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1/22/2009
02:15 PM
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Software Maintenance Fees: Time For This Model To Change?

The slow economy plus alternatives such as SaaS and open source could pressure vendors into offering lower-cost options.

On The SAP Front ...
Bill McDermott, president of global field operations at SAP, makes no apologies for SAP's decision, announced in July, to replace its two levels of support offerings with just one premium support offering, called Enterprise Support, with an annual price of 22% of the software license. "The real criticism you can make is, 'Gee, Bill, why did it take you guys so long to increase the cost of customer support, because you were five points below the industry benchmark of 22% all that time and giving up shareholder value?'" McDermott says. "That's a fair criticism I'll accept with open arms."

SAP's software revenue rose 7% in the quarter ended Sept. 30, while service revenue rose 14%, driving a profit margin of 14%. Services make up 72% of SAP's revenue.

McDermott maintains that customers don't have a 17%-type maintenance environment anymore. They have myriad custom and integrated software systems, all of which must integrate with SAP's core systems. "We're OK with that, but we're looked at as the company that needs to support that," McDermott says. "Customers expect us to help solve the problems that are very often taking place in [non-SAP] applications." SAP takes calls from customers 24 hours a day, he adds. "Are you comfortable when you go to sleep at night? That's the higher-ground issue. Nothing about our customer support needs an apology."


Bill Mcdermoot

'Are you comfortable when you go to sleep at night? That's the higher-ground issue'
- SAP's McDermoot
Even customers initially upset about the maintenance price increase are beginning to understand the added benefits through more communications, McDermott says. "We're innovating," he says. "And we have to have enough profitability to be able to do that."

User groups in Germany and Austria opposed to the fee hike have succeeded in getting SAP to hold back, at least for now, amid legal challenges. Three CIOs on the board of the Americas' SAP Users' Group--O'Dell of Pacific Coast, Rod Massey of O-I, and Anthony Bosco of Day & Zimmerman--are generally supportive of the increase.

"We've never viewed maintenance as a black hole you put your money into. Maintenance is part of the game," Bosco says. Customers should give SAP a chance to prove that moving to the improved Enterprise Support program will save them money in the long run, he adds.

SAP says customers will get more custom code support, better help with software testing, a recommendation report SAP will supply each year, guidelines for configurations, help in implementing enhancement packs, and answers to service calls 24 hours a day. "I can't be happy with a price increase, but if I have an issue, the first people I call are SAP," Bosco says.

GET MORE FOR YOUR FEES
Tips from Forrester analyst Ray Wang

Focus On License Discount:
Lower this, and lifetime percentage fees are lower
Audit What You Get:
Compare support requests, bug fixes, etc., against payment in making a case for lower fees.
Document Broken:
Compare support requests, bug fixes, etc., against payment in making a case for lower fees.
Use The User Group:
Push user groups to resist fee hikes, and get guarantees of percentage reinvested in product support and desired functions in future releases.
The Americas' SAP Users' Group, based in Chicago, walks a delicate line between serving as an independent voice of its members and maintaining good relations with SAP, which is involved integrally in the group's training programs and conferences.

Forrester Research analyst Ray Wang thinks customers--and the user groups that represent them--should be demanding that enterprise application vendors put a greater percentage of their maintenance fees back into their products. Wang estimates that 70% to 80% of Oracle's and SAP's fees don't go to maintaining and improving the products they're attached to, so even if the vendors' profits help build more innovative software companies, he says, calling them maintenance fees is a misnomer.

Station Casinos CTO Van Baltz found room to negotiate with some of his company's vendors. His team went to all the company's software vendors to renegotiate maintenance and support contracts over the past year, and was able to cut more than $1 million in annual fees. It got an average 9% reduction from vendors that gave rollbacks, Baltz estimates, while additional savings came mostly from lowered service levels, such as moving support for noncritical apps to 8 a.m. to 5 p.m. instead of round-the-clock. "If you don't ask, you're not going to get any concessions," Baltz says. "We found it very encouraging our vendors were willing to be flexible." About half its vendors were willing to make some concessions, including some giving discounts for longer terms.

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