SAP S/4HANA On-Premise and Cloud Licensing
SAP S/4HANA can be licensed through a traditional on-premise model or via cloud subscription services.
On-premise licensing involves purchasing perpetual software rights (plus ongoing support fees), whereas cloud licensing is subscription-based (covering software, hosting, and updates).
This article compares SAP S/4HANA on-premises and cloud licensing, highlighting the differences in cost structure, available service editions, license types, and key commercial considerations for enterprises.
On-Premise S/4HANA Licensing Model
Perpetual Licensing:
In an on-premise deployment, a company buys a perpetual S/4HANA license with a one-time upfront fee. This license grants indefinite usage rights for the SAP S/4HANA Enterprise Management (the core ERP functionality) and any additional modules purchased.
Enterprises typically also purchase a HANA database license (either a HANA Runtime license restricted to SAP applications or a full-use HANA license for broader use).
After the initial purchase, the customer pays annual maintenance (usually ~20% of the license cost) for support and updates.
Read Top 20 Things Every ITAM Professional Needs to Know About SAP S/4HANA License Management and Negotiations.
Named User Licenses:
On-premise S/4HANA requires a license for each user. Common license names include:
- Professional User – Full access to all SAP modules and transactions (highest-cost user license)
- Limited/Functional User – Restricted access to specific modules or tasks at a lower price (e.g. a procurement or HR clerk with limited scope)
- Employee (ESS) User – Self-service users for light tasks (like time entry or expense reports)
- Developer User – For technical users who build and customize the system (usually in addition to their base user license)
These named-user licenses are stacked on top of the core SAP S/4HANA Enterprise Management license.
Additionally, certain Line-of-Business (LoB) or engine licenses may be required for additional modules (e.g., Advanced Warehouse Management, Treasury), which are often measured by usage metrics (such as transactions or revenue).
The on-premise model offers full control: companies host S/4HANA on their own servers (or cloud infrastructure they manage) and can customize extensively.
However, they bear responsibility for infrastructure, upgrades, and ensuring license compliance (e.g., not exceeding user counts or usage metrics).
Read Differences Between SAP ERP and SAP S/4HANA Licensing.
S/4HANA Cloud Licensing & Service Editions
Subscription Model: SAP S/4HANA Cloud is licensed as a subscription service (typically a 3-year or annual contract).
Instead of buying the software, you pay a recurring fee (OpEx) that includes software usage rights, hosting on SAP’s cloud (or a partner’s cloud), regular upgrades, and support.
Licensing in the cloud is often quantified by an aggregate metric like Full User Equivalents (FUE) or by named user bundles:
- SAP defines user types (e.g., “Advanced” vs. “Core” users) and assigns each a weight (e.g., 1 Advanced = 1 FUE, 1 Core = 0.2 FUE). Customers subscribe to a total FUE count rather than individual named users, allowing some flexibility in allocating different user types under that total.
- Indirect access (external systems using SAP data) in cloud scenarios is usually covered by the subscription (SAP introduced Digital Access licensing for documents in on-prem, but many cloud contracts bundle this or simplify it).
Cloud Service Options:
There are several S/4HANA cloud service editions (SAP’s terminology has evolved):
- SAP S/4HANA Cloud, Public Edition – A multi-tenant SaaS offering. Formerly known as Essential Edition, this is a highly standardized cloud ERP managed by SAP. It has limited customization (primarily “configuring” rather than custom coding) and quarterly release updates that apply to all customers. Licenses are subscription-based per user or FUE.
- SAP S/4HANA Cloud, Private Edition – A single-tenant cloud ERP instance dedicated to one customer (often part of RISE with SAP). It offers more flexibility: customers can carry over some existing customizations and choose slower update schedules (e.g., yearly or twice-yearly updates). The licensing is still subscription, but the system is isolated. Private Edition often appeals to those who want cloud benefits but with an experience closer to on-prem control.
- SAP HANA Enterprise Cloud (HEC) – A legacy offering where SAP hosts your S/4HANA in a private managed environment. In HEC, you typically bring your own S/4HANA licenses or convert to a subscription; SAP provides the infrastructure and management as a service. (Today, HEC has largely been subsumed under SAP S/4HANA Private Cloud Edition as part of RISE).
- RISE with SAP – Not a separate edition of S/4, but an all-in-one contract bundle introduced in 2021. RISE packages S/4HANA Cloud (you can choose public or private edition) with infrastructure, SAP Business Technology Platform usage, and other tools for a single subscription price. It’s essentially “SAP S/4HANA Cloud delivered as a service” plus extras. RISE contracts use the FUE metric for licensing and often require trading in existing on-prem licenses for credits.
