Monday’s Musings: The Three Pillars of Software Maintenance And Support Policies

After more than 350 conservations with customers about the maintenance and support issue in the past 4 months, it’s becoming quite clear users expect from their software vendors. While those issues can be broken into tens of categories, three themes have emerged that include:

• Choice. Customers want to choose between tiered plans. The best plans allow customers to select the option best for them. Choice means the availaiblity of a basic plan or the full range of services expected in a comprehensive “insurance policy”.
• Value. Users expect plans to show ROI or meet service level agreements (SLA’s). These SLA’s should reflect outcomes not just process. If a user contacts a help desk 5 times a year and pays $500,000 in maintenance, at $100,000 a call, they better be getting platinum response levels of 1 hour or less and a resolution in 24 to 48 hours.
• Predictability. Maintenance and support remain one of the biggest budget items in the ownership of packaged apps. Changes in price, policies, or service levels should be communicated with at least 4 quarters notice. The best vendors provide guidelines that give customers predictability 2 to 3 years in advance.

The bottom line- can vendors deliver on such promises?

Let’s see which vendors can deliver on all 3 pillars. Recent financial analyst reports from investment houses (i.e. Merrill Lynch’s Kash Rangan w.r.t. Oracle and Merrill Lynch’s Raimo Lenschow w.r.t SAP) indicate a sharpening downward trend in revenue estimates, not only for Q4 2008, but also for FY 2009 and FY 2010. Software vendors under pressure to make margins will be forced to choose whether they are willing to take short term pain in stock valuations for long term gain in improving the vendor-client commitment or make their numbers by disenfranchising customers during a time of crisis by violating any one of the three tenants of maintenance pricing. Because many software vendors have blown through their Q1 2009 pipe in Q4 2008, new deals are scarce and maintenance revenues are the easiest targets for “guaranteed” revenue and price increases.

Your POV.

Are you being hammered in your existing maintenance arrangements? Do you feel locked in or do you feel your vendor is willing to work with you on deals? Feel free to share with me your experience. You can post here or send me a private email to rwang0@gmail.com.

Copyright © 2008 R Wang. All rights reserved.

Apps Strategy: Now's the Time to Design a 5-Year Packaged App Strategy

What do ERP fatigue, instance consolidation, upgrades, SaaS, third party-maintenance, and BPO have in common? They are all stop-gap measures in addressing the key issue of having a long-term apps strategy.

Some key areas to consider include:

• Most packaged apps were bought in the mid to late 1990's
• Software lifecycle is about 7 to 10 years and we are entering a new upgrade replacement cycle
• Large demand for small projects skirt the real issue of a need for a packaged application strategy
• Architectural renewal via SOA and adoption of Web 2.0 functionality driving interest

As we move into one of the biggest upgrade cycles in a decade, enterprises should take the time to design a top-down view of their apps strategy before committing project budgets. A high-level view of the key components of this strategy include:

• Long term vendor strategy and management
• Packaged applications internal inventory
  
• Maintenance and support schedules
• Upgrade strategy
• Instance consolidation strategy
• Deployment option analysis (SaaS, Hosting, BPO, or On-premise)
  
• Change management readiness
• Business process maturity
• Custom development requirements
• Hardware/data center migration plan
  

(The personal contents in this blog do not reflect the opinions, ideas, thoughts, points of view, and any other potential attribution of my current, past, or future employers.)
Copyrighted 2007 by R Wang. All rights reserved

Software Licensing and Pricing: Focus Efforts on Maintenance First

Maintenance costs are the most expensive over the long term
Focus negotiations on total cost not just license costs. Many enterprises enter into software contracts focused on license cost. However, the key driver of costs is really maintenance. At 17 to 25% of the license cost, enterprises end up buying up to 2x the original cost of software in a 10 year period. Let's take a look at what this means:

Number of licenses: 1000
Average cost: $2000/named user
Maintenance %: 20%

10 year license cost: $2M (assuming upgrades are free)
10 year maintenance: $4M (assuming no maintenance fee increases in between)

As you can see, the focus on negotiations should be on the maintenance fee increases as well as the maintenance fee percentage.

Quick advice:
1. Focus on negotiating a lower maintenance percentage
2. Use net price not list price as the starting point
3. Cap maintenance fee increases for the life of the relationship to x% or CPI whichever is lower
4. Agree upfront on how upgrades and additional modules will be priced into maintenance contracts

(The personal contents in this blog do not reflect the opinions, ideas, thoughts, points of view, and any other potential attribution of my current, past, or future employers.)
Copyrighted 2005 by R Wang. All rights reserved