“Oracle and SAP seem to be nearing a point of having to make some hard choices about whether to consider modifying their one-size-fits-all 22% annual fees for upgrades and support. Wall Street will boil them in oil if they do because the 90% margins on those fees sure make overall earnings look good, but an even bigger risk could be that customers will begin putting the big guys on ice if they don’t show some pricing flexibility in today’s very different IT market.”
So begins an interesting article by Bob Evans published recently in Information Week (“Global CIO: Will Oracle or SAP Blink First On 22% Maintenance Fees?”), which was triggered by an article in Barron’s the week before (“An Emerging Threat to Oracle and SAP”—subscription required). The debate about the cost and value of maintenance fees is not new, and it applies to most enterprise software vendors, not just SAP and Oracle (both companies are ARC clients).
My colleague Steve Banker, for example, wrote a report on this topic back in 2001 (“Ensure Your Software Maintenance Contract Isn’t a Rip-off”—available to ARC clients only) where he argued that companies should have the ability to negotiate maintenance contracts. “ARC believes that setting aside about 20 percent of the initial software license price for a maintenance package is wise,” Steve wrote, “but it shouldn’t [necessarily] be spent on a standard maintenance contract. The ultimate goal is to get the most out of the system on an ongoing basis. Rather, strive to develop a spending plan that is structured to your company’s unique requirements for ongoing maintenance and training, ensuring a high ROI for the money spent. Users should set aside money for ongoing training, for sending users to supplier conferences, and for ongoing consulting.”
In other words, companies should have some flexibility in deciding what they want to buy with the 22 percent fee (i.e., have the ability to add and remove items from the maintenance contract).
Interestingly, both articles overlook another trend that is impacting not only maintenance fees, but license fees too: software-as-a-service (SaaS). Consider what’s been happening in the transportation management systems (TMS) market over the past six years. Vendor revenues from subscription/transaction fees (which are typically linked to SaaS deployments) are growing 5.6 times faster than revenues from license fees. Simply stated, in the TMS market, the industry is moving away quickly from the traditional pricing model of license fees and maintenance contracts to subscription-based pricing.
TMS License vs. Subscription Fees, 2002-2007 (Source: ARC Advisory Group; click to enlarge)
So, what do you think? Are you getting value from your current software maintenance contracts? Should software vendors give customers more flexibility in negotiating the scope and cost of maintenance contracts? Will software-as-a-service make this whole discussion obsolete? Post a comment and share your viewpoints!