Under any cloud option, SAP is responsible for system uptime, routine maintenance, and updates. The customer focuses on the configuration and use of the system, paying regularly for the service.
One notable difference is that cloud subscriptions have a term – if you choose not to renew, you lose access to the software (and must extract your data).
This contrasts with on-premises, where a perpetual license means you can theoretically continue using the software indefinitely (even if you stop maintenance, albeit without support or updates).
Read SAP S/4HANA Digital Core Licensing.
Cost Structure and Pricing Comparison
One of the biggest contrasts between on-premise and cloud licensing is how you pay for the software over time.
On-premise requires significant capital expenditure upfront, while cloud is a pay-as-you-go Operational Expenditure model. Below is a comparison of typical cost elements:
| Cost Factor | SAP S/4HANA On-Premise | SAP S/4HANA Cloud (Subscription) |
|---|---|---|
| License Fees | Large one-time purchase for software rights. Example: ~$1M upfront for 500 users (depending on user types and discounts). | No upfront license cost; pay subscription per year or month. Example: ~$600k per year for 500 users (at ~$100/user/month average). |
| Support & Upgrades | ~20% of license fee per year for support (maintenance). e.g. $200k/year on a $1M license. Upgrades are manual and at the customer’s discretion (but require current maintenance). | Included in subscription fee. SAP provides updates (e.g. quarterly for public cloud) and support as part of the service. No separate upgrade charge, but you must accept the update schedule. |
| Infrastructure & Hosting | Customer’s responsibility (self-host on servers or cloud IaaS). This entails hardware, data center costs, and IT staff. Budget a few hundred thousand USD (for 500 users) initially, plus ongoing ops cost. | Included in subscription. SAP (or hyperscaler via SAP) hosts the system in the cloud. No separate hardware cost to the customer, though subscription price builds in these hosting costs. |
| Customization Effort | High flexibility – you can deeply customize, but at your cost (developers, longer implementation). No direct licensing cost for customizing, but heavy modifications may complicate future upgrades. | Standardized environment – customization is limited to what SAP allows (especially in public edition). Heavy modifications might require moving to private edition. Simpler processes can reduce implementation cost, but less ability to tailor means potential gaps. |
| Total 5-Year TCO (Illustrative) | If we combine costs: $1M (license) + $1M maintenance (5 x $200k) + say $500k in infrastructure/staff = **$2.5M** over 5 years (not including implementation services). Significant upfront, lower incremental costs thereafter. | Subscription for 5 years: ~$600k x 5 = $3.0M total. This covers software, support, and hosting. Upfront costs are lower (perhaps just implementation services), but cumulative costs may be comparable or higher over time. |
Real-world pricing varies. SAP’s list prices are high, but large enterprises often negotiate >50% discounts on on-prem licenses, especially when migrating from SAP ECC (credits for existing investments are common).
Cloud subscriptions are also negotiable – volume discounts apply, and SAP may bundle incentives (for example, a fixed base fee plus a variable user fee).
Always benchmark and negotiate: a Professional on-prem user license has a list price in the ~$3k–6k range (one-time), whereas a Cloud subscription per user might list at ~$2.4k–3k per year – but your deal could differ greatly after discounts.
The key is aligning costs with your projected 5-10 year roadmap. On-premises can be cheaper in the long run if you utilize the licenses fully, while cloud shifts costs to predictable yearly payments and reduces internal IT expenses.
Flexibility, Customization, and Upgrade Considerations
With on-premise licensing, you have full control over the S/4HANA environment.
This means you can tailor the system extensively, adding custom code, industry-specific modifications, and third-party integrations as needed.
The licensing doesn’t restrict customization, but highly customized on-prem systems can become expensive to maintain. Importantly, on-prem customers decide if and when to apply upgrades or enhancement packs; you might choose to upgrade S/4HANA every few years (to align with business readiness and testing cycles).
This flexibility can be a double-edged sword: you avoid disruptive frequent changes, but delaying upgrades too long can leave you on outdated software and potentially unsupported versions.
In the cloud model (especially S/4HANA Cloud, Public Edition), SAP delivers automatic updates on a fixed schedule (e.g., quarterly feature releases). This ensures you’re always on the latest version, which is good for innovation and compliance, but it means less control over change timing.
Companies must be ready to absorb updates continuously (testing new releases quickly). Customizations are restricted to what SAP allows via “extensibility” (limited custom fields, modest extensions, and integration via APIs). You cannot modify core code or tables in the public cloud edition – all customers run on a uniform code line.
