The Strategic Decision
Enterprise IT leaders face a pivotal decision when adopting SAP S/4HANA: should you use a cloud subscription model (RISE with SAP or S/4HANA Cloud SaaS) or stick to traditional on-premise perpetual licensing? This guide compares cloud vs on-premise S/4HANA licensing from a CIO/CFO perspective, covering differences in cost structure, user licensing metrics, contract flexibility, upgrade responsibilities, and vendor lock-in. Understanding these trade-offs helps you select the optimal approach for your enterprise.
Related: Migrating from SAP ECC to S/4HANA — Licensing Conversion Strategies
In This Guide
Overview: Subscription vs Perpetual Licensing
At the highest level, the difference comes down to how you pay and what you control. These two models have fundamentally different implications for cost planning, flexibility, total long-term cost, and contract negotiation.
On-Premise Perpetual Licence
You purchase a one-time perpetual licence (CapEx) allowing indefinite use. You pay annual maintenance (~20–22%) for support and updates. You manage infrastructure, upgrades, and patches on your timeline. Like buying a car — pay upfront, maintain it, and own the asset.
Cloud RISE / S/4HANA Cloud
You subscribe to S/4HANA as a service, paying periodic fees (OpEx). No software ownership — access for your subscription term only. Subscription includes software, cloud infrastructure, basic support, and updates. Like leasing a car — predictable payments, but you don't own it at the end.
On-premise gives more control and potentially lower costs over a long horizon (you can use licences even if you stop maintenance). Cloud provides quicker time-to-value and offloads infrastructure and upgrade burdens, but comes with ongoing payments and less control over environment and timeline.
Further reading: Overview of RISE vs On-Prem and the 2027 Deadline
Traditional On-Premise S/4HANA Licensing
Licence Purchase (CapEx)
You purchase S/4HANA licences measured by Named Users and package metrics — e.g., 500 Professional User licences, 100 Limited User licences, plus engine licences. This is a large one-time expense (often millions for large enterprises), subject to discounts. These licences are perpetual — once paid, you can use that software version forever.
Annual Maintenance (22%)
Standard SAP Enterprise Support is 22% of net licence value per year. A $5M licence investment means ~$1.1M in annual maintenance. If you stop paying maintenance, you still own the licences — you just won't get updates or support (software freezes at the last version you had rights to).
Infrastructure and Operations
You decide where to run S/4HANA — your data centre or a cloud IaaS you manage (AWS, Azure). You're responsible for installation, hardware sizing, backups, patches, and upgrades. This provides scheduling flexibility — you can stay on a release for years if stability is important.
Maximum Customisation Flexibility
On-prem provides full access for customising the system — extensions, modifications, and integrations are entirely in your control. SAP has guidelines, but there's no technical limiter from SAP's side.
Named User Metric
You manage user licences as Named Users (Professional, Limited Professional, ESS). This requires periodic user audits to ensure correct licence types. If user count shrinks, you still own the licences — can't get money back, but can repurpose them.
Exit Flexibility
You're not time-bound by a vendor contract for usage. If after 5 years you stop using SAP, you drop maintenance and stop — no cost. If you continue without support, no new costs but also no support. The licences are yours permanently.
S/4HANA Cloud Subscription Model (RISE & SaaS)
Subscription Pricing (OpEx)
You pay an annual (or quarterly) subscription fee, typically calculated based on users (FUEs or named users by type). For example, 200 users averaging $150/month ≈ $360,000/year. Actual prices vary widely by deal and user category. Enterprise deals may not be strictly per-user but present an overall annual figure.
All-Inclusive Bundle
The subscription includes S/4HANA software licence (for the term), HANA database licence, infrastructure (hosted on hyperscaler), standard support, system maintenance, patches, and upgrades. SAP handles technical operations and provides uptime SLAs. A significant IT overhead is outsourced to SAP.
RISE vs Public Cloud Editions
RISE with SAP is typically a private cloud (single-tenant) managed by SAP — more flexibility for customisations at higher cost. SAP S/4HANA Cloud public edition is multi-tenant SaaS — less expensive but less customisable. Both are subscriptions, but differ in flexibility and scope.
FUE User Metric
SAP commonly uses Full User Equivalents (FUEs) in the cloud — a pooled capacity model rather than individual named user categories. You commit to a certain number of users for the term. Adding more means upselling; using fewer doesn't save money until renewal.
