Enterprises moving to the cloud face a balancing act: they must maximize existing on-premise SAP investments while adopting new cloud services.
SAP’s licensing model complicates this by forcing customers to juggle perpetual on-premise licenses alongside term-based cloud subscriptions. SAP often touts its approach as “flexible,” but CIOs and procurement leaders should approach hybrid licensing with a strategic, skeptical eye.
SAP markets its Cloud Extension Policy as a flexibility tool – yet in practice, it can lock customers into longer, less negotiable cloud commitments. Read our overview article, SAP Cloud Licensing Models: Navigating SuccessFactors, Ariba, Concur & More.
The reality is most large SAP customers aren’t abandoning on-premise entirely; they run legacy ECC or S/4HANA on-prem for core systems while expanding into cloud apps like SuccessFactors, Ariba, or SAP Cloud ERP in parallel.
Navigating this hybrid model wisely is critical to prevent overpayment, compliance gaps, and loss of leverage during SAP contract negotiations.
Understanding SAP Hybrid Licensing Framework
Hybrid licensing means managing two fundamentally different entitlement models at once.
SAP’s commercial rules for on-premise versus cloud are distinct, and blending them requires careful oversight:
- Perpetual On-Premise Licenses: You own these licenses indefinitely, but pay ~22% of their value per year in maintenance for support and updates. Maintenance fees persist unless licenses are formally terminated.
- Cloud Subscriptions: You rent software as a service for a term (typically 1–5 years) with recurring annual fees. Subscription cost covers usage rights and support for that term, but must be renewed or renegotiated when it expires.
- Concurrent Hybrid Use: During a migration or phased adoption, companies often operate on-prem and cloud systems side by side. This can lead to double-spending (maintenance plus subscription) if not managed. SAP doesn’t automatically credit or reduce on-prem costs when you add a cloud product – they are separate commitments.
- License Portability: Critically, you cannot directly reallocate an on-premise license to cover a cloud service. An unused ECC license doesn’t simply become a cloud credit. Without a special program or agreement, the two remain siloed: dropping on-prem licenses won’t give you cloud access unless negotiated.
- SAP’s “Exchange” Programs: To bridge the gap, SAP promotes programs like the Cloud Extension Policy (CEP), allowing customers to convert a portion of on-prem maintenance into cloud subscription credit. However, this comes with strict terms and usually requires an overall increase in spend (SAP expects new cloud commitments to exceed the value of what you’re converting).
In practice, SAP’s default stance is to keep maintenance and subscription deals separate. Customers must proactively seek concessions to integrate these or risk paying for both fully. Understanding these fundamentals sets the stage for leveraging SAP’s policies to your advantage rather than being caught in an inflexible arrangement.
SAP’s Cloud Extension Policy Explained
What is the Cloud Extension Policy? It’s a commercial framework SAP offers to ease the financial hit of moving to the cloud. Essentially, CEP lets you convert part of your annual on-prem maintenance spend into credits toward new SAP cloud subscriptions.
The goal is to avoid “double paying” for old and new systems during a transition. For example, if you currently pay €1 million per year in SAP maintenance, SAP might allow you to allocate perhaps €300k–€400k of that as a credit toward a new cloud deal (say for SuccessFactors or Ariba).
This reduces the upfront cost of the cloud subscription. But beware: nothing comes free – you’ll be accepting specific trade-offs.
How it works: SAP applies a conversion ratio (often up to 1:1, but sometimes lower) to your maintenance fees. Every €1 of maintenance you convert might give €1 of cloud subscription credit (or less, depending on SAP’s offer).
You then terminate the equivalent on-prem licenses or put them into a restricted status, since you’re effectively trading their support dollars for cloud services.
Key restrictions to note:
- Limited to SAP Cloud services: Credits can only be applied to SAP’s own cloud offerings. You can’t use CEP to fund non-SAP solutions or third-party cloud spend. It’s a closed loop benefiting SAP’s portfolio.
