Understanding SAP Licensing: Key Insights for Cost Optimization and Compliance

As an SAP customer, you may be facing increasing pressure to migrate your ERP systems to the cloud. Navigating SAP purchases, contract renewals, and licensing can be complex, varying greatly based on your organization’s current and future technical and business needs. Whether you’re negotiating a new contract, managing existing licenses, or transitioning to SAP S/4HANA, understanding SAP’s licensing framework is crucial for cost optimization and compliance.

To maintain control over your licensing and ensure a smooth cloud migration, you need a well-defined plan and transition model. Without it, you risk unnecessary expenses that could significantly impact your IT budget.

1. Introducing SAP

1. What is SAP?

SAP, short for Systems, Applications, and Products in Data Processing, is a global leader in business process management software. Its integrated applications unify all aspects of an organization on a digital platform, replacing outdated legacy systems.

Best known for its Enterprise Resource Planning (ERP) software, SAP has enhanced its offerings with SAP S/4HANA, leveraging in-memory and cloud computing to process vast amounts of data while integrating AI and machine learning for smarter automation and decision-making.

What products does SAP offer?

SAP offers a wide range of software products for businesses of all sizes and industries. Most of these products require a license to use.

Some of the most popular SAP products that require a license include:

• SAP S/4HANA (also called SAP Cloud Service): An intelligent ERP system that uses in-memory technology to process vast amounts of data and support advanced technologies such as artificial intelligence (AI) and machine learning.
• SAP ERP: A software suite that includes financials, logistics, human resources, and other modules.
• SAP Business One: A business management software designed for small and medium-sized enterprises (SMEs).
• SAP SuccessFactors: A cloud-based human capital management (HCM) system that helps organizations manage their workforce.
• SAP Ariba: A cloud-based procurement platform that helps organizations manage their spend and suppliers.

Please note that licensing requirements may vary depending on the specific product and usage scenario. It’s always best to consult with a qualified SAP licensing expert to ensure that you are in compliance with SAP’s licensing policies.

2. How to license SAP – the basics

1. SAP Licensing Models

SAP offers a range of licensing models to accommodate different business requirements and deployment strategies. The primary models include:

• Perpetual Licensing – A traditional model where customers pay a one-time upfront fee for software licenses and an annual maintenance fee for support and updates. This model grants indefinite usage rights but requires separate infrastructure investments, making it common for on-premises deployments.
• Subscription-Based Licensing – A recurring payment model that bundles software, support, and sometimes infrastructure. This approach, often used for SAP cloud solutions like SAP S/4HANA Cloud and RISE with SAP, provides flexibility and reduces upfront costs.

Beyond these two primary models, SAP also offers alternative licensing structures, such as:

• Unlimited Licensing – A broader agreement allowing unlimited use of specific SAP software within defined parameters, often used by large enterprises with extensive SAP deployments.
• Single Metric Licensing – A simplified model where fees are based on a single key metric, such as the number of users, transactions, or revenue, rather than multiple licensing factors.
• Consumption-Based Licensing – A pay-as-you-go model where costs are based on actual software usage, making it ideal for organizations with fluctuating workloads or evolving business needs.

Choosing the right licensing model depends on factors like budget flexibility, infrastructure strategy, business growth plans, and the level of control needed over software usage. A thorough evaluation of current and future requirements is essential to avoid overspending and ensure an optimal licensing structure.

2. SAP Named User and Package Licenses

SAP licenses are generally classified into two main types:

• Named User Licenses – These licenses are assigned to individual users based on their roles and the level of access they require.
• Package Licenses – Also referred to as “Engine” licenses, these are based on specific software functionalities, such as SAP Payroll or BusinessObjects, and are typically measured by transaction volume, number of users, or other usage metrics.

Understanding the distinction between these license types is critical for cost optimization. Over-licensing leads to unnecessary expenses, while under-licensing can result in non-compliance penalties during audits.

Named User Licenses

Named user licenses are mandatory for all individuals who access SAP systems. SAP offers a variety of named user licenses tailored to different roles within an organization. These licenses form a significant portion of an SAP contract’s total cost, and selecting the appropriate type is essential to avoid overpaying.

Types of Named User Licenses

• Developer – Grants access to development tools for customizing SAP applications.
• Professional – Provides full access to manage, administer, and operate SAP systems.
• Limited Professional – Grants restricted operational access to predefined functionalities approved by SAP.
• Employee – Allows users to access reports and data relevant to their role.
• Employee Self-Service (ESS) – Enables employees to perform self-service tasks such as time tracking and leave requests.
• Worker User – Designed for users involved in production processes, such as submitting purchase requisitions or entering production data.
• Logistics User – Provides access for managing transportation and warehousing operations.
• Management Self-Service (MSS) – Enables managers to oversee HR processes, create requisitions, and evaluate candidates.
• Read-Only – Grants view-only access to SAP data without modification rights.
• Service User – Allows system-to-system communication between SAP and third-party applications.

