How significant is SAP’s on-premise and Cloud licensing swap announcement?

This week SAP announced that it will allow customers to swap on-premise software licenses and maintenance payments for Cloud subscriptions that “assumes an expanded investment with cloud solutions from SAP”. Given the innovation and scalability available in the Cloud, this is certainly a positive move for customers. What is the real impact of this for customers?

From an SAP perspective, this announcement allows customers to expand their Cloud footprint with SAP solutions while ensuring that SAP maintains the same level of income that it does now. This is a win-win for customers, particularly for those with shelfware licenses. An interesting conversation took place on Twitter between Chris Paine, Jarret Pazahanick, Naomi Bloom, and myself:

My initial thought was that SAP benefits more from this as customers due to the increase in licensing costs. After all, customers are supposed to benefit from the fact that SaaS is cheaper than on-premise due to the economies of scale of using software and infrastructure, among other things. However, this thought is only based on cost versus cost and doesn’t take into account that customers would spend more but also would get more. Taking away things like innovation and long-term costs, there is also the fact they will get additional applications that they can implement at a much quicker pace than on-premise software and are more likely to be used across the enterprise.

From something-for-nothing to nothing-for-something

Customers should also not forget that many of them are sitting on shelfware licenses that they can trade for subscriptions. However, it is also important that customers don’t trade shelfware licenses for shelfware subscriptions! This is an excellent opportunity for customers to expand their HCM and/or Talent Management technology usage without investing significantly more costs. It is an ideal time for customers to begin to consider using additional Talent Management processes within their organization to enhance their competitive edge.

Hidden costs

One thing that isn’t included in this deal is the implementation and integration costs. Although subscriptions of a higher nature provide additional software services, this software still needs to be implemented and – if retaining SAP as the core system of record – integrated with SAP HCM. It is important for customers to understand that there will be these one-off costs. I don’t expect customers to have any additional on-going costs to manage the integration as they have on-going maintenance costs that will be gone with the transition to the Cloud.

Bottom Line

This is a good move by SAP to increase adoption of their Cloud solutions as well as provide customers with the latest-and-greatest software. Moving to the Cloud provides customers with enhanced innovation, usability, and scalability and – more importantly – presents an opportunity to revisit existing business processes and introduce new Talent Management processes. It also gives customers with shelfware licenses the chance to swap them for services that will provide real value.

*Updated: Full terms can be found here [S-user required]. Interesting terms include a minimum 5-year subscription and license audit.