Changes to the conversion rules for SAP contracts

For existing SAP customers, the migration to S/4HANA is the next step in the digital transformation. This requires the conversion of existing licences. SAP has now announced drastic changes to the conversion regulations for contracts, which can lead to sharply rising licence and maintenance costs for many customers. To make SAP's licensing policy more transparent for you, we have compiled information on the changes and their effects:

The migration to S/4HANA is an important step for companies that requires careful preparation. In addition to the technical transformation, the challenge lies particularly in the conversion of licences and contracts. SAP offers existing customers two options for this: Product Conversion and Contract Conversion.Product conversion is the option of a 1:1 conversion of the classic "Industry & Line of Business" licences into new S/4HANA licences. With this procedure, only parts of the existing contract are transferred, as the products to be converted can be selected according to need. It is also possible to carry out several product conversions if the requirements are spread over a period of time. With this procedure, the old ERP named-user licences remain in place and can continue to be used under S/4HANA according to their definitions. The prerequisite for the product conversion is the so-called flat fee, which includes the right to use S/4HANA Enterprise Management.

With contract conversion, on the other hand, the entire contract landscape is converted. Customers are given the opportunity to reconfigure SAP contracts according to the "milkshake" principle. This means that unused software or shelfware can also be credited to new, unrelated software licences. However, it is assumed that at least 100 percent of the existing maintenance base is always continued.

Both options come with different advantages and disadvantages and may turn out to be preferred depending on the company's goals, situation and planning. Regardless of the option chosen, the rights of use of the invoiced legacy licences are retained as long as the migration has not been completed.

Within the last few months, SAP has surprised its customers with two decisive changes to the framework conditions of the conversion options. The first change concerned product conversion and resulted in the removal of the well-known flat fee ("SAP S/4HANA Enterprise Management for ERP customers") from the price and conditions list (PKL) at the beginning of the second quarter of 2023. As a result, product conversion is now only possible for companies that have already purchased the flat fee. 

In the course of the recently published price list for the third quarter, SAP has also changed the framework conditions for Contract Conversion, namely the crediting factors for existing licences. Previously, conversion credit was given at the lower of 100 per cent of the previous maintenance base or 90 per cent of the net payment of the new transaction. Effective immediately, SAP has now reduced the crediting factor to 80 percent of the maintenance base. There are to be no defined exceptions or transition period. In addition, a graduation has already been announced for the next few years, in which the crediting is to be reduced by ten percentage points each year from 01.01.2024 onwards. SAP has not yet given any concrete reasons for the reduction, but the cloud business it is aiming for seems to be a possible justification.

The current changes have partly serious effects on companies and put them under pressure to make decisions. Economically, this means on the one hand that customers must either accept a high loss in value of their existing licences or contribute an increase amounting to 25 percent of the existing maintenance base. By way of comparison: Up to now, only an increase in the maintenance base by a factor of 1.11 had to be achieved for full crediting of the old licences. 

Even if, from the point of view of Expert:innen, it was already to be expected that SAP would change the crediting regulations sooner or later, the lack of communication and transparency vis-à-vis the customers is the real problem. Many companies are now forced to examine the effects of the changed conversion regulations under time pressure and to evaluate the different scenarios according to their own goals and from a profitability point of view. As early as the beginning of next year, the chargeable value would otherwise be reduced by another 10 per cent or would require an increase of about 42 per cent (17 percentage points), which is hardly a realistic additional requirement for any company.

With the latest changes to the framework conditions for product and contract conversion, SAP has presented its existing customers with a fait accompli and put new pressure on the decision-makers. For companies that have not yet contractually converted to S/4HANA, these changes could mean high financial disadvantages and additional costs. It is therefore more urgent than ever to carefully examine the individual options for contract conversion and to reconcile them with your own goals and plans. Our experts can advise you on the path to a successful and sustainable S/4HANA migration. They will be happy to help you evaluate your current contracts, check the cost-effectiveness of a contractual conversion and work out a cost-optimised solution for you.