This enforces best practices and simpler configurations, but if your business has unique processes, it might not fit a pure SaaS model without change.
The Private Cloud Edition relaxes some of these restrictions: you get your own instance, allowing you to apply select modifications, and you can delay updates slightly (SAP typically allows skipping one release cycle, for example).
Still, even in the private cloud, SAP encourages keeping the system as standard as possible to ease the upgrade process they manage.
Another aspect is scalability: Cloud subscriptions make it easier to scale users up or down. If your business grows or shrinks, you can adjust the number of user subscriptions at renewal (or sometimes mid-term).
In contrast, on-prem licenses, once bought, are fixed assets (you can add more, but you usually cannot return licenses for credit if your user count drops). For rapidly changing organizations or projects with variable usage, the cloud’s elasticity is particularly attractive.
On-premises may result in shelfware (unused licenses) if the organization downsizes or restructures, but on-premises also means no ongoing fee for unused licenses – you retain the rights even if you are not currently using them.
Data residency and compliance can also drive decisions. Some industries (government, defense, etc.) prefer on-prem for full data control and to satisfy regulatory requirements by keeping systems in-house or in a specific geography.
SAP’s cloud does offer region-specific hosting and various certifications, but certain compliance officers are more comfortable with on-premise control.
That said, SAP invests heavily in cloud security and compliance standards, operating under a shared responsibility model (SAP secures the infrastructure and application, the customer manages user access and configuration).
Contract and Negotiation Considerations
Choosing between on-premise and cloud has major contractual and long-term implications. With on-premise S/4HANA, you own a software asset.
If you’ve been an SAP ERP customer, you likely already invested in licenses. SAP offers programs to convert those ECC licenses to S/4HANA licenses (often via a contract conversion or exchange process).
One strategy is the SAP contract conversion: e.g., licensing “SAP S/4HANA Enterprise Management for ERP customers” at a flat fee to cover your current SAP footprint, then simply carrying over your named users.
This can sometimes be cost-efficient, leveraging past spend. When negotiating an on-prem deal, seek price protections (for future user or module additions) and understand your entitlements (for example, does your S/4HANA license include certain previously separate components like CRM or SCM? S/4HANA’s core is broader than ECC’s, which can reduce the need for extra licenses).
Cloud contracts (including RISE with SAP) simplify procurement – everything is bundled into one SKU – but be aware of potential lock-in clauses.
A RISE contract often requires you to terminate existing on-prem licenses (or convert them) as you move to subscription; if you do so, you relinquish those perpetual rights.
This means that if you ever want to revert to on-premises, you may have to repurchase licenses.
It’s crucial to ensure the cloud contract meets your needs: negotiate flexibility in user counts (e.g., the ability to flex up/down annually without steep penalties) and performance/service SLAs.
Also, clarify how overages are handled: if you exceed your FUE or user count, will SAP allow a true-up at reasonable rates? Ensure that indirect usage or API calls are accounted for.
SAP’s Digital Access document licensing can be included in a RISE deal, but make sure it’s explicitly covered to avoid surprise charges if, say, your e-commerce site generates extra SAP transactions.
Audit and compliance risk shifts in the cloud model. In on-prem, SAP has the right to audit your usage – they will check if you have unlicensed users or if engines are being used beyond licensed metrics.
Audits can result in hefty compliance fees if, for example, more users are using the system than you paid for, or if indirect access isn’t licensed.
In the cloud, audits are less about traditional compliance and more about subscription scope – if you stay within your contracted metrics, you’re fine, but if your usage grows beyond it, you’ll need to upgrade your subscription.
Cloud contracts may specify periodic usage reviews. Overall, cloud can reduce the classic audit risk (since you’re pre-paying for usage), but be cautious with user count estimates – avoid over-committing (paying for far more FUEs than needed), yet also avoid underestimating (which could force a mid-term contract expansion).
A good practice is to conduct an internal license audit or usage analysis before signing any S/4HANA contract. Understand how many users and which modules you truly need.
This applies to both models: it informs an on-prem purchase (so you buy the right mix of user types and engines) and a cloud subscription (so you contract the appropriate number of FUEs and services).
Finally, consider your long-term IT strategy. SAP has signaled a “cloud-first” direction – for example, new innovative functions sometimes appear in S/4HANA Cloud first.
Support for S/4HANA on-premise will continue for a long time (well into the 2030s), but the pressure to move to the cloud may increase over time as SAP’s investment shifts.
If you go on-premises now, ensure you have a plan (and contract provisions) for potentially transitioning to the cloud later (some enterprises negotiate conversion options into their contracts).
