It's no secret that maintenance and support for enterprise applications is wildly profitable for vendors and, likewise, incredibly expensive for IT shops. Some of those IT shops, in fact, are overwhelmed by the cost and find too little return to justify paying for it.
Even as the economy worsens, IT service contracts are growing pricier. The Yankee Group puts that hike at 10 to 15 percent year over year. IT budgets, meanwhile, are softening, according to Gartner, which found that while overall IT spending is expected to expand, that growth rate has slowed from 3.1 percent to 2.3 percent.
Yet companies still shell out millions for support and maintenance contracts to stay on the software upgrade treadmilldespite, Yankee says, 80 percent of customers' IT budgets going toward operational expenses, while a paltry 20 percent is available for capital expenditures.
According to a June 2008 Forrester report, 21 percent of companies are undergoing major application upgrades, while a similar percentage will face minor upgrades. "To a large extent, these upgrades are driven by vendor-imposed support deadlines where customers will face increasing maintenance costs or the decommissioning of specific releases if the upgrades are delayed further," the report said.
What's more, Oracle last month ratcheted up its prices, again, this time by as much as 20 percent, while rival SAP ended its low-price support option in late May. Previously, customers could choose the lower tier that cost 17 percent of their license fees; now they are left with the Enterprise Support package, which runs at 22 percent.
So what is a company facing the now-clichéd mantra "do more with less" to do about those high-ticket enterprise application support and maintenance contracts?
Basically, IT shops have three options: renegotiate existing contracts, switch to a third-party service provider to extend the life of your applications, or in certain instances, the extreme case: drop support altogether.
Revisit contracts already in place
Customers have more power than they might think in negotiating an existing contract. "A customer’s leverage is not just to go to a competitor," explains Frank Scavo, president of Computer Economics, a 28-year-old IT research firm.
According to Scavo, customers can use "events" in the normal course of a relationship as opportunities to negotiate, such as buying more user licenses or modules, or upping the ante to a longer-term contract.
[ Time to pull out the checkbook? Prepare yourself with "Seven strategies for highly effective buyers" ]
"If you're planning to buy additional modules from an apps vendor, use that as an opportunity to negotiate better terms and conditions," Scavo advises, "perhaps to get a refund on other modules not implemented, or to lock in maintenance fees at some fixed rate. Or to get computer-based training thrown in for free. Roll that discussion in as part of the transaction. You may not get what you want, but there’s no better time to ask than at the point where the vendor wants to make a new sale to you."
Also, Scavo suggests assessing what you have and what actually gets used -- for both support options and application modules -- since some customers inevitably wind up paying for more than they ultimately put into practice.
"With Oracle, the way the license is negotiated you get the kitchen sink. There are definitely features in there that we pay for but don't use just because the package is so big," says John Mayes, associate vice president and chief procurement officer of Yale University.
Scavo also recommends that IT look hard at how many user license seats you initially purchased and how many are currently being utilized because while the vendor will tell you if you've exceeded the original number, they're not as likely to let you know about the surplus you're still paying to use, support, and maintain.
[ If you skip the fine print, you may not get your money's worth. Read "Are you paying too much for software licenses?" ]
Yet another option for cutting costs is to consider a lower tier of support. "A lot of CIOs and CEOs are rethinking the level of support and what they're getting for it. People are cutting costs where they can," says Laura DiDio, a research fellow with Yankee Group. "But there's a sense among CEOs and CIOs of 'let's not be pennywise but pound foolish,' so they at least get phone support."
SAP, for instance, offers Enterprise Support at the high end. According to an April 2008 IDC report entitled "The Evolution of SAP Support Services," software upgrades, updates, and patches are the chief reasons customers purchase premium support. Older, more mature applications that run with relatively few problems could be ripe for a lower level of support, such as SAP Standard Support or even the project-level SAP Safeguarding.
Somebody, anybody other than the vendor
When the vendors either won't budge on price or simply cannot provide the level of service that you require, there are third-party providers to consider -- but the vendors will fight tooth and nail to keep you from going to one.
That's what happened when Rusty Gaston, CIO of Santa Fe Natural Tobacco, called her Oracle rep to explain that the company was considering going with a third-party support provider for PeopleSoft 8.8 instead of renewing with Oracle.
"Our maintenance costs were incredibly high," Gaston explained. "We were not getting a return on the dollar for maintenance fees."
But Oracle did not surrender pleasantly. "It was immediately about telling me how stupid I was. It was all about what's around the corner for Oracle, rather than a negotiation," she added. "This was like me asking somebody what time it is and them saying 'we don't use the sundial anymore.'"
So Gaston turned to a third-party provider of support for Oracle applications. After evaluating both Rimini Street and rival TomorrowNow, she ultimately elected Rimini Street because it was willing to engage in a unique relationship with Santa Fe Natural Tobacco that calls for what Gaston referred to as aggregate staff, or support folks dedicated to her so that Gaston would not have to carry an extra 2.5 full-time IT professionals.
Rimini Street and TomorrowNow provide performance, operational, and configuration support, as well as patches, bug fixes, legal, tax, and regulatory updates, among others. "The standard pricing approach for both Rimini Street and TomorrowNow is to take whatever the customer is paying to Oracle [or SAP] and halve it," explained Pat Phelan, a research director at Gartner. "In Rimini Street’s case, they have taken an even deeper discount for certain situations. I suspect it was for deals where Oracle had been substantially overcharging for old, very stable modules."
