewal: In a cloud subscription, the situation is quite different. You are contractually bound to pay for the service for the duration (3, 4, 5 years, etc.), and at the end of that term, you face a true renewal decision point.
If you don’t renew, you lose access to the software and support – meaning your business could be cut off from its ERP system unless you’ve migrated data and processes elsewhere.
This dynamic generally shifts leverage to SAP at renewal:
- By default, you must either accept the renewal pricing or scramble to transition off SAP in a short timeframe (which is often impractical for a mission-critical system). SAP is aware of this, and without protective clauses, they could present a significant price increase at renewal.
- You also have less flexibility to reduce scope mid-stream. During the contract term, if you find you bought too high a user count, you usually cannot reduce your subscription until renewal (and even at renewal, SAP may not allow a significant decrease easily – they may set minimums or require another multi-year commitment).
- However, you do have some negotiation angles. Cloud customers can negotiate renewal price protections up front (for instance, a clause that caps any price increase at renewal to a certain percentage or ties it to a discount retention). It’s critical to secure this in the initial contract; otherwise, you may face a steep “uplift” in cost when renewing.
- Additionally, suppose you have options to shift workloads or have maintained an alternative (such as a parallel on-premises system or are considering a competitor’s cloud service). In that case, you can use that as leverage. For example, if SAP’s renewal quote is too high, you might threaten to migrate to a different SaaS provider or revert to an on-prem solution. To make this credible, enterprises sometimes keep core modules on-prem or have a phased cloud adoption such that not everything comes up for renewal at once – giving you at least some fallback if negotiations don’t go well.
Contract Leverage Considerations: Your leverage with SAP will also depend on the broader context:
- SAP’s Sales Priorities: Currently, SAP is very focused on moving customers to cloud subscriptions. This can work to your advantage. On-prem customers might get enticing offers to transition to cloud (because SAP wants to report cloud growth), while cloud customers are valuable for SAP to retain (for recurring revenue). If you know SAP’s fiscal year-end is approaching or they need cloud wins, you can time your negotiations to hit when they’re most eager to make a deal.
- Hybrid Environments: Some enterprises adopt a hybrid approach (a mix of on-premises and cloud SAP), which allows them to play one side against the other. For instance, you might keep your core ERP on-prem (maintaining the option to stay on it) while adopting some SAP cloud modules. When negotiating a renewal for those cloud modules, SAP is aware you still have an on-prem foothold and could choose to expand that instead of renewing the cloud service – this implicit threat can soften SAP’s stance at the table.
- Switching Vendors: While switching off SAP entirely is a massive undertaking, in certain domains (such as HR, CRM, and procurement), there are viable non-SAP alternatives. Knowing you have the option to move a particular function to another vendor’s cloud (say Workday for HR or Salesforce for CRM) can give you negotiating power. SAP would prefer to keep you within its ecosystem, whether on-premises or in the cloud, rather than see you migrate to a competitor.
In summary, SAP on-prem license flexibility tends to be greater when it comes to renewals and contract adjustments.
Cloud subscriptions require more careful negotiation of terms upfront to achieve flexibility later.
It’s essential to bake in as much protection as possible in a cloud contract (caps on price increases, rightsizing options, clear exit terms) to mitigate the inherently higher lock-in. Both models can be negotiated to work in your favor – but you must approach each with a strategy tailored to its strengths and weaknesses.
Negotiation Tactics for SAP Cloud Deals
When negotiating SAP cloud contracts, you’ll want to focus on terms that control cost over time and preserve flexibility, as well as maximize value through SAP’s eagerness to sell cloud.
Here are several tactics to use before signing a cloud subscription deal:
- Secure Multi-Year Price Protections: One of the biggest risks in a cloud deal is the potential for a renewal price spike. Negotiate price caps or fixed renewal rates as part of the initial contract. For example, insist on language that limits annual subscription price escalations to a small percentage (or none at all), and caps any increase at renewal time. The goal is to avoid a scenario where SAP lures you in with a reasonable first-term price only to demand a substantial increase later, when you’re dependent on the service. Multi-year price lock guarantees or options to extend at the same rate can save millions over the long run.
