Software Maintenance Fees: Time For This Model To Change?

Rusty Gaston is one of thousands of CIOs who use Oracle software to automate their organizations' supply chain, financial, and HR operations. But she's one of just a handful who have decided to run those applications without an Oracle maintenance contract, giving up rights to software updates, full upgrades, and Oracle-trained service expertise.

Gaston, CIO of Santa Fe Natural Tobacco, a subsidiary of Reynolds that sells the American Spirit Natural brand of cigarettes, didn't think she was getting her money's worth on the contract, which charged the Oracle standard annual rate of 22% of the original cost to license the software. While Santa Fe Natural had paid for its software licenses once, the maintenance bill came every December.

When Gaston told her Oracle reps that she wasn't renewing Santa Fe Natural's contract and instead would try a third-party maintenance firm called Rimini Street, which promised to fix the company's software problems at about half Oracle's yearly fee, they told her she was making "a horrible mistake," she says. Gaston would be cut out of the Oracle family, giving up her rights to innovative software updates and customer-only information on product strategy. But a year later, Gaston says she has just one regret: that she didn't drop the contract sooner.

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Software Maintenance Fees: Time For This Model To Change?

Not many CIOs are willing to take such a radical step to cut their software maintenance costs. But most understand Gaston's aversion to that yearly fee, and many question the value they get for it.

It's certainly not just a question about Oracle. SAP is trying to convince customers on older, 17% maintenance contracts that the new contracts they're required to move to this year, increasing to 22% by 2012, will give them more valuable services in return. A 22% rate means that for a $1 million software license, a company pays an annual fee of $220,000 for service packs, product enhancements, and some services. For those SAP customers on the 17% rate now, that's an increase of $50,000 a year on a $1 million license.

A $50,000 yearly hike on a $1 million license may not seem huge, but any increase seems unusual to CIOs who think the maturation of the software industry should mean they start to see their software bills go down instead of up--sort of like the Moore's Law of the hardware industry. Instead, the model of one-time licenses and ongoing maintenance fees remains strong across enterprise software segments.

Manjit Singh, CIO of Chiquita Brands, says he's been watching maintenance fees for the software vendors he uses creep up from an average of about 18% a few years ago to 21% or 22%. "And for that, what am I getting? I'm not getting to dictate product strategy, and I don't get premier support," Singh says. "I'm getting the right to code fix it and to upgrade."

With more pressure on his IT budget, Singh is looking at what maintenance contracts he can cancel--typically software nearing the end of its life cycle. With some other applications, he's switching to software as a service, bypassing the conventional maintenance fee structure altogether.

Not everyone thinks the system is broken. Ian Abramson, president of the Independent Oracle Users Group and a consultant who specializes in Oracle technologies, says maintenance costs aren't a particularly heated topic of discussion among group members. "I understand the price is high for maintenance, and Oracle probably makes a lot of money off of it," Abramson says, "but I guess that's the cost of doing business, like buying insurance for your car and wanting the best insurance when you're driving it."

Michael O'Dell, CIO at construction services firm Pacific Coast Cos., supports the premise of an argument Oracle and SAP executives make: IT environments have become much more complex, and customers typically call on Oracle or SAP services even if their problems originate with another technology, application, or human error. That means higher internal support costs for the vendors, which count on those maintenance fees not just for customer service, but also to fund future development. "We understand SAP's dilemma, and that it's no longer just an ERP system," says O'Dell, who's also chairman of SAP's user group board. "As a platform, it touches many different areas of our enterprise."

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Yet there is undeniable discontent out there. And when there's discontent, there's an opportunity for disruptive forces. The industry is witness to rapid growth in alternative business models: SaaS; free, Web-based software such as Google Apps; open source software; and third-party maintenance firms. These forces could pressure conventional software vendors to develop a lower-cost model for customers.

Or, as the traditional software vendors maintain, those emerging vendors with new models will discover within a few years there's just one way to grow profits, attract talented employees, provide first-rate service, and keep innovating for customers--and that's to charge sizable license and maintenance fees.