The Price of Value

The Price of ValueDr. Peter GrafEVP Solution Marketing, SAP

October 11, 2005

SAP AG 2005, SoftSummit Keynote / 2

"I can't change the fact that my paintings don't sell. But the time will come when people will recognize that they are worth more than the value of

the paints used in the picture."

Vincent van Gogh


The Value of “Paint”

Perpetual license Named or concurrent user licenses

Maintenance Single vendor or multi-vendor maintenance

Transaction Pay as you go, “Utility” pricing

Free software Charge for services and support and/or monetize partner relationships

Subscription Rent-to-buy option

TODAY’S PRICING MODELS MOSTLY IGNORE THE BIG PICTURE VALUE


“Many organizations have embraced the rental approach, but fail to evaluate the full financial

impact of rental licensing over a multi-year period and the negative effect of the lock-in. Most orgs

that have a number of years’ experiences with this model are generally dissatisfied and often try to

return to perpetual models.”

Gartner Group


Are We Looking At a Perfect Storm?

Promised value not delivered Customer perception of the value of software has evolved

Technology dynamics E.g. open source, SOAs, virtualization, RFID

New delivery models E.g. Software as a service & utility computing

Shareholder pressure Vendors need more predictable revenue streams and thus drive for more

compliance of street prices to terms and conditions

Risk mitigation Customers drive for predictable, simple, flexible licensing models

Courtesy: IDC Insight 2005; A. Konary

A COMBINATION OF FORCES THAT POTENTIALLY ALTER LICENSING


"The cynic knows the price of everything and the value of

nothing" Oscar Wilde


How Do We Create Value?

Factor inFactor inMarketMarket

DynamicsDynamics

AddressAddresscustomers’ customers’ biggest painbiggest pain

Apply innovationApply innovationto deliver uniqueto deliver unique

solutionssolutions

INNOVATIVE SOLUTIONS THAT ARE DIFFERENTIATED IN THE MARKETAND HELP CUSTOMERS IMPROVE THEIR BUSINESSES

VALUE


Top 4 Drivers of Mega Trends

Macroeconomic changes

Evolving customer

needs

Technology innovation

Softwareindustry

structure

• Business environment changes customer priorities• Economic changes size the software market

• New technologies address latent or current needs better/cheaper than current alternatives

• Changes in industry concentration, competitive behavior, industry value chain and economic model that creates new go-to-market options

• Changes in customer business affect how they prefer to consume business technology and related services

Types of trends triggered Drivers

New opportunities in enterprise

software


Mega Trends 1995-2010

1. Macro economic

changes

2. Change in customer

needs

3. Technology innovations

4. S/w industry structure

2005-2010Flexibility & Time to value

2005-2010

• Compliance • Operational flexibility • IT spending keeps pace with

GDP

• Industry-specific processes• Compliance and risk mgmt • Contextual usage • IT value ethic : time to value • CIO - Chief Process

Innovation Officer• LOBs push their priorities• Applistructure and ESA • Grid and virtualization

• Co-innovation & ecosystem based competition

• New pricing models • New deployment models • Competition from BPO

Disillusionment - Keeping thelights on 2000-2005

• Focus on consolidating the core & operational efficiency

• IT spending flat, trails GDP

• Consolidation & standardization

• IT value ethic : ROI • Centralization of IT under CIO

• No major change in architecture

• Standards adoption: J2EE, Linux

• App. innovation stagnates• Industry consolidation begins• Community led development

• Start of globalization era • Dot.com bubble • IT spending bubble

• Internet • 3-tier client server with web

front ends

• Innovation by start-ups • Pricing model – perpetual

license and maintenance

• Cross-industry transactionalsystems

• Internet-enablement • No strong IT value ethic• Laissez faire, full autonomy

to LOBs

Internet and IT gold rush 1995-2000


Source: Bureau of Economic analysis and CSFB

-10%

-5%

0%

5%

10%

15%

20%

25%

30%

35%

40%

Y-Y

Gro

wth

SAP R/3

Windows 3.0

Windows 95 released,Client/Server takes-off

Bubble Bursts:1) Spending Freezes2) Budgets Scrutinized

Netscape IPO Back to Reality:1) Spending Rationalization2) Consolidation3) Centralization

Next Big Thing??? 1) SOA2) Virtualization3) OnDemand4) RFID

Internet Bubble

Y2K

LOW GROWTH TRANSITION PERIOD ‘TIL SOA INFLECTION POINT

Are We Going Back to the Good Days?


Enterprise Services Architecture (ESA)

Business viewProductivity with best practicesAbility to differentiate your

business (co-innovation)Flexibility to do both on one

platform

Technology viewEvent-drivenModel-basedServices-oriented

SAP NetWeaverEnterpriseService

Repository

SAP, partner &custom xApps

Existing Systems

Portal Devices Office RFID

A BLUEPRINT FOR IT POWERED BUSINESS INNOVATION

mySAP

http://images.google.com/imgres?imgurl=http://www.rfsmart.com/images/page_imgs/rfid_bc_combo_tag.jpg&imgrefurl=http://www.rfsmart.com/labeling.htm&h=149&w=155&sz=6&tbnid=mNX3w5LVqtgJ:&tbnh=87&tbnw=91&hl=en&start=279&prev=/images%3Fq%3Drfid%2Btag%26start%3D260%26svnum%3D10%26hl%3Den%26lr%3D%26sa%3DN

http://www.sapdesignguild.org/editions/edition6/images/chrome-portal.jpg

http://www.atcommunications.co.uk/images/colour%20blackberry%20above.JPG


Automation for efficiency is assumed and delivered through multiple channels

Business transformation is the next goal via new architecture, platform, and ecosystem innovation

