SAP S/4HANA Contract Conversion and Migration
Migrating to SAP S/4HANA is not just a technical upgrade—it’s a strategic licensing transition that can redefine an organization’s relationship with SAP.
For CIOs and IT decision-makers, two primary paths exist for converting SAP ERP (ECC) licenses to S/4HANA: Contract Conversion and Product Conversion. Each approach carries distinct advantages, risks, and implications for cost and compliance.
Navigating these options effectively is a strategic pillar of a successful S/4HANA transition.
An informed, proactive licensing strategy will help maximize the value of past investments while positioning the enterprise for future growth.
The Two Key License Migration Paths
Product Conversion: This path allows an organization to convert existing SAP ERP product licenses to their S/4HANA equivalents on a product-by-product basis.
The company retains its current SAP license contract and swaps out older software titles for newer S/4HANA titles where one-to-one equivalents exist.
All previously negotiated contract terms and discounts remain in effect under the existing agreement. Crucially, product conversion permits a gradual, phased migration of licenses; companies can continue to run their legacy SAP Business Suite systems in parallel with S/4HANA during the transition period under “dual use” rights.
This means users can leverage the old and new systems concurrently (up to the licensed quantities) without additional license fees while migration is in progress.
Product conversion protects prior investments and minimizes disruption by maintaining the continuity of licensing. It’s often viewed as a “lighter” touch conversion – essentially incrementally keeping your contract intact and adapting it to the S/4HANA world.
Contract Conversion: This route involves ripping and replacing the entire existing SAP license contract. The organization terminates or replaces its current ECC license agreement and signs a new contract for S/4HANA licenses (often under SAP’s revised S/4HANA licensing framework and use rights).
In exchange for surrendering the old licenses, SAP provides credit toward purchasing the new S/4HANA licenses, typically based on the value of the licenses you already own. Contract conversion is a one-time, comprehensive migration of all licenses (“wholesale conversion”) rather than a gradual swap.
Under the S/4HANA contract, new terms and metrics supersede all legacy contract terms. Because it’s an all-in approach, contract conversion allows companies to reconfigure their license portfolio from scratch, trading in shelfware (unused licenses) and adjusting the mix of products to better fit current and future needs.
It also moves the organization onto SAP’s latest pricing and licensing model (for example, new S/4HANA user types and metrics, and updated definitions like Digital Access for indirect use).
Both paths allow customers to carry forward prior investments, but in different ways. It’s important to note that SAP’s policies evolve. Historically, both options were available to on-premise customers.
However, recent policy changes have started limiting the availability of product conversion in favor of contract conversion or cloud subscription routes. Organizations should verify which options are currently supported by SAP as they plan their transition.
Partial product conversion opportunities may still exist in regulated industries or specific cases, but generally, SAP’s strategic push is toward full contract conversion or cloud solutions.
With these two paths defined, the next step is to compare their implications in detail.
Product Conversion: Preserving Legacy Contracts with a Phased Approach
Under product conversion, the key characteristic is continuity. The organization’s original ERP license contract (and all its negotiated pricing and special terms) remains in force. Only specific products within that contract are converted to S/4HANA equivalents.
Notable features of product conversion include:
- Selective, Stepwise Migration: You choose which licenses to convert and when, aligned with your project phases. This flexibility means you could, for example, convert financial modules to S/4HANA this year and logistics modules later rather than all at once. It aligns well with phased technical migrations and pilot rollouts. Business units can move to S/4HANA at different paces without licensing holding them back.
- Dual Usage Rights: Because the original contract stays active, users can continue running the legacy SAP ECC system in parallel with S/4HANA during the transition. The licenses you converted (and even those you haven’t yet converted) can be used in both environments concurrently. This dual usage avoids double-paying for overlapping systems and provides operational continuity — a critical risk mitigator for big ERP projects.
