SAP Customers are increasingly choosing to transition their ERP systems to cloud based platforms. A question that we often get asked by clients is, “How do we negotiate good cloud software agreements?” and “Am I getting a good deal?” All things considered Cloud ERP services are still relatively new in the IT marketplace. However as more and more companies are contemplating making the transition as cloud becomes more mainstream in today’s marketplace. Most SAP customers will probably have either implemented one of SAP’s cloud solutions already or have one under serious consideration. Those already invested are likely to expand further into cloud solutions in the future. For customers considering cloud many factors need to be considered to ensure cloud service contracts are fit for purpose and customers are getting maximum value from their cloud negotiations.
The fundamentals of on-premises software negotiation should be the basis for negotiating a good cloud service contract. This involves challenging and questioning the right elements of standard vendor agreements so they can be tailored to better serve the needs of your business. This article covers the key things we recommend you pay close attention to so that you aren’t caught with your hands behind your back later down the line.
Understanding how SAP Cloud Agreements are Structured
Before covering recommendations for negotiating a good cloud contract, it is worth taking a quick look at how an SAP cloud services agreement is structured. The contract for SAP cloud services consists of three main elements: The Order Form, the Data Processing Agreement, and the General Terms and Conditions. See Figure 1 below:
These are generally the same for any cloud service available from SAP, while the Cloud Service Description, including Product Supplement, Support Policy and Service Level Agreement, form a product-specific collection of terms. These elements are all referenced by way of hyperlink in the first section of the Cloud Services Order Form. These documents should read and reviewed in detail before signing and printed and kept on file after the contract has been signed. The Data Processing Agreements and General Terms (GTC) should also be standardized so these terms apply to all future cloud service purchases. If you buy cloud service in future years you don’t want to have to manage different sets of General Terms and Conditions for different products or indeed the same products.
The Order Form is used to subscribe the customer to a specific Cloud Service or schedule of Cloud Services to be provided by SAP. It defines the commercial terms and lays out the agreement structure by defining all the component parts that make up the agreement between the customer and SAP. The Data Processing Agreement details the technical and organizational measures to be implemented and maintained by SAP to adequately protect the personal data stored on the cloud platform and defines the customer as the “data processor”. The general terms and conditions (GTC) document detail the specific legal terms that apply to the Cloud Service being subscribed to which includes usage rights, customer data obligations, warranties, confidentiality, and limitations of liability, which typically apply regardless of the Cloud Service being subscribed.
What are the key considerations customers need to make when negotiating cloud agreements?
In this section the following key considerations are covered. You can skip to relevant sections or read through them one by one:
Leverage Market Competition
A viable enterprise architecture approach is to consider SAP as the system of record whilst innovating around the fringes with other SAP products, best of breed solutions, and cloud services. If your application landscape is heavily SAP centric you have much less bargaining power and less chance of getting what you want in the negotiations. SAP can be central to your ERP roadmap but you want to ensure you have options and flexibility. Creating competitive purchasing scenarios around key technology investments is a sure way to ensure you have the right amount of influence on the terms and conditions surrounding the purchases you make. When you use this to your advantage SAP will become much more competitive with what they can offer.
Service Level Agreements
One of the key things every SAP customer needs to think is the Service Level Agreement (SLA). Many SAP customers overlook this, assuming terms are non-negotiable or simply don’t push back hard enough in key areas. SLA’s detail key aspects of the service being provided such as service availability and performance. Firstly, there should be absolutely no ambiguity in the meanings applied to the standard terms in the contract. Wording has to be crystal clear so both parties know how to administer the agreement if something goes wrong or where issues need to be resolved. The wording of all clauses has to reflect the intent and understanding of both parties signing the agreement and you are well within your rights to have standard terms adapted to provide additional service level assurance.
SAP customers should be targeting uptime of 99.5% for live cloud environments as a starting point. Uptime as a service level metric also need to be measured relative to time so that both parties can clearly determine if service levels have been met. Vendors for example may prefer to measure themselves quarterly as standard. However, quarterly measurement may mask service level incidents that may otherwise need to be addressed by the vendor to improve service levels. For businesses where ERP services are business critical monthly measurement might be more appropriate where more frequent measurements give a better indication of service level across the course of a year.
