Software Licensing and Pricing: Push for value from maintenance agreements, not discounts

I would like to provide an alternative view to Ray's most recent post, Software Licensing and Pricing: Stop the Anti-Competitive Maintenance Fee Madness. As head of research for the SSPA, whose members rely on maintenance revenues for their livelihood, I'm not ready to say maintenance contracts are overpriced. In fact, the SSPA view of this is the continued push back on maintenance pricing is having some major impacts on how (and how well) products are being supported.

According to our benchmark database, 81% of maintenance contracts for hardware and software are renewed annually, but over 1/3 require concesssions or discounts to renew. Enterprise hardware companies discount an average of 15% on renewals; for enterprise software companies the average is 9%.

What do you get for your maintenance? Bug fixes, new releases of software, access to community features to share best practices, and of course access to technical support. If the vendor did a good job of fulfilling these deliverables all year long, why are you balking at the maintenance renewal?

And, things are getting trickier for support organizations, whose push into proactive service means that more technical issues are identified and fixed remotely, before the customer is ever impacted. As Chip Gliedman always says, you don't call your doctor and thank them when you haven't been sick in a year. Similarly, support managers tell me that they are increasingly charged with "What have you done for me lately?" upon renewal, because so many problems were intercepted and eliminated that customers rarely interacted with support. In other words, when innovative support teams do a great job, they are invisible. And under appreciated.

If a contract is up for renewal, before you trot out your handbook on 'Negotiating with Terrorists,' be sure to get an account review for the past year and understand how many service issues may have been proactively resolved with little or no involvement from your staff. Review what support and maintenance options you were entitled to under last year's agreement and determine if the vendor delivered on these commitments. If they fell short (no timely releases, missed SLAs, etc.), give 'em hell.

This may be a radical suggestion, but instead of asking the vendor to continue giving you good service for less money, the renewal discussion should be "How can your support team help me get better value and more quickly achieve my business goals for your product over the next year?" If the vendor has not embraced this view of Value-Added Support and can't articulate how they are going to partner with you to help better leverage their products, then you are dealing with a support group in continual 'breakfix' mode that is unlikely to meet your needs for a strategic implementation. And that is a maintenenace contract worthy of hard negotiation.

If the vendor, and their support organization, has a shared interest in helping you succeed with their products, and you are getting as much (or more) value from your purchase as anticipated, then the maintenance agreement is a good investment.

Just my 2 cents. Thanks for reading!

(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 2008 by John Ragsdale and R Wang. All rights reserved

Software Licensing and Pricing: Stop the Anti-Competitive Maintenance Fee Madness

Recent maintenance fee increases by several large vendors lack any logical rationale other than pure greed. Customers and prospects should demand lower maintenance fees in their contracts because:

• Maintenance fees represent the biggest cost items in the software ownership lifeycle. Every percent reduction in a $1M deal equates to an annual savings of $10,000. Controlling the base line costs and future increases results in long term cost savings. Keep in mind most deals focus on the net license cost.
  
• Maintenance and support remains highly profitable. Support and maintenance profit margins often hover between 60 to 85% after the third year of a product’s introduction. If a vendor invests 50% of that revenue into R&D, then the customer benefits. However, if the vendor pockets the profits, then the customer loses.
  

The bottom line
The lack of third party maintenance offerings and the anti-competitive behavior among the large software vendors has led to a de facto increase in maintenance fees without any subsequent value to the enterprise. On top of this, vendors come back and charge for new modules and functionality paid for from the maintenance and support profits. Market place consolidation has ultimately resulted in a less competitive market for consumers. Customers should revolt en masse by protesting any maintenance fee increases that do not come with additional value. Expect a potential class action lawsuit some time in the future where customers will claim collusion among vendors in charging exorbitant maintenance fees while keeping third party maintenance providers from delivering cost effective alternatives.

(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 2008 by 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

Enterprise Software Earnings Watch: Solid License Growth Amidst Increasing Customer Backlash on Maintenance Pricing

Recent positive earnings announcements from SAP, Oracle, Microsoft, Business Objects, Agresso, and Epicor signal that the enterprise software market remains quite healthy. Despite doomsayer analyses that talk about the slowing economy, high single to double digit growth in license revenue demonstrate the success of recent initiatives to capture new industries and market segments (e.g. SME and services industries). Both Agresso and Epicor show significant success in net new license growth in the SME market.

Agresso- 2006 FY License revenues up 16% to €56.8M
Business Objects [BOBJ.O]- Q1 2007 License revenues up 9% YOY to $137M
Epicor [EPIC.O]- Q1 2007 License revenues up 14.1% to $22M
Microsoft [MSFT.O] - Q3 2007 License revenues up 20% (MBS Dynamics break out not disclosed)
Oracle [ORCL.O]- Q3 2007 License revenues up 57% $423M (organic/acquisition mix TBD)
SAP [SAP.N]- Q1 2007 License revenues up 16% YOY (Constant Currency) €563M

However, the real story remains the growth in maintenance revenues which account for 2x to 3x of license revenues. Many vendors report a 25% to 50% increase in maintenance revenues and retention in the 90%+ range. Estimates on profitability for maintenance range from 25% to 90% margin.

As maintenance costs average from 20 to 25% of the license fees, customers continue to express outrage over the value they are receiving. Despite the number of Y2K replacement projects slated for 2008 to 2011, many customers express ERP upgrade fatigue. Consequently, expect upgrade projects to be pushed out to 2009 through 2012 and third party maintenance options to remain attractive.

(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