- Retained Contractual Benefits: Any special agreements, discounts, or usage rights in your current contract carry forward. For instance, if you negotiated special terms for certain user categories or got a carve-out for a particular indirect use scenario, those remain intact with product conversion. Additionally, legacy user license types that no longer exist in S/4HANA’s catalog (e.g., older limited-use roles) can continue to be utilized. This could be financially advantageous if those legacy user types had lower costs than the new S/4HANA user categories.
- No Immediate Repricing: Since you are not entering a new contract, you avoid an abrupt increase in maintenance costs or a change to subscription licensing. Maintenance fees continue on your existing contract value. SAP typically allows a license credit of up to 100% for one-to-one product swaps under product conversion, meaning if you already paid for a given engine or module, you get the S/4HANA version without new license charges (assuming you negotiate to cover any price list differences with appropriate discounts). However, you generally can’t convert a product you don’t already own — product conversion won’t grant entirely new functionality without purchase.
Despite these strengths, product conversion comes with constraints and risks. It requires mapping each legacy product to an equivalent S/4HANA product, which can be complex if your portfolio is large.
Not every classic ERP module has a direct S/4HANA counterpart (some functions might be split into multiple components or renamed), so careful analysis is needed to ensure nothing is lost.
Also, you cannot use product conversion to reduce your license volume or cost – downsizing isn’t permitted as part of the deal. The annual maintenance base you pay to SAP will remain the same; even unused (“shelfware”) licenses typically must stay on contract if you want to preserve their credit value for potential later conversion.
In other words, you carry any inefficiencies in your current licensing. Suppose your organization is significantly over-licensed relative to usage. Product conversion extends that situation into S/4HANA unless you take separate action to terminate maintenance on unused products (which SAP often restricts).
Another consideration is eligibility: in the past, SAP required customers to have a special S/4HANA bridging license (often a so-called “Enterprise Management for ERP Customers” license) to utilize product conversion. Product conversion might not be offered without prior purchase of this or a similar entitlement.
Additionally, SAP’s shifting policies mean product conversion options might be withdrawn or discouraged over time. Thus, while product conversion is attractive for its low disruption, its window of availability may be limited.
Organizations should weigh the benefits of keeping their legacy contract versus the possibility that a full re-contracting could eventually be inevitable.
Contract Conversion: Reinventing Your SAP License Portfolio for S/4HANA
Contract conversion is a transformative approach that goes beyond a simple swap. Replacing the contract allows a “blank slate” re-design of your SAP licensing in S/4HANA.
Key aspects of contract conversion include:
- Complete Portfolio Restructure: All existing license entitlements (software products and user licenses) are evaluated and converted into a new S/4HANA-aligned license bill-of-material. This is an opportunity to drop or trade in what you don’t need and acquire what you need for the future. For example, suppose your ECC contract included modules or add-ons you no longer use. You can forego them in the new contract and apply their value toward new S/4HANA modules supporting your business processes. SAP permits cross-credits of shelfware in contract conversions – even if the unused licenses are for different product areas, their contract value can offset the cost of unrelated new licenses. This flexibility is sometimes called the “milkshake” approach, effectively blending the old and new license values into a single pool.
- New License Metrics and Terms: With a fresh S/4HANA contract, you’ll be subject to SAP’s latest pricing and terms (typically the SAP S/4HANA Product Use Rights and Software Use Agreement). All users and engines will be licensed under the new S/4HANA definitions. Named user licenses, for example, will convert into the streamlined S/4HANA user categories (often Professional, Functional, Developer, etc.), which may simplify the user classification but could be a big change if you previously had many tiers of users. It’s vital to study the new licensing terms in detail—certain rules (like those governing indirect access to SAP data) have changed in S/4HANA’s agreements. (SAP’s much-discussed Digital Access model for indirect use is a case in point: contract conversion is one way SAP has encouraged its adoption, though in some cases, SAP may negotiate exceptions or accommodations if a customer resists adopting the new model immediately.) Ensuring no critical usage rights are lost in the move to new terms is a key part of the conversion planning.
