SAP Plans to Mine More Revenue From Its Installed Base

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1 Select Q&A, A. Bona, D. Prior Research Note 15 April 2003 SAP Plans to Mine More Revenue From Its Installed Base SAP is adding new categories to its pricing model and is using its software license agreements more creatively to generate further revenue. Gartner answers important questions from SAP clients about this strategy. Core Topics Customer Relationship Management: Creating Business Value for CRM ERP II, Supply Chain & Manufacturing: ERP II Strategies, Applications and Technologies Key Issues How will successful enterprises select, deploy and manage ERP II solutions to minimize risk and achieve optimum ROI? How can enterprises control the investments and quantify the benefits of CRM? In the current economic climate, revenue from business application software is hard to find even for leaders such as SAP. SAP has introduced a number of new license categories for 2003 and is innovatively interpreting contractual clauses to obtain more money from the smaller number of available deals. Clients who plan to buy software from SAP in 2003 need to understand the expanded SAP license model and the additional costs they may incur. Clients with SAP license agreements will remain unaffected until they need to renegotiate with SAP for more licenses or redeploy existing ones, at which point they will be subject to the 2003 license model or strategy. Four major questions about SAP's 2003 license strategy emerge: 1) Why do customers now have to pay for SAP application interfaces? When SAP first introduced its mysap.com license model (now called mysap Business Suite), it tried to charge customers for transactions triggered by automated interfaces, as well as by named users (see Note 1). SAP had great difficulty in measuring such interface transactions and its customers had even more difficulty predicting the licensing fees. Note 1 Named User Pricing All interactive users of mysap Business Suite software are licensed by three categories: Professional User, at a list price of 3,800 euros; Limited Professional, at a list price of 1,600 euros; and Employee at a list price of 400 euros). In 2001, SAP abandoned the notion of charging for all transactions and instead charged only for purchase order (PO), and sales order (SO) transactions from automated interfaces (where no users are involved). This was because these e- commerce transactions represented real value for its customers, but e-commerce never really developed as SAP had hoped. PO and SO transactions are licensed according to annual order volume (see Note 2). Gartner Reproduction of this publication in any form without prior written permission is forbidden. The information contained herein has been obtained from sources believed to be reliable. Gartner disclaims all warranties as to the accuracy, completeness or adequacy of such information. Gartner shall have no liability for errors, omissions or inadequacies in the information contained herein or for interpretations thereof. The reader assumes sole responsibility for the selection of these materials to achieve its intended results. The opinions expressed herein are subject to change without notice.

2 Note 2 Software Engine Pricing Purchase order and sales order automated transactions are licensed via "cross industry software engines" according to the annual PO and SO transaction volumes, which are automatically processed by SAP software. Such volumes can be measured by SAP software and fees are nonrecurring. Other cross-industry engines (and annual metrics) include advanced planning and scheduling (based on the cost of goods sold), transportation optimization (based on freight cost), and payroll processing (based on employee master records). In 2003, SAP has changed course again and customers now have to pay for other interfaces with other applications, under certain circumstances. The problem is that virtually all SAP R/3 systems have between 30 and 100 interfaces to other systems. There has always been a latent, "catch all" clause in SAP's standard agreement that states "Each access, direct or indirect, needs to be licensed." In 2003, SAP now uses this clause selectively to license some outgoing interfaces from SAP applications as equivalent named users. Problems with this approach are: Organizations will face unexpected and dramatically high license fees in many cases paying two software vendors for the same users. For example, portals are a special case of synchronous access to SAP applications. Organizations planning to use a third-party alternative to SAP's Enterprise Portal will also have to pay SAP named user license fees, which will be high because of the large number of users often involved. A further example would be if an organization licensed Siebel Systems for a call center application and the agents had to access data "indirectly" in a SAP financials application, fees would be due to both SAP and Siebel for thesameusers. SAP has no rigorous technical definition for exactly which outgoing interfaces fall into this "indirect access" category. The criteria used to evaluate whether interfacing fees will be due include bidirectional, synchronous or asynchronous transfer and frequency although these do not appear in contracts or any policy document. Rather, each case must be interpreted by SAP's pricing director in Walldorf, Germany on a one-off basis. This is a very unclear area and unsatisfactory from the client perspective. Each case has unpredictable costs and takes time to resolve. SAP justifies this new approach by maintaining that some organizations build an interfacing layer to artificially reduce license fees. By charging named user fees for indirect access to data in SAP applications, it thinks it will recoup license fees, or prevent this practice entirely. However, building SAP interface applications is costly, and we believe very few organizations will do this solely to avoid paying SAP for additional licenses. It is both onerous and unreasonable for SAP to ask for additional license fees for any non-sap applications (for example, Siebel, Oracle or legacy) that use data extracted from SAP applications. In a heterogeneous world, organizations select non-sap applications for many reasons. Organizations should strike out the phrase "or indirect" from the clause in the contract that stipulates that all "access, direct or indirect," should be paid for. It 15 April

