SAP support contracts: annual fee increase from 2024

SAP® support contracts: ^® annual fee to increase from 2024

Companies need to evaluate SAP® service^® contracts as a top priority this year.

This is because, as of 1 January 2024, the annual fee could increase by up to 5 per cent, depending on the respective CPI (consumer price index, a metric used to monitor the inflation rate). So says the ' “Adjustment Support Fees 2024' note released on 26 July by the vendor on the support.sap portal.

A company with an annual support fee of EUR 600,000 in 2024 could face an additional annual expense of EUR 30,000, if we take into account the local CPI in Italy (currently 5,6%)) and a cap of 5 per cent.

The fee increase - as specified in the note – doesn’t apply to new software purchases, but to existing software purchases after the initial term (current calendar year plus the following calendar year) and the first renewal term (full calendar year following the initial term). For example, in a contract closed in February 2021, the initial period ends in December 2022 and the first renewal period in December 2023.

The contracts affected are the existing contracts for SAP ^® Standard Support, SAP ^® Enterprise Support and SAP ^®Product Support for Large Enterprise, i.e. the three models available for SAP^® support for on-premises installations. The increase, however, does not affect cloud products or contracts, as support is usually part of the SAP^® cloud offering.

This is not the end of the story: SAP^® has described the adjustment as an "annual decision" that will be made based on local and regional market conditions so further support price increases by the vendor are not excluded in the coming years.

Last year the support cost percentage was capped at 3,3%,, based on the local CPI, now at 5%. After a decade-long price freeze, SAP^® has placed itself in the wake of support cost increases by other vendors, such as competitor Oracle.

Who will be impacted by this change?

In short, anyone who is not on the SAP® cloud.^®. 

Leaving aside the fact that support for SAP ECC will end in 2027 (with optional extended maintenance until 2030), even those who have switched to the new S/4 HANA licensing (except for Rise) will face this cost increase.

The change will not only affect those who have installed the software completely on-premise (and thus within their own data centre), but also those who are using hyperscalers outside the RISE with SAP^®. option. So if the installation was done in Private Cloud mode, within a provider/hyperscaler capable of managing the necessary infrastructure (e.g. IBM), the cost increase will also affect these companies.

Those with an on-prem landscape, according toSAP^®, require more complex support and service procedures, as they span multiple versions and combinations of hardware and have to be continually adapted to new regulations (e.g. supply chain constraints, energy consumption, etc.). The vendor considers engineering research as valuable enough to justify what it offers, considering the increase in inflation rates.

According to some analysts, the increase in support costs, together with the previous announcement that some innovations will only be available on the cloud, are part of SAP^®'s strategy to push on-prem customers to move to the cloud.

The more predictable revenues from the subscription purchase of cloud-based software services would, in fact, give stability to cash flow and revenues and allow much more funds to be allocated to the evolution of the company.

What should we evaluate?

We mentioned that there are three contracts involved: 

• SAP^® Standard Support: this is the basic offer and is offered at a price of 19% of the value of the licences purchased. It has no minimum threshold requirements
• SAP^® Enterprise Support:this is SAP's most popular support option because it is more comprehensive and business-friendly. It is offered at 22% (fixed until 2025 on new purchases) of the value of purchased licences and has no minimum threshold requirements.
• SAP^® Product Support for Large Enterprise , on the other hand, is designed specifically for large companies (usually has a minimum requirement based on the total investment spend with SAP) and is offered at 17% of basic annual maintenance

The increase represents a potential vulnerability for IT budgets in FY24 and beyond: can they adjust to meet spending KPIs?

During this period, many companies are engaged in the budget process, which is critical in planning and controlling business operations. The evaluation of SAP^® service contracts must be part of the decision-makers' obligations, in order to be able to plan expenditure in the best possible way.

What aspects do you need to be aware of? 

• Contractual obligations: what kind of support contract do we have? What is the annual maintenance base referred to? What are the termination clauses?
• Estimated cost of expenses for the following year: do we know how much we might have to spend if the local ICC reaches the ceiling?
• Options available: switching to another supplier - at least in the case of SAP^® - is complicated and costly. But there are strategies we can implement to reduce costs

Strategies to be implemented

•  Optimising SAP® licences^®

Proper licence management has a direct impact on maintenance contracts: optimising licences also leads to a reduction of the annual maintenance base. Now let us see how.

SAP^® contracts normally state that it is not possible to partially terminate a service contract (see note 6.3). This means that the termination of active software cannot be done partially: if you have 200 applications, you cannot terminate support on a part of them and continue with the others. Or do it for individual countries, if you have applications implemented globally.

