SAP license and price negotiation dynamics

ERP software represents a major financial and operational investment for any organization implementing such systems. Given the long-term impacts of an ERP purchase, license and pricing negotiations with an ERP vendor take on real significance, and should be handled with the care reserved for other large, capital purchases.

ERP license and pricing negotiations can be particularly involved for many reasons, including the following:

• The technical, business, and financial complexities surrounding ERP systems make it difficult to negotiate these deals. SAP is not alone here, but the potential size and scope of SAP transactions can put this vendor into a unique category.
• The implementation process itself can be long and cumbersome, increasing the purchase risk. In addition, ROI planning should address non-license implementation costs, adding another layer to the negotiation, as described in this post. (For an additional perspective on non-license impacts, see this post.)
• The cost, time, effort, and business disruption an organization endures during an ERP implementation is substantial, meaning the incumbent vendor has a long-term negotiating advantage over the customer. This becomes important when negotiating license extensions.

A new report by Duncan Jones of Forrester Research, titled Effective SAP Pricing And Licensing Negotiation, addresses these points and more. The report describes a framework which ERP purchasers can use prior to entering negotiations with SAP. I was impressed by this research, because far from describing a simplistic checklist, it presents systematic guidelines for approaching license negotiations.

The report suggests that buyers look beyond getting SAP to discount a few percent off the initial license purchase. Instead, Forrester recommends buyers evaluate their strategy, and potential risks, to negotiate a deal reflecting longer term business goals. To accomplish this, buyers must understand their own requirements, while remaining aware of SAP's strategies and goals. The report describes some of the dynamics driving SAP when they sit across the table during a license negotiation.

Read a few quotes from the report:

SAP PRICING VAGARIES MAKE NEGOTIATION A CHALLENGE

An enterprise-wide ERP system represents the top one or two technology investments that an organization will make over a 10-year period, and the ongoing maintenance consumes a significant portion of the annual budget. CFOs expect their vendor managers to keep these costs under control, yet they often have a weak negotiating position. A buyer cannot realistically threaten to switch to another vendor or cancel maintenance if SAP knows it is the customer’s strategic platform. Adding to the complexity and fueling companies’ angst, SAP does not offer a published price list, so buyers are left second-guessing themselves as to whether or not they got a “good deal.” The most common complaint we hear from interviewees is that SAP pricing is complex and opaque.

INSUFFICIENT FORESIGHT LEAVES FIRMS HAVING TO WRITE BIG CHECKS DOWN THE LINE

The complexity increases throughout the software ownership life cycle, given that firms must live with the application for tens of years — changes to the business over that time directly impact the number of users and the scope and validity of the licensing agreement. 2 Most of the licensing problems we’ve heard from clients could have been avoided if they’d foreseen the risk and addressed it during the original negotiations. Complaints to us often start with the phrase, “I would have thought that . . .” Buyers often make incorrect assumptions about how SAP will handle future situations. By the time they find out the licensing implications of a business change, it may be too late: The buyer has a much weaker negotiating position after the initial sale and may struggle to get any more concessions.

SUCCESSFUL SAP NEGOTIATIONS GO BEYOND THE DISCOUNT LEVEL

While most companies naively focus all their bargaining energies on getting the best purchase price, the problems described above could cost an enterprise far more than the few extra percentage points of discount that they extract. Unfortunately, successful risk mitigation is far less visible than the headline discount percentage. Many of our interviewees had bought SAP licenses worth more than $5 million at list price and had obtained an extra discount of up to 10% on licenses, which would be worth $500,000. In stark comparison, contractual issues could easily create liabilities for an additional 25% of the license expense, which would cost $1.25 million.

ERP contract negotiations, with SAP or any other vendor, should always address both short- and long-term considerations. Seek a fair and reasonable deal based on diligent advance preparation, keeping in mind that "fair and reasonable" means just that; it doesn't mean getting screwed by your vendor.

(For more information on IT spend and purchasing strategies, see my fellow Enterprise Irregulars Vinnie Mirchandani and Jason Busch.)

UPDATE: You may also be interested in this post, and also this one, on the subject of SAP's forthcoming A1S system.