- Cannot eliminate maintenance: SAP typically requires that you retain some maintenance base. You might convert a portion of maintenance into cloud credit, but you can’t drop support on all your remaining on-prem systems unless you fully decommission them. In other words, CEP is usually a partial exchange, not an exit from maintenance.
- Term Commitment: Taking advantage of CEP often means signing a longer-term cloud contract (3–5 years). SAP trades short-term flexibility for this conversion. You lock in a cloud subscription for multiple years, which can be less negotiable over time (annual price escalations may still apply, and you’re committed for the term).
- Reduced Future Flexibility: Once a chunk of maintenance is converted, you’ve essentially given up those on-prem license rights (or at least agreed not to use them productively). If your cloud plans change or the new solution under-delivers, you can’t easily revert to the old licenses or reduce that maintenance spend further – it’s now tied into the cloud deal.
Example: A company allocates €300k of its on-prem support budget toward a cloud subscription for SAP SuccessFactors under CEP. SAP credits this €300k, reducing the cloud bill for the first year. In exchange, the customer must retire the equivalent on-prem HR module licenses and commit to (for instance) a 5-year cloud subscription. If, after 2 years, the company wants to drop SuccessFactors, they’ve lost the support rights on those old HR licenses and are locked into the cloud contract through year 5. This illustrates why CEP should be used selectively – it can be beneficial to offset costs, but only for areas you’re confident you will stay on SAP’s cloud long-term.
Bottom line: The Cloud Extension Policy can provide budget relief during a migration, but read the fine print. Ensure any conversion is worth the value and commitment you’re making.
Don’t let SAP simply “rinse and repeat” your maintenance dollars into a shiny new contract without gaining real value or flexibility in return.
Read about SAP CX licensing, SAP Customer Experience (CX) Cloud Licensing: Managing Commerce, Sales & Marketing Cloud Costs.
Negotiation & Co-Terming Strategies
Mixing on-prem and cloud deals gives SAP more leverage if you’re not careful – but savvy negotiation can turn the tables.
Use these strategies to maintain control over a hybrid SAP agreement:
- Keep Contracts Separate (for Leverage): Where possible, negotiate on-premise and cloud deals on separate tracks. Avoid bundling them into one massive contract unless you get significant commercial benefit. Separate contracts mean you can renegotiate or exit one deal (e.g., drop a cloud service or shelf software) without automatically affecting the other. SAP will push for an all-in-one “transformational” agreement; you should push back unless the terms clearly protect your interests.
- Co-Term for Governance, Not Dependency: It’s often wise to align renewal dates for various SAP products – this simplifies budgeting and renewal management. However, do not tie them together in pricing. Co-term your end dates, but insist each product’s pricing and commitments stand on their own. For example, negotiate cloud subscriptions to end the same month as your on-prem maintenance cycle, but don’t agree to a clause that says you must renew all or none. This way, you get administrative convenience without losing the option to discontinue or re-negotiate one component independently.
- Model the Total Cost of Ownership (TCO): Before agreeing to any conversion or combined deal, calculate the 3-5 year TCO of staying on-prem vs. moving to the cloud. For instance, if a cloud SaaS will cost $2M over three years, compare it to three years of on-prem license depreciation, maintenance, and infrastructure costs. This analysis is your baseline to challenge SAP’s proposal. If the cloud TCO is significantly higher, use that to demand either a better discount or an assured business value (e.g., additional functionality, services) to justify the premium. Never enter negotiations without hard numbers illustrating your alternatives – it’s your key leverage.
- Leverage Maintenance as a Bargaining Chip: Your annual maintenance spend is a significant point of leverage – remind SAP of it. However, be careful about simply handing it over as credit. Instead of blindly accepting “maintenance conversion” at face value, negotiate what you get in return. For example, rather than just swapping $500k maintenance for $500k cloud credit, push SAP to also agree to reduced maintenance on remaining licenses, or enhanced service levels, etc. Use the fact that you’re a paying maintenance customer to get extra concessions, not just a straight swap.