This leads managers to think of the maintenance base value as something that always increases with each purchase but can never decrease. Of course maintenance costs are tied to 100 per cent ownership and are paid for, but extreme attention to the definition of 100 per cent ownership can help us reduce maintenance costs significantly.

Let's take an example: with a maintenance base of 6 million and an Enterprise contract, the maintenance invoice would be around 1.32 million. If within this 6 million, there were unused software licences worth EUR 800,000, you would be paying an excess of EUR 176,000.

In fact, ownership is determined by the software and licences installed and accessible. Whether they are in use or not, you pay the same for maintenance costs. But on the other hand, the SAP^® contract does not stipulate that you continue to pay for support for software or licences that you no longer own: so once you have identified the 'deadwood' that needs to be pruned, you have to discontinue them and make sure that you send the software termination notice on time.

If you have a support contract that is renewed annually at the end of the current calendar year (31 December), the latest date for the software termination notice is usually three months earlier (30 September), but you should always check the contractual clauses.

There are many reasons why ownership may increase without any added value:

• Allocated licences and non-synchronised uses: e.g. licences of resigned employees not reallocated, Developer Access licences still active even after the closure of a project, etc.
• Over-utilisation: the type of use of the licence has excessive functionality for the role it has been assigned to, so it could be downgraded to the lower (and cheaper) type. For example, from Professional to Limited Professional if you still have ECC, from Professional Use to Functional Use if you have S/4 HANA
• Excessive licences for HANA databases: we know that runtime licences for the HANA database are counted with a metric called HSAV, which is a value percentage (typically 15%) of one's SAP^® assets from both a purchase and maintenance perspective. If the above points are not optimised, you will end up with an excessive licensing cost even for HANA, which will further weigh on the balance of support costs

The steps we recommend are:

• do a review of SAP^® licences to determine which licences are needed and which are addressable surpluses
  Since SAP reports do not reveal these details quickly and comprehensively, the support of experienced SAM consultants and the use of an analysis tool such as Snow Optimizer for SAP^® can help to understand actual user usage of the software and identify optimisation opportunities
• activate an automated audit and control process: increased cost percentages will not only be an issue in FY24, but also in FY25, FY26 etc.
• with the information in hand, we can consider renegotiating contracts to define ownership in a way that is more consistent with business needs

• evaluating other support contracts 

• Contracts such as Product Support for Large Enterprise (PSLE) allow certain clauses to be negotiated with the vendor, including Support Protection: SAP^® often proposes reductions in annual maintenance fees (usually 5% less than an Enterprise contract) as an incentive to enter into the agreement.

• Signing a PSLE provides a commitment with SAP^® to a certain level of spend in perpetuity: this should only be considered if you plan to grow and invest in the tool in the future (not necessarily On-Prem, even cloud). If there is certainty of doing so, it is an option to consider.

At the same time, you can evaluate between the options offered by SAP^® Standard Support e SAPStandard Support and SAP® Enterprise Support, depending on the complexity and size of your SAP environments

Enterprise, in fact, in addition to Standard Support, offers more support on innovation and integration process management for the entire SAP system landscape (platforms and applications).

• evaluating the move to the cloud

Included in cloud subscriptions is usually the SAP^® Enterprise Support, cloud edition, cloud edition: in 2021 SAP^® commissioned Forrester to conduct research that counts the benefits associated with support services, including reduced implementation costs, reduced effort in releases, optimised business processes and improved internal efficiency.

Con il cloud pubblico di SAP^® si va ad “azzerare” la gran parte dei costi di manutenzione, ma non è detto che il passaggio al cloud sia così economico sul lungo termine. Infatti, si prevedono nei prossimi anni – come riportato here – aumenti annuali automatici e forfettari per le soluzioni cloud SAP^® del 3,3%.

If cloud services grow as announced by 3.3 per cent per year, a five-year contract with an initial annual cost of EUR 500,000 could have an annual cost of around EUR 590,000 at the end of the period. The trend of increasing prices is quite widespread in the cloud market (we could give a thousand other examples!), where new functionalities regularly add value to a product.

This implies, on the part of executives, careful reflection: if you have OnPrem solutions and are considering a move to the cloud, you have to put everything on the scales and weigh it. Also from a cost-forecasting perspective: what is more cost-effective?

Since the topic of support will affect companies for many years to come, at WEGG we are experienced SAP^® licensing consultants. We can help you with appropriate expertise and technology in your contract optimisation and negotiation processes.

*SAP ® e altri prodotti e servizi SAP ® menzionati sono marchi registrati di SAP SE *SAP® and other SAP® products and services mentioned are registered trademarks of SAP SE (or a subsidiary of SAP) in Germany and other countries.