Lower-Cost Options Free IT From Software Maintenance Fees - InformationWeek

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Software // Enterprise Applications
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8/25/2006
02:55 PM
Rick Whiting
Rick Whiting
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Lower-Cost Options Free IT From Software Maintenance Fees

As sales opportunities diminish, vendors are relying more on income from maintenance contracts to keep growing. With fees generally set between 17% and 22% of the original software license price, such expenses can exceed the original cost of a purchase in a few years.

Businesses will pay nearly $100 billion in software maintenance fees this year. IT managers have always grumbled about the tab, but lately more are intent on finding ways around high support costs. They're up against a big obstacle, however: Vendors are addicted to the steady revenue the fees generate and aren't about to let them go without a fight.

As the software industry matures and sales opportunities diminish, vendors are relying more on income from maintenance contracts to keep growing and fund product development. With annual maintenance fees generally set at 17% to 22% of the original software license price, such expenses can exceed the original cost of a purchase within a few years.

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But software buyers have alternatives. If they want regular software upgrades without onerous maintenance contracts, software-as-a-service vendors such as Salesforce.com and NetSuite provide new releases of their products as part of their monthly subscription fees. For those that don't need all the upgrades, third-party service companies such as TomorrowNow and Rimini Street can fill tech support needs.

TomorrowNow made a believer out of Eagle Family Food's Jeff Eshelman

TomorrowNow made a believer out of Eagle Family Food's Jeff Eshelman

Photo by Chris Lake
Eagle Family Foods, which makes Borden milk and other grocery products, switched to TomorrowNow for support of its PeopleSoft financial, manufacturing, and distribution applications in mid-2004. PeopleSoft had increased the price of maintenance and support for the 7.5.3 release Eagle used at the time, even as it limited support for that version, says Jeff Eshelman, Eagle's VP of IS. The move to TomorrowNow, owned by PeopleSoft rival SAP, cut Eagle's support costs by 75%.

Maintenance fees accounted for $86 billion, or 41% of the $210 billion in revenue collected by software vendors last year, according to IDC. They're expected to grow 9.6% a year and reach $137 billion in 2010, accounting for 46% of software vendors' revenue.

That's great for vendors, but not so great for customers. A Business Technographics survey of 436 IT decision-makers last year found that 70% in North America and 60% in Europe cited high software maintenance costs as their biggest challenge related to software licensing models.

"The whole gamut is really a flawed process," says Jeffrey Kaplan, a senior consultant with IT advisory firm Cutter Consortium. "Organizations are taking a closer look at this and deciding whether it's worth investing in this type of insurance."

Maintenance Drain, bar chartNo Hard And Fast Rules
Every software vendor has a different approach to charging for maintenance services. Some, such as SAP, offer multitiered maintenance plans that include broader, more sophisticated service options at higher price tags. Customers that buy Microsoft software under its Enterprise and Open Value licensing contracts automatically gain access to the vendor's Software Assurance maintenance and support program, though some packages qualify only for the program's upgrade rights; those buying Select and Open licenses pay extra to join Software Assurance.

Most annual maintenance fees hover around 20% of software license costs, but some are higher. The price of high-end service packages such as SAP's MaxAttention program are often negotiable. Nearly all vendors calculate maintenance fees based on the actual price customers pay for software, factoring in discounts and other negotiated reductions, rather than on list price. Some vendors adjust maintenance contracts annually for inflation: Oracle's maintenance fees increase 3% to 4% a year, for example.

Just as customers' payment structures vary, so too does the level of service they get. Most programs include technical support by phone or online, patches and bug fixes, updates for new regulations and tax laws, and new technical features.

IT executives may hate paying software maintenance fees year after year, but few will risk dropping support services. That would be like driving a car without insurance, says Jason Maynard, a Credit Suisse software analyst. "Most organizations I know want to pay for support. That's an insurance policy."

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