The Price of Value

1. The Price of Value Dr. Peter Graf EVP Solution Marketing, SAP October 11, 2005

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

3. The Value of “Paint” TODAY’S PRICING MODELS MOSTLY IGNORE THE BIG PICTURE VALUE • 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

4. “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

5. Are We Looking At a Perfect Storm? A COMBINATION OF FORCES THAT POTENTIALLY ALTER LICENSING • 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

6. "The cynic knows the price of everything and the value of nothing" Oscar Wilde

7. How Do We Create Value? INNOVATIVE SOLUTIONS THAT ARE DIFFERENTIATED IN THE MARKETAND HELP CUSTOMERS IMPROVE THEIR BUSINESSES Factor inMarketDynamics Addresscustomers’ biggest pain VALUE Apply innovationto deliver uniquesolutions

8. Top 4 Drivers of Mega Trends Drivers Types of trends triggered Macroeconomic changes • Business environment changes customer priorities • Economic changes size the software market Evolving customerneeds • Changes in customer business affect how they prefer to consume business technology and related services New opportunities in enterprise software Technology innovation • New technologies address latent or current needs better/cheaper than current alternatives Softwareindustrystructure • Changes in industry concentration, competitive behavior, industry value chain and economic model that creates new go-to-market options

9. Internet and IT gold rush 1995-2000 Disillusionment - Keeping thelights on 2000-2005 Flexibility & Time to value 2005-2010 • Start of globalization era • Dot.com bubble • IT spending bubble • Focus on consolidating the core & operational efficiency • IT spending flat, trails GDP • 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 • Cross-industry transactionalsystems • Internet-enablement • No strong IT value ethic • Laissez faire, full autonomy to LOBs • 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 • Internet • 3-tier client server with web front ends • Innovation by start-ups • Pricing model – perpetual license and maintenance Mega Trends 1995-2010 2005-2010 1. Macro economic changes 2. Change in customer needs 3. Technology innovations 4. S/w industry structure

10. Are We Going Back to the Good Days? LOW GROWTH TRANSITION PERIOD ‘TIL SOA INFLECTION POINT Source: Bureau of Economic analysis and CSFB

11. Business view Productivity with best practices Ability to differentiate your business (co-innovation) Flexibility to do both on one platform Technology view Event-driven Model-based Services-oriented mySAP Enterprise Services Architecture (ESA) A BLUEPRINT FOR IT POWERED BUSINESS INNOVATION Portal Devices Office RFID SAP, partner &custom xApps EnterpriseServiceRepository SAP NetWeaver Existing Systems

12. Price • Greater link between value and price • Mix of delivery and pricing models reflect value delivered 2015 Phase 2 2005 • Market begins to link price to value • User-based & process-based (business metric) pricing Phase 1 Late 1990s • Minimal link between pricing and value • CPU-based pricing, concurrent user Phase 0 • Value • Business software closes the gap with business • Point solutions purchased by LOB vs. IT evolve into process orientation • Automation for efficiency is assumed and delivered through multiple channels • Business transformation is the next goal via new architecture, platform, and ecosystem innovation • Business software viewed as technical modules • Relegated to back-office; remotely linked to business Next in Software Pricing: Aligning Value with Pricing

13. Human Resources 1 – 99 100 – 9,999 10,000+ Total Industry-Specific Software Accounting Payroll Salesforce Automation Workforce Management Marketing Automation & Customer Support Product Lifecycle Management 0 10 20 30 40 50 (% of Respondents) IDC on Value-Based Applications Pricing Enterprise Applications for Which Value-Based Pricing isMost Appropriate by Company Size Co. Size by Number of Employees

14. Select Define Pricing Industry Metrics Economic Set & Validate for Industry Profiles Pricing Level Define Solutions based on Value Differential Driver Bundle & Compare Economic Structure Prioritize Value Value of and KPIs Scenarios SAP vs . for Next Best Economic Alternative Profiles SAP Case Study FROM VALUE DRIVERS TO PRICING MODEL Determine Pricing Model Determine Pricing Model Quantify Value Drivers Quantify Value Drivers Select Select Define Define Pricing Pricing Industry Industry Metrics Metrics Economic Economic Set & Validate Set & Validate for Industry for Industry Profiles Profiles Pricing Level Pricing Level Define Define Solutions Solutions based based on on Value Value Differential Differential Driver Driver Bundle & Bundle & Compare Compare Economic Economic Structure Structure Prioritize Prioritize Value Value Value Value of of and and KPIs KPIs Scenarios Scenarios SAP SAP vs vs . . for for Next Next Best Best Economic Economic Alternative Alternative Profiles Profiles “Value Capture” “Value Capture” “Value Creation” “Value Creation”

15. SAP Case Study UNDERSTANDING CUSTOMERS’ ECONOMIC PROFILES

16. SAP Case Study IDENTIFYING CUSTOMER VALUE DRIVERS Sources of Value Increase Revenue/Margin Reduce Operating Cost Improve Asset Efficiency • Better products • Cost to design network • Reduce capital expenditures • Quicker to market • Cost to maintain and operate network • Reduce working capital • Broader availability • Cost to develop products • Improve capacity utilization • Reduce downtime (fixed asset utilization) • Cost to sell and fulfill • Cost to bill and collect • Cost to assist customers • Cost of overhead and support functions

17. META Recommendations Pricing implications for new customer usage and partnerdevelopment and licensing • 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

18. The Growing ISV Ecosystem

19. 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

20. 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

21. "Try not to become a man of success, but rather try to become a man of value" Albert Einstein

22. The Price of Value Dr. Peter Graf EVP Solution Marketing, SAP October 11, 2005