Hedging financial risks in the digital transformation

For companies, digital transformation scenarios are becoming increasingly complex and lead to financial risks in various transition projects. Prerequisites for hedging such risks are case-specific analyses and a shift of individual project risks to the program level by means of novel risk transfer solutions.

While some organizations have already integrated new technologies into their day-to-day operations, others face the question of how to approach these new opportunities as well as identify and leverage profitable application areas. Whether individual projects have already been implemented or are still in the innovation pipeline as part of global transition programs, it is difficult for companies to identify downstream risks arising from increasingly complex IT scenarios.

Particularly with a view to the interoperability of software systems, it becomes clear that commercial and legal aspects are being given too short a consideration. For example, the long-term economic viability of introducing new technologies depends not only on primary costs, such as acquisition, implementation, operation and maintenance, but should rather also be analyzed in terms of the different software used and the associated licensing risks.
Financial dangers

Thus, a key success factor for companies is to identify and manage potential financial risks in addition to developing concrete technology initiatives and aligning them with global digitization and business strategies. Although companies monitor operational project risks in the digital transformation, current KPMG practical experience shows that it may not be possible to manage all inherent risks due to high complexity as well as constant changes during ongoing projects. This is often due to new requirements during the transition, changes in user behavior as a result of new technologies, and complex licensing and contractual provisions.

More license audits

At the same time, in addition to the annual license validation, the number of license audits will increase significantly for organizations, according to current KPMG market insights. New technologies are becoming the focus of audits. It is often wrongly assumed that the risk of incorrect licensing is no longer present, or only present to a limited extent, in the case of subscriptionbased use. In fact, however, the client continues to bear the responsibility for ensuring the compliance of any software use in the cloud.

With the increasing spread of consumptionbased and contingent-price
models, it also becomes more difficult for CIOs to monitor and control ongoing costs. While investment and maintenance costs for on-premises products are comparatively easy to control, cloud applications incur ongoing licensing costs that can vary widely depending on usage and extended services. The combination of growing complexity and increasing audit and review risks for cloud and/or on-premises has significant potential for financial damage to occur in the form of back payments and penalties.

Hidden license risks

While classic risk dimensions, such as the current and future architecture, remain relevant, new aspects, such as cloud computing and associated operating models, such as IaaS, SaaS, PaaS or hybrid models, are being added. The provision of existing licenses or the operation of cloud services on a platform as well as third-party management in the form of service level agreements are uncertain in terms of correct use. The following applies to both: complex licensing models, which can be designed differently for each use case and software manufacturer, cause costs in terms of compliance or in the form of additional payments in the event of non-compliance.

Furthermore, the automation and digitization of numerous business processes mean increased interconnectivity between different software systems. This leads to so-called indirect use, i.e., access to the core software by means of intermediary software programs by human users or any other device or system.

Access to real-time data via constantly changing interfaces and end devices leads to unpredictable costs. Unless there is a contractual agreement for indirect use, many of these cases lead to license costs, which can account for a significant proportion of the total project costs.

Furthermore, such indirect usage scenarios by third-party software are not only relevant from a cost perspective, but must be examined along the entire IT enterprise architecture with regard to the contractual and licensing provisions of all manufacturers used. However, it is precisely this identification of cross risks during an ongoing implementation of a project that is hardly possible due to resource constraints and deadlines. It is simply not feasible for companies and consultants to manage every possible dependency on third-party systems from a technical and licensing perspective.

Indirect use

Since 2018, SAP has responded to the increased indirect access to its core software with a new pricing model for indirect usage. Instead of measuring usage based on the number of direct users (Indirect Access), the new model counts the total number of documents initially created by indirect third-party software (Digital Access).

SAP's digital pricing model includes nine document types: Sales, Invoice, Purchase, Financial, Material, which are counted by line item, as well as Service and Maintenance, Manufacturing, Quality Management, and Time Management documents. The following transactions are not relevant for the new license model: Document updates, read and delete transactions, and cascading documents created based on a document.

Although customers are free to choose between indirect and digital access, it remains difficult for many customers to decide which model is better, i.e. more cost-effective, in individual cases and in the long term.

While the classic model is often limited in terms of vertical and/or horizontal development of the technical architecture, digital access removes the limitations of technical and process development, especially when use cases (for example, read-only access) or document types are not subject to licensing.

It is therefore necessary to determine all relevant systems as well as the interfaces and accounts behind them, including the relevant document types. Subsequently, the results of the two models must be scrutinized with regard to profitability, benefit and risk.

SAP offers its existing customers two technical options to help them determine the relevant documents. The Estimation Note determines an estimate of the documents created in the last twelve months, which must be determined with regard to completeness and correctness. The Passport tool differentiates between the creation of documents by SAP and non-SAP applications and must be operated for at least twelve months in order to obtain reliable data. It can be assumed that the Passport tool will be included in the SAP survey routine for customers with the Digital Access contract addendum in the future.

For the switch to the new licensing model, SAP also offers two sales incentive models that either discount existing licensing at a high percentage or align licensing only with future growth.

Program Management

Despite the technical and sales offers, however, a customer-specific comparison of costs, benefits and risks per use case as well as holistically must ultimately be carried out in order to make the best possible decision, taking into account the company and SAP requirements.
strategy to be able to meet.

It is possible to partially eliminate financial risks for individual projects with the help of structured software asset management, but holistic coverage of all risks in the project portfolio remains difficult, regardless of the quality and scope of management. Instead, new risk transfer solutions can help to cover financial losses arising from license risks.

As a business transformation consultancy, KPMG offers a vendor-independent license and IoT guarantee in cooperation with one of the largest solution providers for reinsurance, Munich Re, in addition to its SAM service. The guarantee covers internal events (for example, vulnerabilities in license management) and external events (for example, changes in product components, open source, license metrics).

License Compliance

Operational software asset management remains a prerequisite for license compliance. It enables planning security and control for the digital transformation, the avoidance of provisions and expensive process costs, cost transparency as well as profitability not only of individual projects but of entire transition programs.