- Trade-In Credit and Investment Protection: SAP will calculate a credit based on the value of your existing licenses (often related to the original license fees or the current maintenance base). That credit is applied toward the cost of your new S/4HANA licenses. In theory, this can cover a substantial portion of the new purchase—sometimes nearly the entire amount—meaning you’re not paying twice for software you already own. In practice, SAP typically requires that a certain percentage of the new contract value be incremental (often a minimum increase to your annual maintenance commitment). For example, organizations might find that they must carry over 100% of their previous maintenance spend (no reductions) and perhaps accept a modest uplift (e.g., a ~10% increase in the maintenance base) as part of the deal. The principle is that SAP protects your past investment, but expects a fresh investment for the new system. Contract conversion is often most cost-effective for customers who plan to expand their SAP footprint or add new capabilities – the credit for old licenses smooths the cost of those new investments. In contrast, if a company only wants to continue what it already owns without growth, a contract conversion could increase cost with little functional gain due to the required maintenance uplift.
- Dual Environment Transition: Even with a full contract conversion, SAP allows customers to continue operating their legacy ECC systems for a transition period. The new S/4HANA contract will typically include provisions (sometimes via special “compatibility packs” or simply transitional wording) to let you use the old software until your S/4HANA go-live is complete. However, unlike product conversion, you’ll be using those old systems under the new contract’s terms (essentially, the old products get new license codes under S/4HANA pricing). Still, the effect is similar: you avoid a hard cutoff and can phase your technical migration. The difference is that because your entire contract is swapped, you have committed fully to S/4HANA, even if parts of your business are temporarily on the old system.
Contract conversion, by its nature, carries more upfront risks and complexities. It is a major negotiation and legal undertaking.
All previous agreements must be reviewed—any favorable clauses in your old contract (such as price protections, unlimited deployment rights for certain components, or special discounts) will vanish unless you explicitly renegotiate them into the new S/4HANA contract.
Organizations must carefully catalog and preserve critical legacy terms during negotiations. It’s advisable to involve licensing experts or legal counsel to compare old and new contract language so that nothing important is lost in translation.
Another risk lies in misjudging the needed licenses in the new environment. Because S/4HANA’s product structure is not identical to ECC’s, defining the new Bill of Materials requires mapping all your business processes to S/4HANA offerings.
Some ECC packages have been split into multiple S/4HANA components, while others have been renamed or discontinued. If you underestimate or overlook a component in the new contract, you could find a functionality gap later (with an unexpected new purchase needed).
Conversely, overestimating needs could lock you into paying maintenance on licenses you don’t fully use. Thorough discovery and future-state planning are critical before signing on the dotted line.
In essence, contract conversion condenses what might have been a series of incremental licensing decisions into one big bang—you must “get it right” up front.
Despite these challenges, the opportunity side of contract conversion is significant. It’s the best chance to clean the house and optimize.
Companies can exit the conversion with a leaner, more relevant set of licenses, potentially simplifying compliance management and aligning costs directly with current business value.
It also paves the way for adopting innovations (since you can include additional SAP modules like S/4HANA analytics, cloud extensions, etc., financed partly by legacy credits).
Moreover, some organizations leverage the contract conversion event to negotiate better long-term commercial terms (for instance, setting new discount levels, protection against future price increases, or concession packages from SAP as part of the S/4 commitment).
SAP’s sales teams are motivated to move customers onto S/4HANA, so customers may have leverage to obtain incentives during the contract conversion deal-making.
Comparing the Approaches: Advantages, Risks, and Strategic Considerations
Choosing between product and contract conversion (or determining the sequence of using both) demands a strategic evaluation.
Both paths ultimately allow you to run S/4HANA using your existing license investments, but with different financial and operational implications.
Below is a comparative overview:
- Investment Protection: Product conversion is conservative – it maintains the status quo of your contract, which protects any existing investment without requiring much new spending (beyond perhaps a one-time S/4HANA access fee if not already paid). Contract conversion also protects past spending via credits, but it usually involves committing new investments (you’ll almost certainly pay more maintenance or license fees in the future). If minimizing near-term costs is paramount, product conversion initially has the edge. However, contract conversion can maximize the long-term value of your investment by reallocating it to areas you truly need (making your spending more effective, if not lower).