Contract Lock-In (3–5 Year Terms)
Cloud contracts are typically 3-year or 5-year terms with renewal clauses. Leaving early means penalties or paying the remainder. After the term, if you don't renew, you lose access to the software unless you negotiate a transition to another model.
Automatic Upgrades
SAP controls the update schedule (quarterly or biannual releases). Beneficial for new features, but you must be prepared to test and adapt continuously. You're always on a supported version, but have less control over timing. Customisations are more restricted — SAP encourages BTP side-by-side extensions.
Further reading: Negotiation Strategies for RISE with SAP
Cost Structure Comparison
| Cost Element | On-Premise (Perpetual) | Cloud Subscription (RISE/SaaS) |
|---|---|---|
| Licence Fees | High upfront CapEx for perpetual licence (e.g., $X million one-time), amortised over many years | No upfront licence cost; annual OpEx subscription (e.g., $Y per year for contract term) |
| Infrastructure | Customer pays for hardware, data centre, backups, DR — separate costs | Included in subscription; SAP provides cloud infrastructure |
| Maintenance | 22% of licence cost per year; predictable but grows with licence purchases | Basic support included; premium support extra; subscription fees may escalate ~3–5% annually at renewal |
| Upgrades | Periodic big projects funded by customer; you choose timing | Technical upgrades handled by SAP continuously; no large upgrade project cost |
| Customisation | Highly customisable (full access); custom work increases long-term maintenance | More restricted; BTP extensions add cost; some requirements may not be feasible |
| Long-Term TCO | 10+ years can be cheaper: after paying off licence, only maintenance + infra + upgrades | TCO accumulates as continuous payments; RISE may claim 20% lower TCO for 5 years but subscriptions often overtake beyond that |
In many scenarios, on-prem vs cloud TCO crosses over around the 4–7 year mark. Cloud can be more cost-effective in the first few years because you avoid big CapEx and get bundled services. Over a decade, paying yearly subscription often proves more costly. However, some CFOs accept that premium for other benefits — agility, no hardware refresh cycles, reduced IT management. Each organisation should model their specific situation with actual quotes.
Detailed analysis: Cost Comparison — RISE vs Own Infrastructure
Flexibility, Control, and Risk Considerations
Flexibility to Reduce Scope
On-prem: if you downsize users, you're not forced to pay more (you already own licences). Cloud: you must wait until renewal to adjust commitments; mid-term reductions are typically not allowed. Cloud contracts often have minimum commitments.
Scalability Upwards
On-prem: purchase additional licences and hardware (takes time and negotiation). Cloud: scaling users/resources is technically easier (SAP provisions more), but you pay immediately. Scaling down is the bigger issue in cloud.
Upgrades and Innovation
Cloud keeps you on the latest version with faster feature access. On-prem lets you control timing and stay on stable releases. If your company prefers slower change management, on-prem may feel safer.
Compliance and Data Residency
Highly regulated industries often prefer on-prem for data control. SAP's cloud offers regional hosting and certifications (GDPR, industry-specific), but verify these meet your specific requirements.
Vendor Lock-In
On-prem: you hold the licences; can use third-party support or negotiate if SAP raises maintenance. Cloud: locked in for the term; at renewal, SAP has leverage knowing switching off a live ERP is extremely difficult. On-prem gives slightly more negotiating leverage over time.
Hybrid Options
It's not strictly binary. Some organisations run S/4HANA Cloud for smaller subsidiaries and on-prem at HQ. SAP can sometimes bundle hybrid deals. This adds complexity (two environments, two contracts) but can be a strategic stepping stone.
Also read: Digital Access Differences Between Cloud and On-Premises
Strategic Recommendations
Conduct a 5–10 Year TCO Analysis
Model costs of both options over at least 5 years (preferably 10). Include licence/subscription fees, maintenance, infrastructure, personnel, and upgrade costs. This highlights the cost crossover point and justifies your decision to stakeholders.
Align with Business Priorities
If agility and rapid innovation are top priorities, lean toward RISE or cloud. If cost control and autonomy are paramount, consider on-prem. Ensure IT strategy aligns with overall business strategy.
Negotiate Contract Safeguards
For cloud: cap annual price increases, ensure transparency on inclusions (storage, DR, environments), include transition assistance if contract ends. For on-prem: negotiate price protections for future purchases, licence swap rights, and cloud extension options with credit.
Consider a Pilot or Phased Approach
Pilot S/4HANA Cloud in a smaller subsidiary while maintaining on-prem for core. Evaluate results before committing company-wide. Or start on RISE with a clause to evaluate switching models at renewal.