- Ask for Cloud Credit Flexibility: If you do negotiate credits (via CEP or other offers), make them as flexible as possible. Try to ensure cloud credits can be applied across different SAP cloud products or even different business units. For instance, if you commit to a big SAP cloud spend, request the ability to shift allocations between, say, SAP Analytics Cloud and SAP Ariba if priorities change. SAP may resist, but even getting the option to swap one module for another mid-term can save you from being stuck with an ill-fitting solution.
Checklist – Preparing for a Hybrid Deal:
- Inventory On-Prem Assets: Identify all active on-premise SAP licenses you own and the current annual maintenance fees for each. Know your baseline entitlements and costs.
- Examine SAP’s Offer: Request SAP’s Cloud Extension (or conversion) proposal in writing. Note the conversion ratio being offered (how much cloud credit per € of maintenance) and which specific licenses would be terminated or affected.
- Run the Numbers: Calculate the total cloud cost with and without using CEP. How much would you pay over 3–5 years if you keep paying maintenance versus if you convert part of it and sign the cloud deal? Make sure the math of any exchange shows real savings or strategic value – not just a short-term rebate.
- Check Co-Terming Implications: If SAP suggests co-terming or bundling contracts, scrutinize the fine print. Will co-terming limit your ability to drop a product or renegotiate pricing? Ensure alignment of dates doesn’t create a scenario where one poor-performing product drags others along.
- Map Cloud vs Legacy Usage: Detail which on-prem systems or modules the new cloud subscriptions will replace. Validate that the cloud functionality covers your needs. This prevents a scenario where you give up a license (to get credit) only to find the replacement cloud service lacks some features your business still requires.
By preparing in this way, you enter negotiations with a clear picture and a credible stance. You can challenge SAP’s assumptions, push for better terms, and avoid surprises hidden in complex hybrid deals.
Common Pitfalls & SAP Tactics
Even well-prepared customers can stumble if they’re unaware of SAP’s common tactics in hybrid negotiations. Below are five pitfalls to watch out for – and how to counter them:
- Pitfall 1: Inflated Cloud Deal via CEP. SAP’s Cloud Extension Policy can sometimes be used to simply inflate the deal size under the guise of flexibility. They might encourage you to convert a large chunk of maintenance into cloud subscriptions that you don’t fully need yet, boosting the immediate contract value. Fix: Insist on a transparent conversion ratio and itemized cost comparison. Don’t accept vague promises – require SAP to show how the credit was calculated and compare the cloud cost to your current spend. If the “credit” just masks an overpriced cloud subscription, call it out and negotiate the price down or scale the scope appropriately.
- Pitfall 2: Maintenance Fees Remain Unchanged After Partial Migration. Many customers assume maintenance costs will drop once they move part of their estate to the cloud, but SAP often keeps maintenance at the same level unless formally reduced. You could end up paying full maintenance on legacy licenses and the new cloud fees concurrently. Fix: Negotiate a maintenance reduction clause upfront. Get it in writing that maintenance will decrease in proportion to any licenses retired or unused due to cloud migration. Tie the reduction to measurable milestones (e.g., after decommissioning an on-prem module, maintenance for it is removed from the bill).
- Pitfall 3: Co-Terming Erodes Pricing Flexibility. While aligning contract end dates is convenient, SAP might use co-terming to lock you into uniform pricing or prevent piecemeal changes. For example, if everything renews together, SAP could refuse to renew one product unless you renew all at a certain uplift. Fix: Co-term only the dates, not the financial terms. Make it clear in agreements that each product or service can be renewed or renegotiated independently at renewal. Avoid clauses that tie discounts or conditions across multiple products. If SAP wants a multi-solution commitment for a better discount, ensure you have the right to scale down or drop specific elements at renewal without penalty.