- Licensing Flexibility: Contract conversion is far more flexible when reshaping your license portfolio. You can swap anything you don’t need for something else, essentially monetizing shelfware into useful licenses. Product conversion lacks this flexibility; it’s a one-to-one mirror of what you already have. If you own obsolete modules for your business, product conversion offers no relief (you’d not convert them and possibly lose their value). In contrast, contract conversion lets you get credit for those and apply them elsewhere. Contract conversion is strategically advantageous for organizations with a lot of unused SAP functionality or plans to adopt new capabilities.
- Risk and Complexity: Product conversion is simpler from a contractual standpoint. Since you’re not breaking the contract, there’s less negotiation and fewer legal unknowns. This reduces risk in the short term – you know exactly what terms you are operating under (the same ones you had). The main complexity is ensuring each product maps correctly to an S/4 product and that you temporarily manage two environments. Contract conversion carries more complexity: negotiating a new contract, ensuring all requirements are captured, and possibly dealing with new licensing constructs (like revised user definitions or indirect access rules). The risk of missteps is higher, but so is the potential reward. Think of product conversion as an evolutionary step and contract conversion as a transformational step that needs careful project management across IT, procurement, and legal teams.
- Timeline Alignment: If your S/4HANA technical migration is planned as a multi-year journey, product conversion naturally aligns with that – you convert licenses in sync with system go-lives and comfortably run dual environments. It avoids paying for licenses long before they are used. On the other hand, contract conversion effectively pulls the licensing trigger early: you will own (and pay maintenance on) the full S/4HANA contract from the moment of conversion, even if the S/4 system rollout takes time. You must ensure a budget for potentially overlapping maintenance (though SAP’s dual-use provisions mean you shouldn’t pay double; the maintenance shifts to the new contract). Organizations confident in an aggressive migration timeline or those starting mostly fresh (e.g., a “greenfield” S/4 implementation) often do fine with contract conversion. Those expecting a drawn-out hybrid ECC/S/4 period might prefer product conversion initially to avoid overpaying or rushing into a final license state.
- Future Growth and Innovation: Contract conversion sets you up on SAP’s latest model, which may include licensing for innovations (IoT integration, advanced analytics, etc.) or easily adding on cloud services. It’s forward-looking: if your strategy is to expand with SAP’s evolving technology, a new contract may accommodate that more cleanly. Product conversion is backward-looking because it keeps your licenses tied to older definitions. It may be that some new S/4HANA capabilities (especially those not existing in ECC) can only be obtained via a contract conversion or a net-new purchase. Thus, product conversion might delay your access to certain advanced solutions unless you’re willing to handle a mixed licensing environment.
Product conversion is about stability and phased change, while contract conversion is about comprehensiveness and strategic realignment.
Many enterprises initially lean toward product conversion to minimize disruption and cost in the near term, then later execute a contract conversion when they are ready to fully embrace S/4HANA and possibly negotiate a broader deal (some even use the threat of third-party support or delay S/4 adoption as leverage to get a better contract conversion offer from SAP).
Each organization’s choice will depend on its unique situation: the amount of unused licenses it has, the aggressiveness of its S/4HANA adoption plan, the favorability of its current contract terms, and its tolerance for change.
In some cases, a combination approach is used—for example, a limited product conversion now to buy time and preserve certain rights, with the intention of a full contract conversion in a year or two once requirements are clearer or internal alignment is achieved.
The key is approaching the decision strategically rather than reactively, considering immediate needs and the long-term business roadmap with SAP.
Maximizing the Value of Existing SAP Investments During the Move
A central theme for CIOs is ensuring that the significant investments already made in SAP licenses are not wasted in the move to S/4HANA.