ERP Core License

A foundational Named User License, the ERP Core License is required for basic SAP ERP functionalities. It is typically priced based on the number of users and is one of the most commonly used licensing models.

Key Consideration

Named User License selection should be aligned with actual usage needs. If a user has not been assigned a license type before an SAP audit, SAP will default to assigning them the most expensive Professional license. To avoid this, organizations should regularly review and adjust license assignments.

Package (Engine) Licenses

Package licenses, or Engine licenses, provide access to specific SAP software functionalities. These licenses are modular, allowing businesses to combine them based on their operational needs. Common package licenses include:

• Financial Accounting – Covers core financial management and reporting functionalities.
• Sales and Distribution – Supports order management, billing, and customer relationship tracking.
• Manufacturing & Supply Chain – Covers inventory management, production planning, and logistics.
• Spend Management – Includes procurement, supplier collaboration, and expense management.

Unlike Named User Licenses, package licenses are often based on usage metrics such as transaction volume, database size, or number of employees interacting with the system.

3. Other SAP Licensing Cost Factors

In addition to Named User and Package Licenses, SAP customers must consider additional cost components that may significantly impact their overall licensing expenses.

1. Engine Usage

SAP software engines serve as the backbone of various modules, and usage is often charged based on the number of users or systems accessing them.

2. Standard and Special Packages

• Standard Packages – Pre-defined software bundles for common business processes such as contract management or payroll processing. These are typically priced based on user count or system usage.
• Special Packages – Custom-built SAP solutions tailored to unique business requirements. Pricing is determined on a case-by-case basis with SAP.

3. Indirect Access

Indirect access occurs when third-party applications or custom-built integrations retrieve data from an SAP system. SAP defines indirect access as any usage that does not happen directly through an SAP user interface. Licensing is often based on the number of system-generated documents rather than users.

For example, if an external reporting tool extracts financial data from SAP for business analytics, this may require an indirect access license—potentially leading to significant additional costs.

4. Digital Access

Digital access refers to usage through emerging technologies such as:

• Internet of Things (IoT)
• Bots and automation tools
• External web portals or third-party applications

Unlike indirect access, which focuses on system interactions, digital access is typically priced based on the number of documents processed by SAP rather than the users accessing it.

3. Deployment: Choosing the Right SAP Hosting Model

Selecting your SAP deployment method is just as crucial as choosing the right software and licenses. A key decision is whether to manage hardware and software in-house or outsource it to a third party. SAP offers multiple deployment options, each with its own advantages and complexities:

• On-Premises: SAP software is installed and run on servers within a business’s own facilities. This grants full control over infrastructure, security, and data but requires significant IT resources and investment.
• Hosted Private Cloud: SAP runs on a private cloud managed by a third-party provider. This balances security, flexibility, and cloud benefits while reducing IT burden.
• Public Cloud: SAP software is hosted in a shared cloud environment managed by SAP or a hyperscaler. This is often the most cost-effective and scalable option but offers less control.
• Own Private Cloud: Businesses can also deploy SAP in their own private cloud, providing flexibility with full control over infrastructure and management.
• Hyperscaler (e.g., AWS, Azure, Google Cloud): SAP can be deployed on a public cloud infrastructure from a hyperscaler while the business or a managed services provider oversees operations.

Key Considerations for SAP Deployment

When deciding how to deploy SAP, consider:

• Control & Security: Businesses with strict security requirements may prefer on-premises or private cloud, while others may benefit from the flexibility of public cloud.
• Budget: On-premises requires high upfront investment, while cloud models shift costs to a subscription-based model.
• IT Expertise: On-premises demands in-house IT management, whereas cloud solutions offload some or all maintenance to a provider.
• Customization Needs: Public cloud SAP solutions may have limitations, whereas private cloud or on-premises allow more extensive customization.
• Licensing & Contracts: Businesses must decide between perpetual (CAPEX) and subscription (OPEX) licensing, as well as whether to consolidate services under SAP (e.g., HANA Enterprise Cloud) or manage components separately.
• Service Levels: Consider whether SAP’s standard service levels meet your needs or if a customized SLA is required.

4. SAP License Audits and Compliance Risks

SAP conducts regular software audits to ensure customers comply with their licensing agreements. These audits can uncover compliance gaps, leading to unexpected costs, back payments, and even penalties.

Common pitfalls include:

• Misclassified Named User Licenses – Users with more access rights than necessary may be incorrectly assigned expensive licenses.
• Unaccounted Indirect Access – If third-party systems interact with SAP without proper licensing, companies may be charged retroactively.
• SAP Engine Usage Overages – Some SAP engines (modules) have strict usage metrics, and exceeding thresholds can lead to additional fees.

To minimize compliance risks:

• Regularly review and optimize user roles and license assignments.
• Monitor indirect access connections and clarify licensing terms with SAP.
• Track usage of engines and digital access to prevent unexpected costs.