If you go cloud now, be mindful of exit strategies – for instance, what if, in 5 years, you want to switch to a different hosting provider or bring it in-house?
Negotiating data export rights and termination assistance in the contract can save headaches later.
In summary, the decision between on-premises and cloud is not just a technical choice, but a commercial one: it affects how you pay, how you negotiate with SAP, and your flexibility in the future.
Recommendations
- Assess Total Cost of Ownership: Analyze a minimum of 5-10 years. An upfront license + maintenance might cost less over time than a decade of subscriptions – or not, depending on your growth and discount. Build scenarios for both to inform your decision.
- Inventory and Right-Size Licenses: Before migrating or signing a new contract, do an internal audit of your current SAP usage. Identify actual active users and needed modules. Optimize license allocations (e.g., don’t assign all users a Professional license if many only need limited access). This prevents overbuying in a new S/4 deal and provides a basis for negotiating FUE counts or user numbers with SAP.
- Leverage Conversion Programs: If you are an existing SAP ERP (ECC) customer, consider engaging with SAP about conversion credits or programs. SAP often offers credit for existing licenses when moving to S/4HANA (especially into RISE). Use this to reduce the cost. But weigh the trade-off: taking credits usually means retiring your old licenses – ensure the new subscription genuinely adds value before giving up a perpetual asset.
- Negotiate Cloud Terms Rigorously: In subscription deals, push for flexibility and clarity. For example, negotiate the ability to adjust user counts annually, and clarity on price per FUE if you need more. Ensure cloud SLAs meet your requirements (uptime, support response) and include provisions for data retrieval at contract end. Try to include indirect usage (digital access) in the subscription to avoid separate bills. Everything in SAP contracts is negotiable – don’t accept the list terms.
- Plan for Compliance: Even in on-prem, stay compliant by monitoring user assignments and usage. Implement governance to promptly remove or reassign licenses when employees leave or change roles, ensuring seamless transitions. In the cloud, monitor your consumption of SAP resources against contract limits. Proactively manage this to avoid last-minute true-up costs or compliance findings during SAP audits.
- Consider a Phased or Hybrid Approach: You don’t have to choose a full one-or-the-other immediately. Some enterprises adopt a hybrid model – e.g., keeping critical systems on-premise (where absolute control is needed or heavy customizations are required) and placing new or less differentiated workloads on S/4HANA Cloud. SAP’s licensing can accommodate hybrid scenarios (and you might negotiate a combined deal). This can ease the transition and spread out costs.
- Align with Business Strategy: If your organization prioritizes agility, rapid deployments, and standard processes, the cloud edition’s simplicity and continuous updates may align well. If you require specialized processes and autonomy for system changes, an on-premises (or private cloud) solution could be a better fit. Make the licensing model decision a part of your broader IT strategy discussion, not just a procurement task.
- Keep Exit Options Open: Technology and business needs are constantly evolving. If opting for RISE or Cloud, have a contingency plan in place for what happens after the contract. For example, negotiate contract lengths that make sense (many opt for 3-year subscriptions with options to extend), and understand the process and costs if you ever want to bring the system on-prem or to a different cloud. Similarly, if you stick with on-premises now, ensure your licenses are under maintenance so you retain the option to receive updates or even switch to a subscription later with a conversion.
- Consult Expertise: SAP licensing is a complex matter. Engage with SAP licensing experts or user groups (ASUG, DSAG, etc.) for benchmarks and advice. Peer insights can reveal negotiation tactics and common pitfalls. When drafting contracts, involve both IT and procurement/legal to cover technical needs and protect commercial interests (like capping price increases on renewals, etc.).
- Monitor SAP’s Roadmap: Keep an eye on SAP’s support timelines and product strategy. For example, knowing the support window for S/4HANA on-prem (and any announced extensions) helps in planning. SAP’s emphasis on cloud might come with incentives – or eventual pressure – so stay informed to make proactive decisions rather than reactive ones.
FAQ
Q1: Can we switch from S/4HANA on-premise to cloud in the future (or vice versa)?
A: Yes, but it requires planning. Moving from on-premises to cloud typically means either migrating via RISE (where SAP may offer conversion credits for your existing licenses) or reimplementation in S/4HANA Cloud. Be aware that if you’ve heavily customized on-premises systems, those customizations may need to be rebuilt or dropped in the cloud. Moving from cloud to on-premises is less common; it would entail purchasing new licenses (if you relinquish your originals) and migrating data back to an on-premises system. Always check contract terms – for instance, RISE deals might stipulate what happens if you exit the cloud service. In any case, switching models isn’t a simple swap; it’s a project akin to a migration, and you should carefully evaluate the costs and benefits.
