S/4 as a new beginning in SAP license management

This article will take a closer look at why it is so important and what needs to be considered from a licensing perspective during the S/4 Hana transformation. The question that inevitably arises here, whether cloud or on-premises, ultimately depends on the respective corporate strategy and must be considered individually for each company.

SAP announced in a press release last Feb. 4 that it would provide mainstream maintenance for core SAP Business Suite 7 (ERP/ECC 6.0) applications only through the end of 2027, followed by optional Extended Maintenance through the end of 2030. This increases the pressure to migrate to the new S/4 system. The upcoming migration of many existing customers is also accompanied by the opportunity to reduce the historically grown complexity of the licensing landscape and thus increase transparency. In the long term, this has the potential to reduce the time and effort required for the annual audits.

S/4 On-premises

The often confusing number of contracts, attachments, supplements, additions and terminations can be replaced by a manageable contract landscape, offering a fresh start in SAP license management. However, in order to use the S/4 transformation to their own advantage, existing customers must have or build up a deep understanding of their current SAP licensing situation - and this must be done before contract negotiations. Otherwise, companies quickly run the financial risk that the licenses purchased as part of the transformation do not correspond to the actual license consumption.

Simplification and standardization - that's what SAP promises with S/4 Hana and delivers a new licensing model to go with it. In the on-premises area, the model consists of the components direct user access, indirect use, Line of Business (LOB) and Industry Solutions as well as Hana. But what exactly are the options for an on-premises migration?

S/4 Conversion

System conversion, new implementation or selective transformation - existing SAP customers must carefully consider the form of technical migration. While SAP can only choose the path of new implementation for migration to the cloud, the question for companies in the on-prem area is whether the existing system should be converted in its entirety, a completely new system implemented or the system landscape transformed. SAP answers this with the brownfield, greenfield and bluefield approaches. In addition, companies should analyze whether the path of product conversion or contract conversion is more suitable for them.

Product Conversion

With Product Conversion, existing licenses can be gradually converted to the corresponding S/4 solutions for each product (one-to-one conversion). Companies retain their existing contracts and framework agreements; ECC 6.0 and S/4 Hana solutions can be operated in parallel. However: Only those products that are also owned at the time of the transformation can be converted to the respective S/4 equivalents as part of the product conversion. The limitation here is on solutions that also already exist in S/4 Hana.

Not every license has an equivalent in the area of S/4 Hana. In addition, the package "S/4 Hana Enterprise Management for ERP Customers" must necessarily be purchased, with which the Named Users can access the Digital Core of S/4. Although companies can continue to use third-party databases for their ERP/ECC solutions, this is not possible for S/4 Hana solutions. Companies must therefore also purchase an SAP Hana platform.

Compatibility package

Depending on the product and contract situation, companies can receive 100 percent credit on their former products. However, the maintenance base may not be reduced, according to SAP. If a so-called compatibility package is required for an S/4 product, conversion is not possible during product conversion - in this case, companies must wait until SAP has developed a comprehensive S/4 solution for the product. 

Product conversion allows customers to retain historically "good" license terms. Likewise, Named User conversion is generally not possible. This offers SAP existing customers the opportunity to migrate to the S/4 products at their own pace. There is currently no end date by which the transformation must be completed. Compared to Contract Conversion, there is also the advantage for companies of being able to keep their Special User types, if they exist.

Contract Conversion

Contract conversion is a one-time event where the company exchanges its entire existing contract for a new S/4 Hana Bill of Material (BoM). SAP customers can receive 100 percent of the existing contract value as credit in the process. However, the total credit is limited to 90 percent of the value in the new BoM. Specifically, this means that the maintenance base of the new BoM would increase. Unlike Product Conversion, SAP is allowing ECC solutions that don't yet have an S/4 equivalent to continue to be used by means of compatibility packages. Furthermore, the company is migrating to the new S/4 Hana software usage rights.

