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11/12/2009
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Global CIO: SAP's Spread Out Payment Plan Is Good But Not Enough

The ERP business has become a buyers' market and is likely to stay this way. SAP could be on the verge of capitalizing on that.

We are at a time of potentially momentous change in the way ERP applications are bought and sold. They key word here is "potentially"--and in this column, I'd like to share some thoughts on SAP's business model and what its recent changes in pricing plans means for CIOs today, and what it could mean for them in the future.

For more than 15 years, SAP (like other large vendors) has given customers volume discounts that are based on the size of a single deal. Aimed at making customers commit to buying as much software as possible, this scheme was vastly successful in its first 5 or 6 years.

Customers then started to realize that their implementations took longer than anticipated and that their needs had developed in a different way. Administrative staff was cut reducing the number of SAP users. Corporate strategies changed sooner than planned and a lot of add-ons just never were deployed. Customers were sitting on a lot of shelfware.

SAP, on the other hand, used its creativity and invented new pricing programs that extended the official discount schemes by far. Most of these schemes were targeting large, actually very large customers. In some cases, discounts reached levels up to 80% or even 90%. SAP knew perfectly well that marginal cost for producing software is close to zero once development costs have been recovered.

Global Enterprise Agreement, "all you can eat," "limited unlimited"--these were just a few of the names used. Large customers could define their own "special users" and were able to defer license audits. These agreements are usually valid for 5 years and are meant to supply customers with all software they possibly could source from SAP. When the agreement terminates, customers can continue using the software but they will be audited and may have to upgrade their license as a result.

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Different from the original volume discount scheme, these large customers could pay in phases and also obtain the software in phases. Some customers, usually with the help of advisors, were able to negotiate optional packages or rights for rescission. Negotiating such a package is not an easy task – it can take 6-12 months.

As the term of these agreements is very long (a lot can happen in five years!), you would expect that corporate strategists would have a say in these negotiations--the scope of such agreements is certainly beyond the standard business of a software purchasing officer. This, however, happens very rarely.

In most cases, the SAP account manager develops an idea about his customer's needs and starts a discussion with the CIO. He then will try and align this with the portion of the corporate strategy he considers reasonably solid. That may cover the first 2 or 3 years. The rest is gambling and usually customers try and solve this uncertainty issue "commercially"--if the discount is big enough, they will commit to everything. And that exactly is the intention of the vendor:

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