- Avoid Sharp Renewal Uplifts: Similar to the above point, explicitly discuss the renewal scenario during negotiations. If the contract term is 3 years, ask SAP what happens in year 4. Push for “renewal discount protection” – e.g., you retain your discount level during the renewal, or even negotiate a preset renewal price in the contract. If SAP won’t commit to exact future pricing, at least get a clause that says, for instance, renewal will not exceed a certain percentage over the prior year’s fees. Always document any verbal assurances about “don’t worry, we’ll take care of you at renewal” into the contract itself.
- Bundle Cloud Modules for Maximum Discount: SAP offers a vast portfolio of cloud services (ERP, procurement, HR, analytics, etc.). If you anticipate needing multiple SAP cloud solutions, consider negotiating them together as a package. Bundling can dramatically improve your discount. SAP’s sales reps have more flexibility when the deal size grows and spans multiple cloud products – you can leverage one component against another (“We’ll sign up for SAP Ariba and SuccessFactors as well, but we need an overall discount of X% across the bundle”). Be cautious to only include modules you truly plan to use, because bundling just to get a discount on paper could lead to shelfware in the cloud (paying for unused services). However, if done wisely, bundle negotiations can give you leverage to reach SAP’s volume thresholds and secure better pricing.
- Negotiate Migration Credits & Incentives: If you are an existing on-premise SAP customer migrating to the cloud, ensure you don’t pay twice for similar capabilities. SAP has been known to provide migration credits, such as offering a credit for the residual value of your on-premises licenses toward the cloud subscription or providing a steep first-year discount to offset the transition cost. Ask about programs like “conversion credits” or trade-in allowances. For example, if you have historically spent $10M on licenses, push SAP to recognize that investment by reducing cloud fees or providing free initial usage periods. Additionally, seek incentives to cover dual-running costs if you need to run old and new systems in parallel during migration – SAP might offer a grace period or temporary discounts during the cutover.
- Right-Size Commitments and Retain Flexibility: It’s critical not to over-commit in a cloud deal. Negotiate the ability to adjust user counts or swap cloud services as business needs evolve. While SAP may resist allowing reductions mid-term, you could secure an option to reduce a portion of your subscription at renewal without penalty or carry forward unused credits. At a minimum, be conservative in your usage estimates and add clear terms for adding or removing users. For example, ensure that adding users later will come at the same discounted rate as the initial ones (no premium for growth), and try to obtain an agreement that if your user count needs to decrease at renewal, the pricing per user won’t suddenly increase to compensate. The more flexibility you build in, the less chance you’ll overpay for idle capacity.
- Leverage SAP’s Cloud Sales Targets: Remember that SAP’s team is highly motivated to sign cloud deals right now. Use this to your advantage. Time your negotiation strategically – often, the end of SAP’s quarter or fiscal year is when they are most eager to close deals, and they may offer extra concessions (such as free additional months, extra modules, or higher discounts) to secure cloud revenue. If you have a choice between an on-prem deal and a cloud deal, let SAP know you’re evaluating both (even if you internally favor one). The mere hint that you might stick with on-premises could prompt SAP to improve its cloud offering. Additionally, inquire about any special promotions or programs for cloud commitments – SAP frequently offers internal incentives to boost cloud adoption (e.g., “RISE” migration deals). If you don’t ask, they might not volunteer those savings.
In cloud negotiations, your mindset should be protecting your long-term interests. Because cloud contracts lock you in, sweat every detail in the contract: pricing not just this year but in year 5, the ability to flex usage, what services are included, performance SLAs, and exit provisions (data extraction, transition assistance) in case things go south.
A well-negotiated SAP cloud subscription can deliver predictable costs and agility, but a poorly negotiated one can become an annuity for SAP and a budget headache for you.
Stay firm, use the above levers, and don’t be afraid to push back – SAP’s desire to land a cloud customer can translate into significant savings if you ask for them.