Both conversion paths are designed to protect the value of your installed base, but maximizing value requires active effort:
- Thorough License Inventory & Usage Analysis: Conduct a detailed inventory of what you own and how it’s being used before any conversion. Identify shelfware (unused or under-used licenses), heavily used licenses, and licenses tied to soon-to-be-retired processes. This baseline will inform your strategy — for instance, you might discover you have far more HR user licenses than needed but will require additional supply chain licenses in S/4HANA. Knowing this lets you plan a trade-in (with contract conversion) or decide which products not to convert (with product conversion) if they aren’t needed in the future. It also strengthens your negotiating hand with SAP when valuing your legacy portfolio.
- Align License Needs with Future-State Architecture: Determine which S/4HANA modules and components you intend to implement. Some functionality in ECC may be delivered differently in S/4HANA. For example, certain industry solutions might roll up into the core in S/4HANA, or previously separately licensed add-ons might become standard. Ensure you’re not planning to license components that become redundant or are now bundled. Conversely, check if any new S/4HANA capabilities (analytics, Fiori apps, etc.) are on your roadmap and include them in conversion discussions so you can obtain them using credit rather than buying them later as standalone. The goal is to cover your future requirements as comprehensively as possible under the conversion deal, leveraging your existing investment to pay for them. This forward-looking approach prevents needing an unexpected purchase post-migration (which could be budget-unfriendly if you lack the leverage of a big conversion negotiation).
- Negotiate Dual-Use and Transition Periods: However, you convert and secure provisions that allow adequate time for parallel use of ECC and S/4HANA environments. This typically means obtaining dual-use rights for the duration of the migration project. These rights ensure users can access both systems without extra cost and that you remain compliant during data migration, testing, and phased cutovers. SAP generally provides this (explicitly in product conversion and via contract clauses or “compatibility licenses” in contract conversion). Still, the exact length of the allowed period and conditions should be negotiated in writing. Large enterprises often need several years of overlap; make sure SAP’s offer aligns with your project timeline and includes some buffer for unexpected delays. Dual-use rights protect the value of your old licenses until you truly retire the old system.
- Maintain or Re-negotiate Special Terms: Over the years of using SAP, you might have secured special licensing terms (e.g., rights to use certain programs in non-production environments at no extra cost or grandfathered pricing for a module). During conversion, there’s a risk of “losing” these in the fine print. A savvy approach to maximize value is to explicitly carry over such terms. In a product conversion, they inherently carry over because the contract stays the same (but double-check that nothing in the S/4HANA product conversion process inadvertently nullifies an old agreement). In a contract conversion, make a checklist of all critical special provisions in your current contracts and use it as part of negotiations. For instance, if you have an agreement that caps annual maintenance increases, ensure the new contract includes an equivalent cap. If some old user types had an advantageous definition you rely on, see if SAP will include a protective clause or provide an exception in the new contract. While not all old terms can be replicated, you may negotiate compensating benefits if something is lost. Protecting these legacy gains ensures you preserve the full value of what you’ve invested historically.
- Plan for Cost Management: Neither conversion path is fundamentally about cost-cutting – SAP has structured them so that your annual spending typically stays the same or rises. However, you can maximize value by ensuring every dollar spent goes toward useful licenses. For example, if you must maintain the same maintenance spend under contract conversion, allocate it to licenses that bring new capabilities rather than continue paying for dormant ones. In essence, optimize your spend composition, if not the absolute amount. Additionally, conversion time is a prime chance to negotiate volume discounts, migration incentives, services, and training credits from SAP to sweeten the deal. A well-negotiated conversion might yield not just licenses but also help with implementation or training, adding to the value received for the cost.
- Avoiding Pitfalls: Be mindful of common pitfalls that can erode value. One pitfall is underestimating indirect access exposure in S/4HANA. If moving to the Digital Access document model, analyze how documents are created in your landscape to size that correctly, or negotiate a protective clause if you plan to stick with the old model. Another pitfall is not considering future scalability: locking in a certain number of user licenses only to find you need many more in a few years. It may be wise to build flexibility (such as discount tiers for additional users or a conditional option to convert extra licenses at the same credit rate later). Lastly, watch out for any one-time conversion fees or policy clauses that could lead to surprise costs (for instance, some conversions might stipulate that if the project isn’t completed in a set time, additional fees kick in—ensure you understand all such terms).