Service Level Compensation
It is vital that you negotiate the highest uptime commitment from the vendor as possible but equally vital that you negotiate the appropriate remedies where agreed service levels are not met. Cloud Service Credits are a good recommended remedy to service level infringements. Cash credit amounts accrued for service level infringements would be credited against future cloud service renewals. Negotiating effective credits ensures the vendor will commit the appropriate resources to ensuring service levels are met.
You should also have a right of immediate termination and other forms of remedy where appropriate. If, for example, total downtime over a certain period of time exceeds the agreed tolerances then you should be able to walk away from the service without penalty. An extended period of downtime measure for the purpose of termination rights could be 6 months for example. However, this is more appropriate for contract terms of two years or more. You should also pay close attention to how downtime is defined in your agreement.
SAP cloud contracts typically require a notice of non-renewal to be provided by the customer in order to terminate the cloud service. The standard notice period in the contract might be sufficient however it is advised to think this through. For example, a shorter notice period gives you greater flexibility and increases decision making lead-times. However, on the flip side it offers less time to migrate your data onto another platform if you need to do so. Do not permit your cloud provider to have the contractual right to terminate or suspend services other than for cause. If it is a business or enterprise-critical application or service, you can’t afford to have the vendor choose when it wants to walk away from the relationship.
Your cloud contracts should make it easy for you to exit your contract if you need or want to without the need for painful and costly data migration processes. Otherwise you might fall victim to what is known as vendor lock-in. If you do become subject to vendor lock-in your future strategic options will be limited. You should aim to negotiate provisions for how data will be provided to you upon termination of the contract and in what timeframe. This should also be provided by the vendor free of charge. You could also negotiate regular provision of back-ups, so you are not so dependent on the vendor at the end of the contract. If you fail to address these provisions in your contract it makes it nearly impossible to get out of your contract if and when you need to. Many cloud customers have already fallen victim to this and are suffering as a consequence.
Back-up and Recovery
No SLA is complete without adequate attention to the backup and recovery aspects of the cloud service. The agreement should set out in clear terms how the vendor will address backup and recovery through the course of the service delivery period. You should take time to identify these provisions in your contract and discuss them with internal technical teams and the vendor to ensure they meet business requirements and offer the necessary level of security.
SAP, like most cloud service providers, can’t hold onto your data forever and it will need to be deleted following the end of the contract. In many cases data needs to be retained for legal purposes for a certain period of time. When negotiating your contract, you should negotiate a data retention period that gives you adequate time to retrieve it and back it up to another platform before it is deleted. As a minimum you should negotiate a 60-day window for data access at no additional cost, however trying to negotiate a 90 or even 180 day window would not be unreasonable and would offer you more leeway.
In most Cloud service agreements, the pricing structure is fixed for the initial period of the agreement and is variable thereafter. SAP’s cloud agreements come with price increase provisions as standard allowing them to increase prices upon renewal of the contract. You may find yourself needing to buy additional levels of entitlement upon renewal as well as having to pay for these entitlements at a higher price. It is advisable to review the standard price increase provisions and negotiate a cap on the renewal price increases to make sure they are fair and reasonable. You could link your price increase cap to various market indexes like CPI for example (Consumer Price Index). You can also specify a fixed term across which no price increases can be exercised, 3 years from the date of signing for example. It is critical to address these upfront because once you transition to the cloud you are basically locked in to the terms you signed and trying to address these issues retrospectively can be difficult if not impossible.
SAP will want you to renew for multiple years because this can be classed as booked predictable revenue. However, if you negotiate annual renewals you give yourself increased options to ensure SAP has to fight for your custom each year. This approach gives you much more flexibility and control in any resulting annual negotiations. Committing to longer contract terms should however give you leverage to negotiate on price. Don’t commit to 3 or 5 year deals unless you get an excellent price.