- Pitfall 4: Bundled “Migration” Packages Obscuring True Costs. SAP may propose a bundled deal (e.g., a RISE package or a combined S/4HANA + cloud apps transformation deal) that rolls several products together. While it sounds convenient, it can hide individual pricing and an overall cost uplift. You might be overpaying for one component because it’s blended into the total. Fix: Demand a breakdown of costs per component. Even if you sign a single contract, ask SAP to provide the list price, discount, and net price for each element (SaaS product, infrastructure, services, etc.). This transparency lets you identify if one piece is overpriced and gives you leverage to negotiate that component or remove it.
- Pitfall 5: Losing Value of Shelfware Licenses. If you have shelfware (unused SAP licenses), SAP might push you to convert them under the premise of “value realization.” However, once converted or terminated, those licenses are gone – and so is their potential value (for instance, you can’t resell or repurpose them). If the cloud replacement doesn’t cover the same scope, you’ve lost a fallback. Fix: Retain unused licenses until you’re sure of the cloud solution. You can negotiate to keep certain shelfware licenses in dormant status (or under minimal maintenance) as an insurance policy during the transition. At a minimum, document in the contract what rights you retain. This way, if the cloud service underperforms or an audit arises, you still have those entitlements to leverage or fall back on in discussions with SAP.
Staying alert to these pitfalls and addressing them in your contract language will prevent unpleasant surprises. SAP’s sales teams are skilled at structuring deals to their advantage – your job is to inject clauses that protect your flexibility and budget.
Insights about SAP Concur licensing, SAP Concur Licensing: Managing Per-User Fees, Transaction Costs, and Renewal Traps.
Optimization Levers
A hybrid licensing scenario doesn’t have to mean maximum cost.
There are optimization levers you can pull to ensure you get a fair deal and an efficient outcome:
- Selective Cloud Conversion: Don’t feel pressured to convert all your maintenance to cloud credits at once. Apply CEP to carefully chosen areas where the cloud offering clearly replaces the on-prem equivalent and brings new value. Keep other areas on traditional maintenance if they are stable or if cloud benefits are uncertain. This phased approach lets you test the waters and preserves leverage (since you’re not “all-in” on SAP’s cloud in one go).
- Maintenance Offset Clauses: When drafting agreements, include clauses that tie maintenance fees to cloud adoption. For example, as you increase cloud subscriptions, your on-prem maintenance base should decrease proportionally. This ensures you’re not paying two full bills. If SAP is confident their cloud will replace your on-prem, they should agree to reduce maintenance accordingly. Spell out the formula: e.g., “for every $2 in new cloud spend, $1 of on-prem maintenance is waived” – whatever ratio reflects your scenario.
- Hybrid Pricing Model: Seek a blended pricing arrangement for the transition period. If you must run on-prem and cloud concurrently (e.g., during a year of rollout), ask SAP for a temporary discount or a ramp-up model on the cloud fees. For instance, year 1 of the cloud subscription could be at 50% cost while you’re still using the old system, then full price when you fully cut over. SAP may not volunteer this, but bringing it up shows you expect not to pay 100% twice over for the same functionality.
- Credit Portability: Negotiate the ability to reallocate cloud credits or subscription values across the SAP portfolio. A forward-thinking clause might allow you to switch your investment from one cloud product to another if strategies change. For example, if you commit to SAP Cloud Platform credits but later decide to pivot those funds to an SAP analytics cloud service, you could do so without penalty. This kind of portability is ambitious, but even a limited version (like being able to apply unused credits to another SAP cloud product at renewal) can protect you from being stuck with misaligned solutions.