Gaston's experience echoes that assessment. "We now get support comparable to what we were getting from Oracle, but it's 50 percent of what I was paying Oracle. I get a whole, whole, whole lot more. Not only because of the support, but also the aggregate staff arrangement."
Rimini Street in May pre-announced that it will support SAP starting in January, becoming the first third party to actively pursue R/3 customers, according to Gartner. Since spreading the word, "we've had tons of calls from top SAP customers. Some of them, SAP's hair would stand on end if they knew these guys were talking to us. We're talking top five to ten companies here. They stand to save millions of dollars," says Rimini CEO Seth Ravin.
SAP downplayed the significance. "Customers are telling us more and more that they want us to support them, and not just SAP software but everything that connects to it. And they’re willing to pay for it," says Bill Wohl, vice president of global communications at SAP.
That may be true for some customers, but third-party support has another key advantage: A way to escape the high-pressure upsell to the latest version. Ravin says that the other half of its customer base uses Rimini Street to extend the life of older applications; many want to keep their software for 5 or even 10 years without upgrading. "Customers are taking control of their destiny." Often, "the software can run even after the vendor doesn't want anybody on it."
Gartner's Phelan explains that "old releases of products are very stable and require little actual on-the-ground support; and the companies are not receiving much in the way of support from the vendors anymore on the old releases anyway, so the risk of going to a third party can be less than it looks at first glance."
The city of Flint, Mich,, for instance, uses a PeopleSoft payroll app from 1997. Had they been on Oracle's upgrade path, they'd have spent millions by now to get new apps they didn't really need, says Ravin. He used to think the practical life of an application was 10 years. "With Flint, we're going to go another 5."
At some point the desperate among us consider the radical possibility of going off maintenance and forging our own support. Backing that idea, Scavo points out that maintenance and support contracts may not be worth the cost for customers that get only bug fixes, help desk, or access to future enhancements.
"It may sound crazy, but it might make sense to abandon vendor support if an organization has highly modified the software, is running on an older release no longer supported, intends never to upgrade, or plans to migrate from the system in the near future," Scavo added. "Vendors have increased their fees for software maintenance to the point where they may not be justified in a large percentage of cases."
[ Read about another seemingly radical 21st-century IT idea: "IT heresy revisited: Let users manage their own PCs." ]
"Going naked," as Scavo calls it, works in very specific scenarios. "When we know we are moving off the platform at the useful end of life of the software, it might make sense not to renew the contract," Yale's Mayes says. But for the most part, the risk is higher than the cost, akin to driving around without auto insurance.
"The question is, how critical is it? If the system is down and you can't get it started, can you go back to the vendor? Or can you get someone else there right away?" Duncan Jones, a senior analyst with Forrester Research, probes. "If the knowledge base of known bugs and patches is out there, it can work. If not…"
Matt Aslett, enterprise software analyst at the 451 Group, describes the risk bluntly: "It would take a brave company to run an ERP [or CRM] application without official support given the criticality and complexity of ERP apps."
Few companies would consider enduring that kind of risk with a mission-critical application. Instead, they would be more likely to consider two popular options to lower enterprise software costs: SaaS (software as a service) or open source. Instead of slogging it on the upgrade treadmill, jump off and try something new.
With SaaS, support costs are similar, but maintenance costs plummet, since the vendor hosts the application. With open source, the business model generally relies on for-pay support, but with a robust enough community, adroit customers may be able to get away with minimal support and rely on the assistance of peers. So far, however, few large companies have made the leap to SaaS or open source enterprise applications.
When subscribing to SaaS applications from the likes of NetSuite, Salesforce.com, SalesNet, or Workday -- or even Oracle or Microsoft SaaS apps -- the host handles upgrades. Be aware, however, that per-seat subscription prices track pretty closely with the conventional licensing, maintenance, and support costs of on-premise software. You get quicker time to market and avoid up-front licensing costs, but factor it all out, and you may not save much, particularly if you add subscription fees to extra-cost options.
[ Is SaaS is a better deal than conventional enterprise software? Read: "Calculating the real cost of SaaS" ]
Open source enterprise applications -- including SugarCRM, Compiere, xTuple, and OpenERP -- are moving into larger organizations, says Ned Lilly, CEO and president of xTuple, the open source ERP provider formerly known as OpenMFG. "We have more and more enterprise CIOs staring down an SAP or Oracle contract renewal, and asking themselves 'why not open source'?" Lilly explains. "Frankly, this is happening a little faster than we'd anticipated."
Perhaps, but for the time being, open source enterprise software appeals primarily to SMBs. "The greater the complexity, the less open source [enterprise applications] provide a viable solution for the enterprise," says Gerry Brown, senior analyst at Bloor Research. Indeed, proprietary or open, customers still need those tax, legal, and regulatory updates, and it's more cost-effective to sign an extensive support contract than to employ an army of experts.
Regardless of whether you're going open source, buying support for a packaged application from Oracle or SAP, or subscribing to SaaS, the trick, according to Tom Pacileo, executive consultant at Compass Consulting, is developing an upgrade road map and balancing the technology so that companies don't overbuy support and not actually need all of what they pay for.
That may be easier said than done. Rimini Street's CEO Ravin claims that up to 70 percent of revenue from support and maintenance contracts actually goes toward software development, so customers wind paying in advance for programs that they may not want or may never get. Plus, companies need the latest versions of applications to take advantage of the most exciting new technology developments, such as SOA and virtualization.
"Businesses don't have the luxury of letting support run out," Yankee's DiDio says. "They get you one way or the other: Pay up front or cross your fingers and pray."