SAP cloud agreements afford you the ability to purchase additional users or licensed levels as your need increases during the term of the agreement. However, it is also important to have a mechanism in place to adjust the economics of the agreement if actual demand decreases. The majority of SAP cloud services require upfront annual payment with no credit for unused entitlement. As a result, many customers are left with surplus entitlements that they haven’t used and can’t get back. These “no credit” provisions are typically found in the order form itself under “Excess Use”. It makes very little commercial sense to be asked to forecast use of cloud services in advance having to pay more if you use more but get no credit if you use less.
Take a consumer billing account for domestic gas supply. You pay £50 a month in direct debits and your account is balanced according to how much gas you consume. If you consume more than that, your direct debits increase to keep account debits in line with usage. If you use less, then your direct debits are reduced meaning you only pay for what you consume. Why should it be any different when buying and consuming cloud services? Without addressing these contractual provisions, you may find yourself faced with incremental and unbudgeted price increases and tied into contracts where you are paying way too much for the software you are using. This risk is increased even further when you are investing in a broad suite of cloud solutions.
If you subscribe to SAP SuccessFactors for example and your Cloud Service subscription includes 4 of the SuccessFactors modules, you will need to time to implement the software before users can start using it. If the metric for a solution is for example “users” then the only user’s, you should need to pay for in this interim period is the developers and functional consultants working on the system before go-live. If you sign a 2-year deal for example and it takes 6 months to go-live 25% of your cloud service spend has been redundant and you haven’t been able to make full use of the software during the contract term. You should seek to negotiate provisions to address this cost wastage to make sure you are getting value from the contract.
You should always ask for a copy of the price list. Otherwise, how can you ensure transparency on pricing. The price list also contains key information you need to understand your licensing and pricing metrics which on review of an order form you wouldn’t know was missing. For example, is the pricing linear, cumulative or tired? What volume discount did you get? Are their any special pricing notes to consider? What is the license metric for the product? For example, I worked with a client sold SuccessFactors on a “employees metric” whereas the price list metric was “users” and this made a big difference to the number of people that had to be counted for pricing purposes. Furthermore, SAP rarely mention in the Order Form that when making subsequent purchases for products on Cumulative pricing did you know that your next purchase starts from the last tier you were in? I.e. not every purchase is made starting from the first tier. Understanding the price list, pricing structure, pricing metrics and conditions is critical and price list transparency is fundamental to achieving this.
Cloud Conversion Credits
It is important to consider if the cloud software you are buying will make replace another on-premises solution you have already paid for. You want to avoid migrating to the new cloud service and continue paying support and maintenance for old software that will become redundant. It is possible to negotiate cloud conversion credit which results in a maintenance base reduction, which off-sets some of the CAPEX cost of your annual cloud service contract. You can also negotiate transition rights where you have the right to terminate redundant software once you have fully migrated to the new platform.
SAP are very keen for customer to transition to the cloud and will push hard for contracts to be signed. SAP will as any vendor would have you believe that the offer on the table is a one time offer and to get this price you will need to sign within “X” timeframe. This isn’t true. If you don’t meet a deadline then you shouldn’t expect to have to pay any more than that if you sign up in the future. Remember, SAP want your business and they want to book the contracts. You should be getting the best price offered at any time when you decide to sign on the dotted line.
So, pay close attention to price negotiation and usage forecasting to get the best possible commercial solutions. Aim to negotiate service credits where possible and set clear service level conditions that serve your business needs. Make sure you maintain control of renewals and that the contract gives you the flexibility to do what you want at the end of the contract. And most importantly take your time to properly evaluate and negotiate your cloud contracts. Do fall victim to vendor pressure and sign up quickly and under pressure. It might seem like a good deal but how will you really know if you don’t perform the necessary due diligence.
VOQUZ Labs are involved in over 100+ SAP licensing projects every year and we negotiate many more software contracts each year than our customers do. Therefor we have expert knowledge that customers can leverage to negotiate better deals.
If you are negotiating software contracts with SAP and want expert guidance, why not get in touch and find out how we can help you.