The High Cost of Support - InformationWeek

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Software // Information Management
Commentary
10/6/2010
01:58 PM
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The High Cost of Support

Software support fees often make up the bulk of the yearly IT budget. This is hardly surprising when vendors typically like to calculate support contracts on the basis of ~20% of list pricing per annum, in perpetuity. Even if you negotiate the initial licensing costs down to $500k, you may still pay $200k per year in support fees...

In many end-user organizations, software support fees can make up the bulk of the yearly IT budget.

This is hardly surprising when vendors typically like to calculate support contracts on the basis of ~20% of list pricing per annum, in perpetuity. So for example on a $1m software deal (list price) you will typically pay around $200k per year in ongoing fees. Even if you negotiate the initial licensing costs down to $500k, you may still pay $200k per year in support fees, if the vendor calculates this against list.Twenty percent of list price is a lot of money, and just as these fees can make up the bulk of a firm's yearly IT expenditure, so too do they make up the bulk of many software vendors revenues. Since support is also very lucrative, anticipated future streams also represent a critical part of vendors' stock valuations.

Hence, though vendors will usually negotiate on up-front license costs -- in some cases to the point where they are virtually giving the licenses away for free -- they will be very reluctant to move on the support fees.

It used to be that support was calculated at closer to 10%, but 20% seems to be the average now, with some wanting even more than that. That percentage has risen over the years as the amount of money buyers are prepared to spend upfront on licenses has dropped (to zero in some cases). So you often spend the same today in the long run, as you did back in the day, only you feel better about it now, since you don't have to cough up quite so much in advance.

What this means for you the buyer is that you need to always compare and contrast the total cost of ownership (TCO) of any new systems over a five-year (or longer) time period to fully understand what this is really going to cost you. You also need to be recognize the reality that when vendors are happy to slash up front prices or give their software away for free, they are not doing it to be charitable to you or because you are a mean and lean negotiator, they are doing it because the real money lies elsewhere.

As an interesting aside, today I discovered that a small number of European content management system vendors have recently been prepared to calculate support costs on negotiated prices, rather than list. This is unusual and not something I have seen happening much elsewhere. It may simply be that list pricing is in the slow process of adjusting downward to simplify the process of pricing, or it could be a knee jerk reaction to the perceived commoditization of CMS systems.

Whatever it is, it's a trend that I will continue to watch with great interest, and if you have insights you would could share on this topic please drop us a line we would love to hear from you (technology users and buyers only please).Software support fees often make up the bulk of the yearly IT budget. This is hardly surprising when vendors typically like to calculate support contracts on the basis of ~20% of list pricing per annum, in perpetuity. Even if you negotiate the initial licensing costs down to $500k, you may still pay $200k per year in support fees...

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