Greater link between value and price

Mix of delivery and pricing models reflect value delivered

2015

Phase 2

Business software closes the gap with business

Point solutions purchased by LOB vs. IT evolve into process orientation

Market begins to link price to value

User-based & process-based (business metric) pricing

2005

Phase 1

Next in Software Pricing: Aligning Value with Pricing

Business software viewed as technical modules

Relegated to back-office; remotely linked to business

Minimal link between pricing and value

CPU-based pricing, concurrent user

Late 1990s

Phase 0Value

Price


IDC on Value-Based Applications Pricing

Human Resources

Industry-Specific Software

Accounting

Payroll

Salesforce Automation

Workforce Management

Marketing Automation & Customer Support

Product Lifecycle Management

0 10 20 30 40 50(% of Respondents)

1 – 99 100 – 9,999 10,000+Total

Co. Size by Number of Employees

Enterprise Applications for Which Value-Based Pricing isMost Appropriate by Company Size


SAP Case Study

Determine Pricing Model

“Value Capture”

SelectPricingMetrics

for IndustrySolutions

CompareValue ofSAP vs.

Next BestAlternative

Set & ValidatePricing Level

based onDifferentialEconomic

Value

Determine Pricing Model

“Value Capture”











Value



Value

Quantify Value Drivers

“Value Creation”

DefineIndustry

EconomicProfiles Define

Value Driver

Structureand KPIs

Bundle &Prioritize Scenarios

forEconomic

Profiles

Quantify Value Drivers

“Value Creation”

DefineIndustry

EconomicProfiles

DefineIndustry

EconomicProfiles Define

Value Driver

Structureand KPIs

Define Value Driver

Structureand KPIs


forEconomic

Profiles


forEconomic

Profiles

FROM VALUE DRIVERS TO PRICING MODEL


SAP Case Study

IM&

C In

dust

ry

Product-based Focus

Service-based Focus

Does the customer rely primarily on products or services to drive profitability?

Low CostIs operational efficiency & lowest cost focus driving strategy?

Low CostIs operational efficiency & lowest cost focus driving strategy?

Product Innovator

Is innovation and new product introduction driving strategy?

Product Innovator

Is innovation and new product introduction driving strategy?

Component Specialist

Is the product portfolio largely comprised of inputs and components?

Component Specialist

Is the product portfolio largely comprised of inputs and components?

Segment Specialist

Are the products considered finished goods with complex BOM for a narrow customer segment

Segment Specialist

Are the products considered finished goods with complex BOM for a narrow customer segment

Solution Provider

Is pre-sales support and consulting used heavily to craft a customized, up-front product configuration?

Solution Provider

Is pre-sales support and consulting used heavily to craft a customized, up-front product configuration?

Downstream Champion

After sales support & service agreements define strategy and competitive advantage

Downstream Champion

After sales support & service agreements define strategy and competitive advantage

UNDERSTANDING CUSTOMERS’ ECONOMIC PROFILES


SAP Case Study

Increase Revenue/Margin• Better products

• Quicker to market

• Broader availability

• Reduce downtime

Reduce Operating Cost• Cost to design network

• Cost to maintain and operate network

• Cost to develop products

• Cost to sell and fulfill

• Cost to bill and collect

• Cost to assist customers

• Cost of overhead and support functions

Improve Asset Efficiency• Reduce capital

expenditures

• Reduce working capital

• Improve capacity utilization (fixed asset utilization)

Sources of Value

IDENTIFYING CUSTOMER VALUE DRIVERS


META Recommendations

Large commercial users should:Exploit the capabilities and interfaces that are enabled by the application infrastructure services from major players (IBM, MSFT, SAP, ORCL, and BEA) to build/assemble their next generation applications

Small packaged application providers should:a) Select one of the leading infrastructure services vendors as a "partner," and build their business applications to this environment

b) Focus their efforts on capturing more specific business processes versus a major infrastructure software investment

Pricing implications for new customer usage and partnerdevelopment and licensing


The Growing ISV Ecosystem


Strategic Pricing Planning Assumptions

Applications will be licensed as (end-to-end) business processes, not just as functional technology components E.g., ‘prospect to cash’ or ‘order to delivery.’ are better ways to sell to

business, rather than IT executives.

The value of software depends on industry and economic profile of the customer

Non-value based pricing will get under pressure Customers staying on a CPU based licensing model will have their software

costs increase by 50%+ Concurrent user pricing will disappear

Utility-based pricing models will take longer time to mature Gartner: The offerings to date are all billing variations on traditional licensing

models


SAP Perspective on Future Direction

Enterprise applications will be split Assets

Core processes Innovation-driven Need to “own” even if run by 3rd-party

Services Context processes Efficiency-driven

ESA is the architecture that cohesively reconciles these different models

Composition platform ties all of the above into a flexible business platform


"Try not to become a man of success, but rather try to become a man of value"

Albert Einstein

The Price of ValueDr. Peter GrafEVP Solution Marketing, SAP

October 11, 2005

The Price of Value

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