Software Maintenance Fees: Time For This Model To Change?

No Room For Negotiation
What bothers Singh most is how many software vendors don't negotiate on maintenance rates. For example, why can't he pay, say, a 12% rate for some applications and get only the bug fixes but bypass the upgrades? "As I talk to Oracle and Microsoft, I'm telling them I'm moving toward SaaS, and why I'm such a proponent of it is that I'm sick of paying maintenance and not getting any results," he says. Much of Chiquita's business runs on Oracle JD Edwards apps, but it's using some software services, including HR, from startup Workday.

Oracle's Phillips notes that there are 1.7 million end users of its own hosted software services. Some of those companies pay conventional license and maintenance fees, and others, mainly Siebel CRM customers, pay a monthly subscription. But SaaS isn't necessarily cheaper, Phillips says. "There's no magic in the costs," he says. "Someone has to pay for developers and maintenance."

Every time Singh has crunched the numbers over a three- to five-year timeframe, Chiquita breaks even or saves money with SaaS compared with conventional licensing, he says. "And that's just the pure software costs. When I look at soft costs in terms of whom I didn't hire to do integrations or customizations, all of a sudden my payback becomes even greater," he says.

Rimini Street offers Oracle support at significantly discounted prices and plans to add SAP services this year. Seth Ravin, CEO of the privately held company, describes business as "booming." Rimini can offer lower prices on maintenance because it's not taking a cut out for future product development, he says.

Yet Rimini and the handful of other third-party maintenance providers, including NetCustomer and Spinnaker Management Group, are relatively small. Rimini, which focuses mostly on PeopleSoft and JD Edwards apps, has fewer than 100 employees, though Ravin says the company's finding plenty of independent consultants seeking "safe harbor and a paycheck" as it looks to double its employee size this year. He says revenue doubled in 2008 and predicts it'll approach $100 million in bookings this year. Rimini counts Pepsi America among its customers.

Pacific Coast CIO O'Dell says he called Rimini about its forthcoming SAP services and decided that forgoing the SAP updates was too high a price. "If you have a static environment that doesn't change very much, it might be interesting," he says. "But we're investing in technology every year and every month and every day, That's not going to support our dynamic environment."

The longer this economic recession grinds on, however, the more tempting lower-cost alternatives will look, and the more pressure software vendors will face to offer tiers of support prices.

Roger Burkhardt, CEO of open source database vendor Ingres Software and former CTO of the New York Stock Exchange, predicts the tough economy and more mature, commercial-grade open source software stacks will make this "the year in which open source competition drives proprietary vendors to begin changing their business models."

The reality, though, is that none of the alternative models to software licensing and maintenance has blown through to the enterprise mass market. Alternative models loom as threats, with considerable success in pockets such as CRM and operating systems, but there's nothing approaching the scale of conventional licensing.

Can vendors driving these new models create long-term, profitable businesses that can afford the talent and investment to keep innovating? Or is Oracle's Phillips right--that there's no "magic in the numbers" and buyers are getting what they pay for?

The challenge is before vendors trying to replace the traditional software model with something better, and before CIOs willing to stick their necks out.