5. Migrating to SAP S/4HANA – Key Licensing Considerations

1. What is SAP S/4Hana?

SAP S/4HANA is SAP’s latest ERP offering, designed to migrate customers from older SAP systems. It is an intelligent ERP solution that utilizes in-memory technology to process large datasets in real-time, supporting advanced technologies like AI and machine learning. This successor to SAP’s ERP suite aims to provide a modern, streamlined user experience and increased flexibility, allowing deployment on-premises, in the cloud, or in a hybrid setup. SAP has already moved around 10,000 customers to S/4HANA and plans to accelerate this in the coming years.

2. What are the benefits of SAP S/4HANA?

Moving to SAP S/4HANA brings several advantages:

• Modern user experience: Simplified data models and an intuitive interface improve usability.
• Flexibility and scalability: S/4HANA can be deployed in any environment, supporting both on-premises and cloud options.
• Real-time data processing: With in-memory technology, S/4HANA enables faster decision-making and accurate insights.
• Advanced technologies: AI and machine learning are integrated to help automate processes and improve business efficiency.

3. Key licensing considerations during migration

Transitioning from legacy SAP ERP systems to SAP S/4HANA is a major decision that impacts licensing. Key factors to consider include:

• Licensing Model Shift – SAP encourages the shift from perpetual licenses to subscription-based pricing for S/4HANA. This change can impact the long-term cost structure for businesses, so it’s crucial to understand how this will affect your licensing needs over time.
• Conversion vs. Reimplementation – When migrating to S/4HANA, businesses must decide whether to convert their existing SAP system (keeping current licenses) or reimplement the system, which would require new licensing agreements. This decision will significantly affect both the cost and the licensing model chosen.
• Digital Access and Document-Based Licensing – SAP’s new document-based licensing model for digital access can lead to additional charges if not carefully managed. It’s essential to understand how digital access is counted and ensure that the licensing approach aligns with your company’s specific needs, to avoid unnecessary costs.

Before migrating, conduct a thorough license assessment to determine cost-effective strategies and identify potential savings.

6. Understanding SAP’s Cloud Licensing Models

SAP offers multiple cloud deployment options, each with its own licensing approach:

• RISE with SAP – A bundled SaaS offering that includes software, infrastructure, and managed services under a subscription model.
• SAP S/4HANA Cloud – A multi-tenant SaaS model with limited customization options but lower upfront costs.
• SAP Private Cloud Edition (PCE) – A single-tenant cloud option providing greater flexibility while maintaining a subscription model.

Each model affects licensing differently in terms of cost structure, flexibility, and compliance requirements. It’s crucial to evaluate which deployment aligns with business needs while avoiding unnecessary licensing expenses.

7. Microsoft and SAP: A Powerful Partnership with Licensing Implications

While SAP and Microsoft are two separate giants in the software space, they often intersect in the enterprise world, especially when it comes to cloud adoption and system integration. Here are a few key areas where their licensing models and offerings align:

1. Integration with Microsoft Azure

SAP and Microsoft have formed a strategic partnership to optimize SAP S/4HANA deployments on Microsoft Azure. Azure provides a secure and scalable environment for SAP applications, offering businesses the ability to run SAP systems in the cloud with high availability and performance. This integration also extends to Microsoft’s Power Platform and Dynamics 365, making it easier to connect SAP data with Microsoft’s suite of productivity tools. From a licensing perspective, businesses need to be mindful of the cost structure when running SAP S/4HANA on Azure, as it involves both SAP licensing and Microsoft Azure infrastructure costs.

2. SAP and Microsoft Office 365 Integration

Many organizations use both SAP and Microsoft Office 365. With SAP’s increasing integration with Microsoft’s suite of tools, such as Microsoft Teams and SharePoint, businesses can streamline workflows and improve collaboration. This has licensing implications in terms of how users are counted across both SAP and Microsoft platforms, as well as potential overlaps in licensing needs for tools like Microsoft Power BI for analytics and reporting within SAP.

3. Cross-Licensing Agreements and Discounts

In some cases, organizations may be able to leverage cross-licensing agreements, where SAP and Microsoft offer bundled discounts for using their products together. For instance, companies using SAP applications on Microsoft Azure may receive discounted pricing for their Azure services or special deals for integrating Microsoft technologies into their SAP landscape. It’s important to assess these opportunities during SAP migration to potentially reduce overall costs.

4. Hybrid Cloud Solutions

A hybrid approach, with SAP workloads running on Microsoft Azure and legacy systems on-premises, is a popular choice for many businesses. This hybrid cloud model requires careful management of both SAP and Microsoft licensing. SAP customers must navigate the complexities of managing SAP licenses in a hybrid environment, while ensuring they optimize their use of Microsoft cloud resources to avoid overprovisioning and unnecessary costs.