3 is also unreasonable to license software for anything that cannot be accurately measured. 2) Why do customers now have to pay to extract data from SAP Business Information Warehouse? SAP perceives that some organizations extract data from their SAP Business Information Warehouse (BW) to perform additional analysis in other third-party data warehouse applications. Since the beginning of 2002, SAP has stated that the extraction of data from BW (part of mysap Business Intelligence) to non-sap applications requires licensing of an open hub engine. This is irrespective of whether the extraction is done with SAP or non-sap techniques. Communication between multiple SAP BWs does not require licensing of the open hub engine. Interfaces feeding data into BW remain free. SAP justifies the additional fees by claiming that BW adds "huge value" by allowing the extracted data to be high-class, consolidated and consistent. SAP contends that many organizations carrying out this extraction pay minimal license fees to SAP. There are two concerns with this approach: In this scenario, SAP is confusing the use of a SAP application with use of data that belongs to the organization itself. Use of the SAP application and the SAP data model must certainly be paid for. But the data, however high quality, belongs to the organization. Enterprises should not have to pay to use their own data, wherever it is extracted from. Other vendors do not charge for this and, indeed, SAP does not charge for extraction of data from its other applications. If all vendors charged for data that was extracted into another system, then license fees would multiply dramatically. In 2002, Oracle attempted to charge for data extracted from its systems, but customer pressure forced it to relax this policy (see "Oracle's Multiplexing Clause Creates Confusion and Costs," SPA ). It is perfectly reasonable for an organization to transfer data from any SAP application (including BW) into other non-sap data processing applications. Organizations should strike out all contractual references to charges for data extraction from any SAP application. At the very least, there should be absolutely no charge for extracting data using non-sap techniques and to directly access BW info-cubes using tools from companies such as Cogos Software or Business Objects. 15 April

4 3) How are a customer's developers of SAP applications to be licensed? The traditional SAP R/3 license model with its seven user categories and based on intensity of application use identified a specific, named user category for developers of R/3 applications. This was called DW ABAP/4 Development. However, the philosophy of mysap Business Suite license agreement was to base licensing on a user's role in the organization, rather than on intensity of use. In 2003, SAP will further complicate its licensing model by adding a new, named user category: The Developer User. This may be priced up to 50 percent higher than the Professional User category. Developer Users will be equipped with license keys to access certain SAP NetWeaver development tools (see Note 3). Organizations should identify all developers carefully, including only those that need full program development facilities provided by SAP. Testers should be excluded. Organizations that have already purchased Professional User licenses for developers should not have to pay upgrades. Note 3 Developer Class Users Developer Class users are licensed to use these SAP NetWeaver development tools: SAP Web Application Server (formerly Basis), Advanced Business Application Programming, Developer Workbench and Business Server Pages SAP Web AS Java, Java Server Pages Developer tools. SAP Enterprise Portal Portal Developer Kit The SAP Web AS 6.20 introduces a Java 2 Enterprise Edition (J2EE) runtime environment in parallel with the traditional Advanced Business Application Programming (ABAP) runtime environment. Organizations can use open-source Eclipse tools plus SAP J2EE tools to develop custom Java programs. They can then execute these programs on the SAP Web AS, instead of competing with Web application servers from other vendors. Some organizations will want to run their own in-house code, or other third-party applications, on the SAP Web AS platform. This capability is covered by the SAP Web AS "full usage" category of SAP licenses. This category is priced either on a named user basis or by using the sort of CPU-based model that other software vendors commonly apply. This seems fair, but organizations are advised to pick the lowest-price alternative over the longer term. 4) How will SAP license mobile users? SAP users have not been mobile users, apart from those equipped with laptop PCs using Field Sales or Field Service within the mysap customer relationship management (CRM) application. The SAP Mobile Engine is designed to support mobile users with laptops or handheld devices. Within several industries (for example, utilities, power generation and telcos) there is considerable potential to deploy mobile applications, provided that the right devices and applications become available. 15 April

5 With an eye to this potential future revenue, SAP will extend the Limited Professional class of user to include users of licensed, handheld mobiles that need only infrequent access to basic new functionality from SAP for an increasing range of mobile applications. This category is priced on a named-user basis. Established, professional users of SAP applications also have access to these new mobile applications. Organizations should ensure that standard SAP mobile applications could be customized without additional license fees. Mobile-only named users will cost approximately half the Limited Professional category list price. Since 2H01, informal client surveys on licensing and associated business practices of dominant application software vendors reveal SAP to be one of the vendors that Gartner clients "trust" more. If SAP becomes serious about implementing these controversial interpretations of its contracts particularly the first two raised here it will have a negative impact on SAP's standing. By 2005, large enterprise CRM vendors that fail to offer license and maintenance contract flexibility will lose ground to rivals that do (0.7 probability). Acronym Key ABAP AS BSP BW DW J2EE PO SO Advanced Business Application Programming Application server Business server pages Business Information Warehouse Developer Workbench Java 2 Enterprise Edition Purchase order Sales order 15 April