The problem is with tokens themselves. Tokens[are] not yet the outcome.

In the ongoing debate around ‘tokenomics’ that’s an eye-catching assertion from Philipp Herzig, Global Chief Technology Officer & Chief AI Officer at SAP at this week’s Bank of America Global Research C-Suite TMT Conference, where he took time out to clear up “some misconceptions” about the firm’s commercial approach to AI. The basic principle, he pitched, is “value-based and then working backwards”.

There’s a division between base and premium AI, he explained, with base being exemplified by, for example, uploading expenses into Concur:

You have the Concur app and you upload a receipt or your taxi receipt or whatsoever, [and] that’s part of the base subscription basically, at no extra charge. There are a bunch of these capabilities that are just table stakes from our perspective that customers come to expect as part of the product.

Then, of course, there are premium capabilities where there’s a willingness to pay by customers because there is great value that this provides to the customer in addition to what the underlying base software or SaaS software brings to them.

Herzig estimates that SAP currently ships around 200 such premium capabilities today out of a total of around 400 AI capabilities overall.  If a customer wants to use any of the premium ones, they need to purchase a concept SKU called AI units:

With that AI unit, you basically get entitled for all premium capabilities across the entire portfolio of SAP. So, no matter whether it’s a capability in supply chain and finance and for the IT function, that’s true for consultants, true for developers – all of them roll up into this AI unit concept.

The AI unit concept by nature is a consumptive model with consumptive revenue recognition, he points out:

It has been, from the get-go, designed as a consumptive model because when we released this in ’23, it was very clear to me, yes, there will be some headwinds because customers don’t like consumptive models, but AI value will be consumed in a consumptive way.  I think we were pretty early in that assumption.

No token gesture

But what SAP is not doing here, he emphasized, is just passing on tokens to customers:

Our customers really don’t like tokens; they like business outcomes. This is what SAP stands for.

That does then open up the definitional question of, what is value and how is it measured? Herzig’s argument: 

When you talk about value, first of all, you need to have a hypothesis [of] what is the value? Let me take the example of Joule for Consultants which has tremendous value, because it directly translates into reduced billable hours that customers spend with their SIs on an SAP implementation.  So they can say, ‘OK, if I use Joule for Consultants, I pay SAP so much more money for my IT staff, so many hundred, 200,000 users’. And that translates directly into 20%, 30% reduced cost in terms of billable as measured by billable hours towards the SI. Very simple deal, win-win situation, so to speak, from a business model perspective.

Whatever the price now is, whatever the value is,  – could be $1, could be $1 million, it could be $10 million – we say 70% to 80% is for the customer. We apply a take rate of 20% to 30% that gets charged to the customer, value-based,  and that’s, again, numbers of days sales outstanding reduced, numbers of days in consulting and billable hours reduced, and so on. [It’s] something the business can measure, where you can go to a CIO, to a CFO, to a CHRO and say, ‘OK, we’re going to deliver that value against you’.

The beauty of this commercial model lies in its transparency, according to Herzig:

Tokens are like measuring the performance of the company based on how much electricity they are consuming.  That’s not the performance indicator. You can consume a lot of electricity, maybe just because you keep the lights on the entire night, [but] nobody is being there, so that’s not a good measurement.  It maybe serves as a proxy variable, but it’s not a good measurement.

In our commercial model, it’s beautiful because you see [that] you have saved so many hours, your days outstanding down by one or two days, and you can directly translate that into your business metric,. What that means is if you have runaway costs, it’s almost certain that you also have runaway value.

Trust issues

But it’s early days here, he admits, and customers are going to need time to get their heads around all this:

Customers, specifically at the beginning of the journey when they don’t trust yet that Return On Investment, of course, still need visibility, they need experimentation. That is exactly why we’re saying with a new product, where customers still first need to gather trust, we give it away for free. They get used to it. They see how much cost it is in terms of AI units.

We have this thing called SAP for Me, [where] every customer can log in and see across the entire portfolio what they spend on AI, and see their finances, see the T&Cs, see which agreements they have with us, all the contractual and financial things that customers have with us. And there, they, of course, see the AI unit consumption.

Soon they will also be able to budget there as well, he revealed:

We don’t have this yet, but they will also be able to budget [at the] end of this year the consumption in the various buckets as well. And of course, then if they see the consumption is going up, so obviously, people are using it, then they also see the value that is associated with it.

That is the trust building exercise you need. So then also basically the up-sell and the renewal becomes a non-event, because they see the value and of course, then they purchase more and expand more as a result of that motion.

My take

Value, value, value – AI’s base currency, but one that still eludes so many across so many vendors. It’s emerging as the common theme – and the latest Holy Grail – as the ‘tokenomics’ debate heats up.