Margin Pressures Drive Maintenance Fee Increases
Announced at the 2008 Field Kick Off Meeting (FKOM), the elimination of the Standard and Premium support offerings was originally developed just for new customers. However, today’s announcement that existing customers will be “transitioned” to Enterprise Support as of January 1, 2009 will come as an unpleasant surprise to SAP’s 17,000 customers on basic support. This move may stem from a variety of factors including:
- Increasing complexity of the SAP user landscape. SAP often cites the movement towards SOA environments and the growing complexity of IT landscapes as the main drivers for a more comprehensive, differentiated, and streamlined support offering. In fact, SAP customers would concur that their environments have become more complex to manage and own. Many of SAP’s largest customers have decided to skip the upgrade to ERP 6.0 and wait for SAP’s next major release.
- Failure of Business ByDesign launch. Inability to scale BBD in a cost effective manner and delays in moving BBD onto the new NetWeaver 7.1 platform have led to a major loss in potential revenue growth. Most notably, SAP will not reach the 1000 customer target by 2008 as promised in its Q4 2007 earnings call.
- Margin pressure exerted by Oracle. During the 2007 Q4 earnings call, Oracle’s CEO, Larry Ellison, stated an overall goal of reaching 50 percent margin and 20 percent earnings annual growth. The effect – SAP has had to react with an equivalent profit margin growth strategy. Combined with the recent $83M payout to i2 and the pending TomorrowNow legal issues, SAP has been left little choice but to respond with a maintenance fee increase to achieve double digit earnings growth.
Compared to the Rest of the Software Industry, Enterprise Support Does Deliver Relatively More Value…
Despite the price hike, SAP should be given credit for holding maintenance fees at 17% for over a decade. Unlike the policies and practices of other vendors, SAP’s increase does comes with additional benefits:
- Free trial period and graduated increase. Customers will be moved to Enterprise Support as of July and not begin payments until January 1st 2009. Expect increases of about 8% a year until the 22% maintenance fee is reached. For most customers this will occur around the 2011 – 2012 period.
- Upgrade commitment. SAP provides a technical upgrade commitment that every installed base customer can be upgraded to the next release. In addition, SAP commits to deliver all the tools required to manage a technical upgrade. However, customers must migrate to ERP 6.0 to take advantage of Enhancement Packages (EHPs).
- End to end operations support. Enterprise Support comes with a central test plan for core business processes, a quality manager that will validate test execution and completeness, and a central transport mechanism and change control system. SAP also commits to 7 X 24 support advisory, 7 X 24 root cause analysis, and continuous quality checks via remote access and supportability.
… However, Most Customers Barely Use What They Have.
In conversations with over 100 SAP customers, most express minimal utilization of the existing Basic Support offerings. Basic Support typically includes problem resolution, quality management, SAP Solution Manager, SAP standards for solution operations, knowledge transfer, continuous improvement, and access to the SAP Service Marketplace. The average customer claims to connect with SAP less than 5 times a year. This is the software equivalent of getting an expensive but comprehensive insurance policy and never utilizing it.
The bottom line.
Maintenance fees continue to erode the value of a perpetual license. At 22% of net price, customers pay the equivalent of 2X their original license cost over a typical 10 year ownership lifecycle. Maintenance continues to be the most expensive cost component of enterprise software. Customers should take action by:
- Considering third party maintenance options. Rimini Street’s recent announcement to provide third party maintenance in 2009 is worth a look. JD Edwards and PeopleSoft customers who have considered this option already save up to half of their Oracle maintenance fees.
- Galvanizing the SAP User Groups to take action. Now is the time that customers should leverage their independent users groups to organize a campaign against this maintenance fee increase. Groups such as ASUG, DSAG, SAP Users Group UK & Ireland need to step up to the plate and find a solution to this increase. This will be the real test of these users groups effectiveness. It will become painfully obvious which individuals in leadership positions have been under the influence of SAP and which individuals will be willing to back the end users.
- Determining long term SAP containment strategy. Most SAP customers adopted a single vendor strategy. The initial benefits were driven by a fear for complicated integrations, desire for process standardization, and need to expedite deployments pre Y2K. This strategy has led to vendor lock-in and vulnerability. Long term apps strategy should consider how to contain future risk in a single sourced ERP scenario.
You’ve heard my view, but I’m looking to see how you feel about this latest increase by SAP as well as the Oracle price increases.
For more details on how SAP has raised maintenance fees see the Forrester Report from March 3, 2008 “SAP Raises Maintenance Fees for New Customers”
For some other interesting posts on this topic check out the news time line:
- July 11, 2008, Enterprise System Spectator’s Frank Scavo, “SAP Botching UP Support Transition”
- July 16, 2008, Irregular Enterprise’s Dennis Howlett “SAP pulls the trigger on higher support costs” and SAP ‘Mittelstand Customers Upset at SAP Maintenance Increases Computerworld Germany Link (for those of you who sprechen Deutch and Babelfish)
- July 17, 2008, The Register’s Joe Fay “Comment on SAP forces customers onto premium support package”
- July 18, 2008, UK and Ireland SAP User’s Group’s Statement on SAP Support
- July 18, 2008, Cio WebLog’s Scott Wilson, “SAP Jacks Support Costs”
- July 21, 2008, E-piphanies’ Michael Hickins, “Tomorrow Now Comes Early”
- July 28, 2008, Irregular Enterprise’s Dennis Howlett, “More dissent on SAP Maintenance Price Hike”
- July 28, 2008, The Register’s Chris Williams, “SAP Defends Forced Price Hike”
- July 28, 2008 MyCustomer.com – Stuart Lauchlan “UPDATED: SAP customers furious at 29% hike in support costs
- July 29, 2008, Enteprise AntiMatter’s Joshua Greenbaum, “Friendly Fire: SAP Flubs the Maintenance Business”
- July 30, 2008, Enterprise System Spectator’s Frank Scavo, “Mad As Hell: Backlash Brewing Against SAP Maintenance Fee Hike”
- July 31, 2008, Computing’s Tom Young and Janie Davies, “Fury as SAP raises support costs”