By proactively addressing these areas, organizations can turn the S/4HANA licensing transition into an opportunity to maximize the ROI on their SAP investments.
It shifts the narrative from “How much will this migration cost us?” to “How can we get the most value from our SAP estate through this migration?”.
Key Considerations for CIOs
In planning a license transition to S/4HANA, CIOs and IT leaders should take a strategic, business-aligned approach.
Below are key considerations and best practices to guide decision-making:
- Start with a License Assessment: Begin with a comprehensive audit of your current SAP licenses and usage. Understand exactly what you have, what you use, and what shelfware is. This clarity is the foundation for any conversion strategy and strengthens your position in discussions with SAP.
- Align Licensing Path with Transformation Strategy: Choose the conversion approach that best fits your S/4HANA deployment plan and business goals. If your migration will be incremental or you need to maintain stable operations, ensure product conversion (or a phased approach) is feasible. If you are ready for a holistic transformation or need to realign licenses with business priorities, plan for a contract conversion. Sometimes, plan a phased conversion (product first, contract later) to balance short-term stability and long-term flexibility.
- Engage Stakeholders Early: Treat the license migration as a project in its own right. Involve procurement, legal, enterprise architecture, and finance teams early in the planning. This ensures that contractual nuances, budget implications, and technical requirements are all considered together. Early executive sponsorship and cross-functional alignment will help avoid last-minute surprises (like discovering a critical license wasn’t accounted for). They will empower the CIO to negotiate confidently with SAP, which a united organization backs.
- Negotiate from a Position of Knowledge: Before engaging SAP on conversion, do your homework. Know the approximate license credit you should receive, understand SAP’s current policies (e.g., minimum maintenance commitments and available incentive programs), and be aware of peer benchmarks if possible. Leverage external expertise if needed (such as SAP licensing advisory firms) to model different scenarios and identify negotiation levers. Well-informed customers can negotiate more favorable outcomes, whether better credit for legacy licenses, retention of certain terms, or additional value-adds. Remember that this transition is likely a one-time renegotiation opportunity that will shape your SAP costs for years to come—make it count.
- Ensure Dual Operations and Compliance: Insist on contractual clauses that allow you to run ECC and S/4HANA in parallel until the migration is complete, which clarifies how licenses are counted during this phase. This safeguards business continuity. Simultaneously, maintain rigorous license compliance tracking throughout the transition. The risk of audit or compliance issues can increase during periods of change. Don’t assume everything is automatically compliant—verify that using both environments falls under the granted rights. It’s wise to document and agree with SAP on the scope of dual-use (users, systems, timeframe) to prevent misunderstandings.
- Focus on Future Value: Keep the end-state vision front and center. The goal isn’t just to migrate licenses—it’s to enable your organization’s future with S/4HANA. So, design your license conversion to support innovation. For example, if you plan to incorporate AI/ML or IoT scenarios via SAP’s technology platform, consider how those are licensed in S/4HANA and include what you’ll need. Ensure your new contract allows you to grow (through flexible volume terms or add-on options) without astronomical cost spikes. A successful conversion is one that you won’t need to revisit in a year or two because of an overlooked requirement.
Next Steps: CIOs should treat the S/4HANA licensing transition as a strategic initiative.
Immediately actionable steps include assembling an internal task force or working group on SAP license migration, engaging with SAP (and perhaps third-party advisors) to obtain the latest program offerings and policy details, and developing a high-level conversion roadmap that ties into the technical migration timeline.
By approaching contract conversion and product conversion decisions with rigor and foresight, organizations can turn what might seem like a license compliance exercise into a strategic lever—optimizing costs, securing needed capabilities, and ultimately enabling the full business value of SAP S/4HANA.