Perform an Infrastructure Reality Check
If your data centre is aging, cloud avoids new hardware CapEx. If you just refreshed hardware or have a private cloud ready, use it and save with on-prem licensing. Let your current infrastructure state inform the decision.
Examine Compliance Requirements
Double-check data protection, regulatory, and performance requirements. If cloud can meet them (it often can with proper SLAs and location choices), great. If not, that's a non-negotiable reason to stay on-prem.
Plan a Long-Term Exit Strategy
Consider: "If we had to exit this model in X years, what would it entail?" For on-prem, exit means software stays but you stop maintenance. For cloud, exit means migration — a major undertaking. Planning ensures you don't inadvertently trap yourselves.
Leverage Existing SAP Investments
If you already own SAP licences (SRM, CRM, etc.), transitioning to RISE may "sunset" those licences with their functions absorbed into S/4. You may end up paying again for functionality you had. Negotiate credits and don't let prior investments be ignored.
Involve IT and Finance Teams Jointly
The CIO, CTO, and CFO should evaluate options together. IT may favour one model for technical reasons, finance another for cost reasons. Procurement should hammer out the best contract terms once direction is chosen. A balanced view is essential.
Frequently Asked Questions
SAP encourages cloud (RISE is heavily marketed), but they've committed to supporting S/4HANA on-prem until at least 2040. Many large customers run on-prem and SAP will continue selling and supporting it. That said, SAP's innovation investments may initially appear in cloud, and pricing incentives increasingly favour cloud. You have a genuine choice today and for the foreseeable future.
Not directly one-to-one. If you have ECC licences, SAP may give credits or incentives when you negotiate a RISE contract. Your ECC licences will be terminated or shelved — you don't "apply" them to RISE. SAP might offer discounted RISE rates for existing customers, but it's a new contract. If you later want to return to on-prem, you'd need to negotiate a conversion at that point.
On-prem uses individual Named User licences requiring careful tracking of licence types. Cloud contracts use FUEs — a pooled capacity model. In the cloud, compliance is about usage aligning with contracted amounts (SAP monitors this). On-prem requires more granular internal tracking. Either way, exceeding your contracted capacity means purchasing more. See FUE vs Named Users explained.
Switching is possible but not seamless. Going from RISE to on-prem requires negotiating a new licence purchase, migrating the system from SAP's cloud to your environment, and having hardware and Basis team ready. Going from on-prem to RISE means negotiating a RISE contract and migrating to SAP's cloud. SAP offers a "RISE Transition" programme. Both directions are projects that require planning — pre-negotiate conversion options if you think you might switch.
Yes, particularly with the public cloud edition which historically had reduced scope (fewer industries, limited advanced features). SAP has rapidly closed the gap, and most core functionality is now available in both. Certain industry solutions or advanced configurations may only be on-prem. Always check SAP's latest Feature Scope Description. Private cloud via RISE typically uses the same code as on-prem but may restrict custom modifications.
Before your term ends, you'll start renewal discussions with SAP. SAP could increase prices — many contracts have escalation clauses (e.g., "prevailing rates at renewal" which is open-ended). That's why negotiating a cap upfront is critical (e.g., no more than 5% increase). At renewal, you can adjust user counts (usually only upward unless you negotiated reduction options). Prepare thoroughly — review actual usage, value from RISE, and approach SAP with data.
Yes, but it adds complexity. Some organisations run S/4HANA Cloud for smaller subsidiaries and on-prem at HQ. You'll manage two environments and two contracts. SAP can sometimes bundle hybrid deals with discounts. Integration between systems uses standard interfaces. A hybrid approach can be a stepping stone, but needs a clear strategy to avoid permanent technical debt.
RISE primarily includes S/4HANA (private or public cloud edition) and basic BTP platform credits. It does not cover SuccessFactors, Concur, Ariba, or other SAP cloud products — these remain separate subscriptions. If you have other on-prem SAP software (SRM, BW), these aren't automatically covered. RISE is not "all-you-can-eat SAP" — it's focused on core ERP. You need to handle other components separately, though SAP sales can coordinate combined packages.
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Fredrik Filipsson
Fredrik Filipsson brings over 20 years of experience in enterprise software licensing, including senior roles at IBM, SAP, and Oracle before founding Redress Compliance. His direct SAP experience gives him deep expertise in S/4HANA licensing models, RISE contract negotiations, TCO analysis, and helping organisations navigate the cloud vs on-premise decision with vendor-independent advisory.