Negotiation Tactics for SAP On-Prem Deals
While SAP’s focus may be on the cloud nowadays, many enterprises continue to negotiate SAP on-prem license deals – whether for a new S/4HANA implementation or expanding an existing footprint.
Negotiating a good on-prem agreement requires a slightly different set of tactics, emphasizing upfront cost and ongoing maintenance.
Key strategies include:
- Push for Aggressive Upfront Discounts: SAP’s on-prem list prices are notoriously high (often purposefully so, expecting negotiation). It’s not uncommon for savvy buyers to achieve discounts of 50% or more off the list price, depending on the deal size and timing. Come into negotiations armed with benchmarks if possible – know what discount percentages similar companies have achieved. Use competitive alternatives as leverage: even if SAP is the chosen solution, signal that you have options (such as Oracle, Microsoft, or staying on an older SAP version) to encourage SAP to put its best financial offer forward. Also, concentrate volume – if you’re planning to purchase multiple SAP products (ERP, analytics, etc.), negotiate them together to maximize the total discount. SAP’s sales representatives have more authority to offer high discounts on licenses, especially at quarter-end or year-end, when they need to meet targets. Aim to minimize that upfront license spend, as it directly impacts your maintenance costs and ROI timeline.
- Negotiate Maintenance Fee Reductions or Caps: The standard SAP maintenance is ~22% of net license price annually, but there may be room to negotiate, especially for large deals. At the very least, ensure that maintenance is calculated based on your discounted price, not the list price (SAP typically does this, but double-check the contract language). For very large license purchases, some customers have negotiated a slightly lower maintenance rate (for example, 18% instead of 22%) or a fixed maintenance dollar amount for a specified period. Another approach is negotiating a cap on maintenance increases – SAP has introduced inflation-linked increases in recent years (e.g. 3-5% annually); you could request a cap that maintenance won’t rise more than say 3% per year or negotiate a longer-term maintenance agreement that fixes the rate. These concessions are tough but not unheard of, particularly if SAP is keen to close the license sale. SAP on-premises support and maintenance cost reduction can save a significant amount over a decade-long ownership period.
- Secure “Swap and Drop” Rights: A common pain point in on-premises licensing is paying maintenance on licenses that are no longer in use (sometimes referred to as “shelfware”). To avoid this, negotiate contractual rights to swap or drop licenses. Swap rights mean that if you purchased licenses for one SAP module or user type that you end up not needing, you can exchange (all or a portion of) that license value for another SAP product of equal value. For example, if you bought too many CRM user licenses, you could swap some for SRM licenses if you need those instead. Drop rights mean you can terminate maintenance on specific licenses and remove them from your support base (usually with notice before the maintenance period renews). SAP’s standard policy allows customers to discontinue maintenance on part of their estate (you won’t get a refund on the license, but you stop the yearly fees). Ensure that this is permitted in your contract without incurring penalties. Having the flexibility to reconfigure your licenses as needs change is invaluable in a long-term on-prem relationship.
- Use Third-Party Support as Leverage: Third-party support providers (such as Rimini Street and others) can replace SAP’s support at typically 50% of the maintenance cost, albeit without access to new SAP upgrades. Even if you don’t plan to use third-party support immediately, bringing it up in negotiations can put pressure on SAP to consider it. The threat of a customer leaving SAP maintenance for a third party often motivates SAP to offer a better deal – whether it’s a discount on a needed additional license purchase, a credit, or more favorable terms – to keep your support business. If SAP believes you might defect to third-party maintenance, they know they stand to lose steady revenue. This tactic needs to be used carefully (it can strain the relationship), but it’s part of being “vendor-skeptical” and asserting that you have alternatives. In some cases, enterprises do switch to third-party support for older SAP systems to save costs. That possibility keeps SAP on its toes when negotiating maintenance renewals or new sales.
- Negotiate on Indirect Usage and Audit Protections: While not directly related to pricing, a smart on-premises negotiation also covers potential future cost traps, such as indirect access fees or audit clauses. Ensure the contract clearly defines usage metrics and includes provisions to minimize surprises (for instance, if you connect third-party systems to SAP, clarify how that is licensed to avoid huge indirect access bills later). Ask for caps or pre-agreed pricing for any additional users or modules you might need later – essentially locking in today’s discounts for future expansions. This is a way of controlling future costs so SAP doesn’t have carte blanche to charge you full price when you need to grow. By addressing these items in the negotiation, you safeguard your company against post-deal “gotchas” that could lead to unplanned spending.