Q2: How do the user licensing metrics differ between on-prem and cloud?
A: On-prem S/4HANA uses traditional Named User licenses – each user is counted and needs a specific license type (Professional, Functional, etc.), which you purchase up front. In contrast, S/4HANA Cloud uses a Full User Equivalent (FUE) model or predefined user bundles. Instead of assigning licenses one by one, you subscribe to a total user capacity. For example, you might contract 100 FUEs, which could correspond to 100 power users, 500 casual users, or any mix (SAP defines how many of each user type equal 1 FUE). This gives some flexibility in user composition. The practical difference: with on-premises solutions, true-ups occur when you exceed your licensed user count; in the cloud, you’re paying for a block of capacity and can usually adjust it at renewal. Both require careful sizing – on-prem to avoid unused licenses or compliance issues, and cloud to avoid overpaying for unused FUEs.
Q3: What are the official SAP S/4HANA Cloud editions that we should be aware of?
A: SAP currently offers S/4HANA in two main cloud flavors: Public Edition and Private Edition. The Public Edition (multi-tenant SaaS) is where your instance runs in a shared environment with strict standardization – ideal for companies that can utilize SAP’s best practices with minimal customization. The Private Edition (often accessed via a RISE with SAP contract) provides a dedicated instance, enabling more customization and control, offering a closer experience to on-premises solutions but delivered as a subscription service. Historically, SAP used terms like “Essential Edition” for the public multi-tenant version and “Extended Edition” for a single-tenant version; essentially, those map to today’s Public and Private editions, respectively. Additionally, SAP HANA Enterprise Cloud (HEC) is a legacy hosting service that is now essentially the backbone of the private edition – it’s SAP or partner-managed infrastructure for your S/4HANA system. When planning, decide if the strict Cloud Public Edition meets your needs or if you require the flexibility of a Private cloud (or even staying on-prem). Each has licensing implications (e.g., the Public edition might be slightly cheaper per user but with less flexibility, while the Private edition usually requires a higher commitment).
Q4: How does the cost compare over, say, a 5-year period between the models?
A: A simplified view: On-premise has high upfront costs but lower incremental costs, whereas cloud spreads the cost evenly. For example, consider 500 users: an on-premises license deal might cost approximately $1 million upfront for the software and around $ 200,000 per year in support (plus hardware and IT personnel costs). Over 5 years, you may spend approximately $2.5 million in total (excluding initial implementation services). In a cloud scenario for 500 users, at a cost of approximately $50–$200 per user per month (depending on user types and discounts), you would pay roughly $ 600,000 per year, which translates to $ 3,000,000 over 5 years, including all expenses (infrastructure, support). So, costs end up in the same ballpark, but cash flow and accounting differ (CapEx vs OpEx). The exact math will vary by your negotiated discounts and specific needs. One model might be cheaper if you have a stable user count and can negotiate a good discount (favoring on-premises), or if you expect significant growth or want to avoid infrastructure investments (favoring cloud, despite potentially higher long-term costs). It’s crucial to project your scenario, including software, hardware, support, implementation, and even the cost of capital (such as spending $1M upfront vs. spreading it out has financial implications).
Q5: What happens to our existing SAP licenses if we move to S/4HANA Cloud?
A: This depends on how you make the move. If you adopt RISE with SAP (Private Cloud), SAP typically offers to convert your existing ERP or S/4HANA on-prem licenses into a credit toward the subscription. Essentially, you trade in the perpetual licenses for the new cloud contract. You stop paying maintenance on them and instead pay the subscription. If you have unused license assets, sometimes those can offset some subscription cost via SAP’s Cloud Extension policy (allowing a partial swap). However, be mindful: when you trade in licenses, you lose the perpetual usage rights. Suppose you choose to keep your on-premises licenses and start a new S/4HANA Cloud subscription (no trade-in). In that case, your old licenses remain yours (you could even use them for a separate sandbox or keep them as a fallback), but you’ll be paying for both maintenance and the new subscription simultaneously, which is costly. Many customers converting to the cloud choose the conversion credit route to avoid double payment, but ensure the valuation of your existing licenses is clearly stated in the contract. It’s wise to have SAP put in writing what happens to your surrendered licenses (they usually become terminated when the cloud subscription starts). Also, note if you had other SAP products (CRM, BW, etc.) integrated, you’ll need to consider their licensing if those functions move into S/4HANA Cloud (some may be included in S/4, others might require separate cloud services). Always work with SAP (and possibly independent licensing advisors) to maximize the value of what you’ve already paid for.
Read more about SAP Licensing Services.