Contract Conversion gives companies the opportunity to rethink their SAP IT structure and to purchase and select the new SAP licenses in an optimized way, for example by eliminating shelfware (unused software licenses).

Compared to Product Conversion, Contract Conversion allows a simplification of the SAP contract landscape as well as a possible renegotiation of terms and conditions. In addition, SAP customers can use the flexibility here to purchase new S/4 Hana solutions with the credit from their old contracts as needed.

Product and Contract Conversion are the conversion paths offered by SAP with regard to S/4 Hana On-premises - both scenarios have their advantages and disadvantages. There is no general answer to which path a company should take and it must be considered on a case-by-case basis.

Named User, Engine and LoB

With S/4 Hana, users calling Line of Business (LoB) and Industry Solutions (IS) do not require a separate user license, as the usage in question is included in the LoB and IS licenses. A Named User license is required for the functions offered by SAP S/4 within the Digital Core. Which license type is required depends on the activated function areas within the Digital Core by the respective account.

The variety of special user types in the ECC world makes conversion to the predefined four user types in S/4 difficult. This makes a case-by-case examination of existing usage indispensable. The only way companies can do this is to look at the usage of their users in ECC and create a mapping. Only through the exact transaction data of the users can a cost-optimal distribution of the user licenses to the S/4 users as well as compliance be ensured.

Hana versus AnyDB

One of the most significant changes is the obligation to run the entire S/4 Hana software on a Hana database - the Hana Runtime Edition or the Enterprise Edition can be selected. The existing SAP customer can choose between the two database licensing models or prefer a hybrid solution.

In the case of a hybrid solution of both licensing approaches, attention must be paid to a clear division of the models at database tenant level. The selection of database licenses for the Hana databases can have advantages or disadvantages for the customer depending on the SAP system and its application. The selection of the license must be evaluated in order to find the cost-optimal solution for the customer here as well.

Indirect use and digital access

Indirect use, in which third-party software solutions access SAP systems, is subject to licensing - this applies equally to the ECC world and S/4. Since April 2018, SAP has been offering Digital Access, a new pricing model for licensing indirect access to the classic SAP core functionalities of ERP/ECC 6.0 and SAP S/4 Hana, in addition to the previously existing user-based pricing model.

The new pricing approach distinguishes between direct human access (which is still calculated based on a user- and engine-based model) and indirect digital access, based on the number of documents originally created in an ERP or S/4 system.

SAP has defined nine document types that are subject to licensing for Digital Access. This principle applies to the new S/4 world, but also to the ECC world if Digital Access is licensed. However, companies can still decide for S/4 Hana On-premises whether they want to license according to the "old" user-based pricing model or using Digital Access.

Conclusion and audits

Another potential uncertainty in the context of an S/4 transformation is the SAP self-audits, which usually take place annually. Regardless of whether an audit pause is agreed as part of the migration, it is not uncommon for SAP transformation projects to take several years. Audits are then carried out in the middle of the transformation, which can lead to an increased compliance risk if there is a lack of knowledge.

SAP does grant a dual use right as part of the transformation to S/4 on-premises, which enables companies to continue to use their existing ECC licenses in parallel with the S/4 licenses - for a limited period of time during the transformation. However, companies must ensure that there is no sublicensing for both systems.

If an audit in the transition phase identifies overuse of ECC software, the purchase of old licenses to cover the use does not always seem to be a sensible solution for customers. The top priority should nevertheless be to restore compliance. Therefore, it is recommended that customers in these special cases try to acquire a correspondingly relevant S/4 equivalent of the product or otherwise secure appropriate contractual passages for future use or conversion of the newly acquired licenses. 

In summary, it is clear that SAP has made some not small changes with regard to the licensing of its software. Whether these ultimately develop into a threat or an opportunity for companies also depends heavily on the companies themselves and the attention they devote to the topic of licenses as part of the S/4 Hana transformation.