- Timing and Competitive Pressure: Just as with cloud deals, timing is a powerful tool in on-prem negotiations. SAP’s salespeople have quotas and are often more flexible near the end of the quarter or the fiscal year. Additionally, if you’re replacing a competitor’s system or SAP knows you’re considering a non-SAP solution, use that to extract a better price. If SAP believes there’s a genuine chance they might lose the deal, their willingness to negotiate increases dramatically. Even if you’re firmly SAP-loyal, it can help to get a quote from a competitor or at least make SAP think you might go another direction. The key is to create a scenario where SAP feels they must compete for your business – either against another vendor or against the status quo (e.g., “We might just stay on our current SAP version and not buy these new licenses this year if the terms aren’t right.”).
In summary, negotiating an on-prem SAP deal is about driving down the upfront and recurring costs and building in flexibility.
Own the fact that you, as the customer, have options and time on your side – you don’t need to buy more SAP licenses unless the business case (enabled by a good price) is solid.
By being tough on discounts, vigilant on maintenance terms, and proactive about future-proofing the contract, you can secure an on-prem agreement that delivers long-term value and avoids the common pitfalls of shelfware and escalating support costs.
When Hybrid SAP Deployments Make Sense
It’s not always an either-or choice between cloud and on-prem. For many large enterprises, the optimal answer to SAP deployment is hybrid – a mix of on-premise and cloud solutions orchestrated to balance cost, risk, and functionality.
The question then is: when does a hybrid SAP model deliver the best commercial outcome?
A hybrid approach can make sense in several scenarios:
- Phased Cloud Transition: If your organization is interested in the cloud’s benefits but concerned about a big bang migration, you might keep your core SAP ERP on-premise (for stability and because it’s already paid for) while rolling out certain new capabilities in the cloud. For example, you might maintain SAP ECC or S/4HANA on-prem for finance and manufacturing, but deploy SAP SuccessFactors (cloud) for HR or Ariba (cloud) for procurement. This allows you to enjoy some quick wins and SaaS innovations without abandoning the reliable core. Commercially, this can spread out costs and avoid the huge spike of moving everything to the cloud at once. It also gives you leverage: SAP will see that you are open to cloud and will be keen to support those projects – they may offer attractive deals on the cloud pieces, knowing that the big ERP core could move in the future if all goes well.
- Best-of-Both-Worlds Cost Optimization: Certain workloads may be more cost-effective or efficient to keep on-premises. For instance, if you have a very large user base with relatively stable processes, the TCO of keeping that on-prem might be far lower than putting it in the cloud (especially after you’ve already invested in hardware and licenses). On the other hand, a smaller or fluctuating workload might be perfect for the cloud’s pay-as-you-go model. By analyzing your landscape, you may decide to split: high-utilization, steady systems remain on-prem to leverage sunk costs and lower long-term expenses, whereas variable or growth areas go to the cloud, where you can scale and only pay for what you need. This SAP deployment model cost analysis often reveals that a hybrid setup yields the lowest combined cost.
- Negotiation Leverage Through Diversity: From a pure negotiation standpoint, having a foot in both camps (cloud and on-prem) can be advantageous. It prevents SAP from having total control over your account via a single contract. For example, if SAP were to propose an unfavorable change in your cloud subscription, you have the implied option to shift some usage back on-prem (or not expand the cloud footprint further). Likewise, suppose SAP tries to increase on-premises maintenance aggressively. In that case, you can point out that you might accelerate moving that part of the business to the cloud (since SAP is pushing cloud, they won’t want to drive you away from it by making on-premises maintenance more attractive). Essentially, you can always play one model against the other. This “competitive tension” within SAP’s offerings can help keep both sets of terms more honest.
