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.

InformationWeek Staff, Contributor

November 12, 2009

4 Min Read

Bypass lengthy product evaluations and complicated strategic alignments, use bundles, suites, volume discounts, deferred audits--in short, use the whole arsenal to make the customer commit to buy a lot over the next 3-5 years. For as long as the vendor gets the money he needs to make his plan, he will give the customer more and more software just to close the deal.

Now, SAP plans to address somewhat smaller companies with similar programs. Reducing up-front payments is a much-required step these days: many companies need the money for other projects. IT budgets are under scrutiny and SAP already has a very big share of wallet.

It is also required to make the standard on-premise software look less awkward when comparing it with cloud services that use a more-flexible subscription model. So, this step serves users and the vendor: users get the discounts and do not have to shell out all the money up front, and the vendor adds another annuity-like revenue stream. Looks like a perfect deal, right?

Not quite. First, it does not automatically eliminate the shelfware issue. That still requires dedicated and wholehearted efforts on the customer side--and then the issue most likely will only be reduced. I have seen cases where companies have purchased upgrades for tens of millions of dollars, paid maintenance on these upgrades for years, but are still on a back-level release. So, do not get too excited about the huge discounts – buy only what you definitely will need.

The ERP software market has turned into a buyers' market and it likely will stay this way. Secondly, SAP loves to replace all pre-existing agreements with one new agreement. At first glance, this looks like a good approach: easy to work, allows customers to discard a lot of old paperwork, etc. But be careful before you make any consolidation decisions: these old agreements may contain hidden treasures that SAP wants to get out of the way, so don't give them up lightly.

Thirdly, it shows again how SAP is so much better-suited for larger enterprises. The smaller customers, while able to get vendor-provided financing, always have bought at a premium. Because they don't have the clout to negotiate and they don't have the volume to get the discount, they have to operate at higher cost levels. This may help SAP to slowly do more business with SMEs because the price difference is getting bigger and bigger, but it is certainly not the way the market would like to have it.

Finally, these high-discount, high-volume programs have depleted pipelines almost completely. This may look like a "private" problem of the vendor, but bear in mind that this will cause vendors to think harder about squeezing money out of their customers without necessarily having better products that might warrant additional business.

But, enough with the critical remarks--now let us try and think of what may be a better way to purchase licenses. First, I think that the idea of having five-year agreements just is not right any more. How about a discount scheme that would allow customers to buy in yearly increments with discount levels based on purchase volume predicated on the planned purchase plus the volume of the last three years?

Second, I consider the idea of ratchet licenses absolutely out of date. It is in direct contradiction with the claims of the ERP vendors: they say that this software enables you to do more with fewer people. But you cannot get rid of the users that you have bought once nor can you easily cancel maintenance for them.

Why are vendors not more flexible, why don't they allow licenses and maintenance to be scaled back? The answer is clear: they do not want to lose revenue. In the end, however, they may lose the market.

It is time, it seems, to revisit the whole business model. Improvements, like lowering upfront payments, are a welcome first step. If it does not get beyond that, it will be no more than a cosmetic fix that well-advised customers have already been enjoying over the past few years.

Helmuth Gumbel is CEO and founder of Strategy Partners International, and a former Gartner analyst with special expertise on SAP products, services, and implementations.

For more Global CIO perspectives, check out Global CIO.

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