- Renewal Visibility and Exit: Lock in pricing transparency for 3–5 years while preserving your exit options. Ensure your contract stipulates how renewals will be calculated – ideally, cap any price increases (e.g., no more than 3% per year or a pre-agreed discount to list price at renewal). At the same time, avoid auto-renewals beyond the term and secure the right to terminate at the end of the term without punitive fees. This keeps pressure on SAP to re-earn your business at renewal and not take you for granted once you’re fully in the cloud.
Example Clause: “Customer may reduce on-premise maintenance fees by up to 20% per year, commensurate with verified migration of corresponding users or workloads to SAP cloud services, without incurring penalties.”
Such a clause concretely ties your cost savings to your cloud adoption progress. It ensures SAP shares the risk of your migration – if they want you on the cloud, they must allow your legacy costs to come down. Always push for contract language that enforces the promises made during sales discussions.
Integration & Governance Considerations
Hybrid licensing isn’t just about dollars and euros – it also raises governance questions.
Consider these factors to integrate cloud subscriptions and on-prem licenses smoothly within your organization:
- SAP RISE and S/4HANA Cloud Scenarios: If you’re moving to RISE with SAP (S/4HANA Cloud bundled offering) or a similar program, clarify how hybrid arrangements are handled. RISE deals often involve a contract conversion of your old licenses. Make sure any remaining on-prem components (perhaps side systems not in RISE) are accounted for. If you have a foot in both camps (some systems in RISE, others on-prem), confirm whether SAP’s Cloud Extension Policy or other conversion incentives apply within that context. Don’t assume; get SAP to spell out how hybrid use is permitted under RISE and whether you retain any on-prem rights for systems outside the RISE scope.
- Audit Protection: Even as you migrate, preserve your documentation of entitlements. Keep copies of all your original license contracts, metrics, and any conversion agreements (like a Cloud Extension addendum). If you terminate licenses under a conversion, ensure the contract notes what usage (if any) is still allowed (sometimes SAP grants a Temporary Use License (TUL) to let you run old systems read-only for a while – secure this in writing). This paper trail is vital if SAP audits you down the road. You want to be able to prove what was allowed during the transition, so you aren’t hit with compliance claims for, say, keeping an old system live for reporting.
- Financial Governance: Managing a hybrid landscape means your costs might be split across different budgets or P&L lines (capital expense for on-prem vs. operating expense for cloud). Track the combined spend closely. It’s easy for cloud subscription costs to creep up year over year, while maintenance fees remain static out of inertia. Regularly produce an internal report that consolidates all SAP-related spending – cloud subscriptions, maintenance, additional services – so leadership has a true view of the total cost of SAP. This helps build business cases and hold SAP accountable to promised savings from cloud migration.
- Unified License Dashboard: Implement a governance process or tool that lists all SAP contracts, their key terms, and renewal dates in one place. A centralized license dashboard should cover on-prem licenses (with metrics and current usage) and cloud subscriptions (with user counts or consumption levels). This portfolio approach ensures nothing falls through the cracks. For instance, you can plan well ahead for a big renewal event or see the impact if one contract’s terms change. It also helps in forecasting: if you know maintenance on a legacy system is due to drop in two years when that system is fully retired, you can forecast budget accordingly or plan how to reallocate that spend to new projects.
Proactive governance in a hybrid model keeps you in control. It prevents the scenario of “We thought someone else was managing that contract,” which is exactly when vendors capitalize. By staying organized, you can optimize usage, avoid compliance issues, and better negotiate from a position of knowledge.
5 Hybrid Licensing Tactics to Remember
- Use SAP’s Cloud Extension Policy selectively – never as an across-the-board swap of maintenance for cloud.
- Co-term end dates for convenience, but never tie pricing or commitments across on-prem and cloud deals.
- Always model the full TCO before accepting SAP’s maintenance-to-cloud credit offers or bundles.
- Retain on-premise license rights (or documented fallback clauses) for audit protection and future flexibility.
- Track every maintenance reduction and new subscription in a central plan – transparency is your ally in hybrid SAP management.
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