- Regulatory or Technical Requirements: Some industries or geographies may require you to keep certain systems on-premises (for data residency or compliance reasons). In contrast, others can be hosted in the cloud. A hybrid model is not just a compromise but often a necessity in such cases. The key from a commercial perspective is to manage two contracts strategically. Ensure that your cloud and on-premises agreements don’t have conflicting terms and that you can synchronize their renewal cycles, if possible, to provide a single window for negotiating everything with SAP holistically. If one part of the hybrid environment is up for renewal and the other isn’t, you might lose some leverage.
- Example – Hybrid Success: Consider an anonymized example: A global manufacturer kept their core SAP ERP on-premise to fully control a heavily customized production system and avoid disrupting operations. They simultaneously adopted SAP’s cloud analytics and customer experience modules to modernize those functions. Commercially, they negotiated a package where SAP provided significant discounts on the new cloud subscriptions (since the customer committed to maintaining their SAP maintenance on the core for the next few years as well). Over five years, this hybrid strategy allowed the company to incrementally modernize with cloud solutions while reducing overall SAP spend (they avoided a costly full cloud ERP migration, kept maintenance costs in check through the deal, and only paid cloud fees for the areas that delivered clear business value).
In essence, hybrid deployments can deliver the best commercial outcome when neither pure cloud nor pure on-prem would be ideal on their own.
You can mix and match to optimize: exploit the cost efficiency and control of on-premises solutions where it matters, and leverage the flexibility and innovation of cloud solutions where it makes a difference.
Be prepared to manage complexity – both technically and in vendor management.
Two different licensing models mean you need to stay on top of two sets of metrics and contracts. But with a smart negotiation strategy, you can use the hybrid state to your advantage, keeping SAP eager to please on both fronts.
Six Expert Recommendations for Cloud vs On-Prem SAP Negotiations
As an SAP licensing advisor, I’ve helped many enterprises navigate these decisions.
Here are six expert recommendations to ensure you get the best deal – whether you choose cloud, on-prem, or a mix:
- Benchmark Both Models Before Deciding: Don’t go into negotiations fixated on one deployment model without exploring the other. Even if your company is inclined toward cloud for strategic reasons, obtain a proposal for an on-prem alternative (or vice versa). Benchmark SAP cloud vs on-prem options side by side – feature for feature, cost for cost. This arms you with data to challenge SAP’s pricing. If the cloud option comes in at a higher TCO, you can push SAP to explain and reduce the gap. If on-prem looks inflexible, you can ask for contract terms to address that. By pitting SAP’s models against each other, you either find the better deal or you force SAP to improve the offering. In many cases, simply signaling to SAP that you are weighing both options will prompt them to sharpen their pencil on whichever route they think you’re leaning toward. Use that competitive dynamic to your benefit.
- Run Multi-Year TCO Projections: Always project your SAP costs out for the long term – at least 5 years, ideally 10. This means calculating the total cost of ownership (TCO) for each scenario, including all relevant costs (subscriptions, licenses, maintenance, infrastructure, personnel, upgrades, etc.). This analysis will highlight when one model becomes more expensive than the other. For example, you might find that at year 4, cloud starts to cost more than on-prem, or that a certain growth in users will tip the scales. Having these insights lets you negotiate with foresight. You can address those out-year costs now (e.g., negotiate a price lock for years 4-5 in the cloud, or a maintenance break for on-premises systems after a few years). It also prevents you from being seduced by a low first-year cost while ignoring the ballooning expense later. A well-grounded TCO model provides confidence in selecting the right path and negotiating a deal structure that makes financial sense throughout the entire lifecycle.
- Align Deployment Choice with Your Future Roadmap: Your negotiations should be guided by where your business is heading in the next 5-10 years. A cloud model might align if, for instance, you’re moving towards a lean IT footprint, have initiatives for rapid innovation, or plan to divest the data center. An on-premises model might be suitable if you require heavy customization, operate in a regulatory environment that favors on-site systems, or want maximum control. Communicate your roadmap to SAP during negotiations – if they understand you have a strategic reason for a certain model, they may tailor the deal (e.g. providing extra flexibility in a cloud contract to address your concerns, or giving assurances for on-prem longevity like extended support). Internally, ensure that your IT strategy aligns with the SAP commercial strategy. If a hybrid is likely in your future (gradual cloud adoption), negotiate with that in mind (maybe securing conversion options to cloud later, or locking in maintenance terms that won’t punish you for a smaller on-prem footprint over time). Aligning with your roadmap ensures that you won’t have to renegotiate mid-course because the chosen model no longer aligns with your business direction.
