Global CIO: SAP Eliminates All-Up-Front Payment Requirement

In a striking move that reflects customers' needs and shows desire to lead the market, SAP is extending to 580 very large customers a payment plan that will allow them to spread their payments across the duration of their multiyear license instead of having to pay that entire capital expense up front.

The move comes as SAP released disappointing third-quarter results with revenue from new licenses down significantly—company CEO Leo Apotheker called it a "tough spending environment" as CIOs continue their reluctance to commit huge chunks of their challenged IT budgets to single projects.

(For more insights and analysis on SAP, be sure to check out the "Recommended Reading" list at the end of this column.)

It also reflects the feeling among an increasing number of CIOs and their CEOs that the traditional all-up-front capital expense for a multiyear license was a fabulous arrangement for SAP but not nearly so wonderful for the customer. The new approach, Apotheker said in a low-key statement released with the quarterly numbers, is intended to restore better balance to that seller-buyer equation:

"Despite the continued tough spending environment, we are pleased to see further progress in the evolution of our volume business as a result of smaller deals," said Apotheker. "In addition, we are driving more multi-year agreements, where customers buy and consume software over many periods, which we believe is a positive transition for both SAP and our customers.

"We have the benefit of many years of experience in facilitating the purchase of our software in this manner, including the success we had in signing multi-year, Global Enterprise Agreements with our largest customers. We have now started to leverage this approach with a bigger group of customers."

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While offering a bit of insight, that statement was still so vague, so oracular (the one at Delphi, not Redwood City), that I went back to SAP for more detail, asking what specific changes will these customers experience? What is the "evolution" Apotheker refers to? We know that customers "consume" SAP products over multiple years, but what does it mean to "buy" over time like that?

Here are excerpts of the reply I got from an SAP spokesperson:

"We see that deal volume will be the main driver going forward, rather than big up-front commitments. This means more sustainable, more predictable and long-term partnerships. . . . Customers want greater flexibility and to phase-in their software use. We’ve seen this trend from the start and are leading the adjustment. . . . Our Global Enterprise Agreements with companies like BMW, Colgate, Exxon and Hitachi are examples of the kind of relationships we are crafting with our blue-chip customer base—we are now also entering the same type of strategic, multi-year relationships with a larger group of customers.

"These partnerships provide customers with the flexibility and strategic relationships they want, and SAP benefits from a more stable source of recurring revenue. In practice, for example, this means that payment of a five-year license agreement will be paid in increments over those five years rather than requiring the up-front capital expense all at once."

That last sentence—"paid in increments over those five years rather than requiring the up-front capital expense all at once"—seemed to break through the fog and offer a real look at what SAP intends to accomplish with this evolving model. I again asked for more details from SAP and got this response: "Through the Global Enterprise Agreement model we have gained the experience on how customers want to buy and consume software based on building a long-term strategic road map over several years. We are now taking this concept, with some adjustments to take into account differentiated market needs, to our next 580 largest customers. We expect this to open up tremendous opportunities for growth going forward."

In response to a related question about whether any changes in annual maintenance and support fees would be forthcoming, SAP said, "We have not discussed such changes as part of today’s earnings announcement."

I think this is a great move by SAP—it shows a recognition of the realities its customers are facing, it shows a willingness to innovate with business models that worked well for both parties in the past but are less effective in today's environment, and it also shows that the company long known for its technical rigor might well be willing to show more flexibility in its marketing and sales strategies.

That's more important today than ever as customers are demanding that strategic IT vendors recalibrate with them the risk-reward ratios that have shifted dramatically in the global economic slowdown of the past 18 months. And while we here at Global CIO have certainly had our differences with some of SAP's approaches to its customers, on this pricing overhaul we have one overriding comment: well done, SAP.

And now we'll see if Oracle's got any similar ideas.