- Lock in Flexibility, Regardless of Model: One of the golden rules of enterprise software negotiation is to incorporate flexibility from the outset. For on-prem, this means securing those swap, drop, and transfer rights, and keeping maintenance terms customer-friendly (no indirect surprises, caps on increases). For cloud, it means negotiating aspects such as the ability to adjust user counts periodically, options to terminate certain components if not used, and clear exit terms if the service isn’t meeting expectations. It’s easy to be swept up by sales promises that “you probably won’t need to reduce users” or “this includes everything you need.” Instead, play devil’s advocate and assume you will need to change something. How hard will it be? Can you reduce your commitment if your business shrinks? Can you change which cloud modules you use without penalty? Can you delay an upgrade or get a dedicated instance if needed (in a private cloud scenario)? Get these what-ifs documented in the contract. By locking in flexibility, you ensure that as your business evolves, your SAP agreement can evolve too – without incurring significant costs or requiring a renegotiation from scratch.
- Time Negotiations with SAP’s Fiscal Calendar: SAP (like most vendors) has a fiscal year and quarterly targets. There are times when they are under pressure to close deals – typically, the end of Q4 (year-end) is the prime discount season, with the end of Q3 also being significant for many regions. Whenever possible, schedule your big negotiations to coincide with these periods. The difference in SAP’s receptiveness can be striking: a deal that gets lukewarm terms in the middle of the year might get far better concessions in December. Additionally, consider the internal initiatives SAP is pushing. Right now, SAP is pushing cloud subscriptions hard – that means you might get a better deal on cloud in Q4, or conversely, if you’re negotiating an on-prem deal, SAP might try to delay or push you to cloud; use that knowledge either to get a better on-prem price (“if you want us to buy on-prem now, make it worth our while, since you know we could wait or consider cloud”) or to secure some future cloud-friendly terms (“we’ll consider RISE in a few years, but we need price protection on our current setup until then”). In short, take advantage of SAP’s timing and goals – it’s an easy win that costs you nothing but patience to maximize incentives.
- Keep Cloud and On-Prem Terms Comparable for Leverage: Even after you choose a model and sign, continue to keep the alternative option in play as a benchmark. For example, if you transition to the cloud, don’t dispose of your on-premises licenses hastily – you might negotiate to park them or retain the right to revert if needed. If you’re on-premises, periodically obtain cloud quotes for your environment to see if the economics shift. The idea is to always have a credible plan B. When SAP knows you are regularly evaluating “Cloud vs On-Prem ROI” and will migrate if one becomes superior, they are more likely to keep your pricing honest. This also means structuring contracts so they aren’t wildly different in scope – for instance, avoid bundling so many extra things in a cloud deal that you can’t compare it to your lean on-prem setup. If you maintain some comparability, you can present to SAP, “Here’s what it costs us to stay on-prem, here’s what your cloud costs – we need you to bridge this gap or we can’t justify the move.” Likewise, if already in the cloud, “Our analysis shows staying in the cloud is X% more expensive over 5 years than if we ran on-prem – we need you to adjust the renewal pricing to make it viable for us to stay.” By always measuring one model against the other, you keep yourself in the driver’s seat and ensure SAP has to continuously earn your business on commercial merit, not just because of technical lock-in.
Following these six recommendations will make you a forward-thinking, vendor-skeptical negotiator – exactly what SAP’s large enterprise customers need to be.
You’ll benchmark options, anticipate long-term costs, align deals with strategy, build in flexibility, utilize timing to your advantage, and maintain leverage through alternatives. These are the habits that lead to truly optimized SAP deals.
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