Tuesday’s Tips: Five Simple Steps To Reduce Your Software Maintenance Costs

Published on March 24, 2009 by R "Ray" Wang

Maintenance costs represent a major part of the software budget and the largest growing source of revenue for software vendors.   In fact, an aggregation of the past four quarters of software vendor financial results definitively demonstrates double digit declines in new license revenue, even more exacerbated by the evils of currency flux from the strong dollar for US based vendors. Not surprisingly, vendors are hard at work vigorously protecting their 70 to 80% margin in maintenance revenues just as clients and readers of this blog now zero in on this line item as the major concession target during contract negotiations.  Here are five steps (i.e. as simple as ABC’s) you need to do now*:

  1. Assemble all the relevant contract information. Aggregate all your contract information and vendor interaction history so that its centrally accessible.  Determine the value of your maintenance agreement. Examine how often you call for support, apply patches, conduct upgrades, and require technical assistance.  Then calculate the total support and maintenance spend.  Most customers will find that for $1M a year, 5 support calls can be pretty pricey at $200k a pop, especially when upgrades aren’t in the picture for the next 24 months.   The vendor better show up the next day with white gloves and be there in person.
  2. Breakdown the total cost of shelfware. Simply put, shelfware is the software licenses purchased, not deployed that is incurring support and maintenance fees.  That great deal 3 years ago you got on 1000 user licenses, when you only ended up using 800, now comes to bite you in the butt.  Calculate the maintenance fee you have for 200 user licenses at $1000/user which is $200,000 X 20% annual support and maintenance X 3 years.  At $120,000, you had better make up the “big” discount you got for buying 1000 user licenses by at least 12% this year and 15% the next year.
  3. Craft your overall software adoption strategy. Consider the business drivers that impact software adoption.  Assemble the domain experts, vendor management and sourcing professionals, legal experts, business owners, and IT team.   Apply a long term apps/ recession proof apps strategy and determine when and how licenses will be used in the software ownership lifecycle.  What processes will be supported? What roles will use the software?  When will you upgrade?  Can you consider an alternative?
  4. Determine all the alternatives. Depending on your adoption strategy, multiple paths exist.  If there are no intentions to upgrade or enhance the software, self support and third party maintenance (3PM) options from vendors such as Rimini Street and Spinnaker should be considered.  In some cases, an upgrade should be completed before switching over to 3PM or self support.  If the system can be replaced, begin vendor selection efforts so that you will have leverage during the negotiation.  If the system cannot be replaced, consider swapping out unused licenses for credit towards newer or more desirable modules.  Reduce your CPI for new maintenance.  Focus on reducing new license costs.
  5. Follow-up with Engage your account representative at least one quarter before the contract expires. Put preparation on your side and begin to let your sales rep know 3 to 6 months in advance that you are unhappy with the current agreement.  Based on steps 1 to 4, you now have the ammunition you need to negotiate from a position of strength.

The bottom line – align your contract negotiations strategy with your product adoption strategy.

Successful negotiations will require these 5 steps.  However, more importantly, organizations should keep a current apps strategy and product adoption strategy.  Without these two key documents, lack of visibility into the business case will lead to shortsighted negotiations that fail to meet the true requirements of the business.  Sourcing, procurement, and vendor management professionals should partner with domain experts who can provide third party, independent and objective advice that will complement contract negotiations strategy.  Click here for more contract negotiation strategy tips.

Your POV

What’s your best practice in reducing maintenance costs?  Post your comments here or send me a private email to rwang0 at gmail dot com.  Do you need more advice on contract negotiations strategy?  If you are a Forrester client, call the inquiry team and they can set up some time.  In your request, specifically ask for R “Ray” Wang.

Contribute to the 2009 Enterprise Software Licensee’s Bill of Rights

Take the new poll on what rights should be included in the 2009 Enterprise Software Licensee Bill of Rights   Posts are preferred!  For every good idea or comment, whether or not we use your idea, we’ll send you a copy of the final report.  Let’s put the collective wisdom of the web to work and help our end user clients create a fair win-win playing field with the vendors.  We’ll be publishing the official update in Q2 2009.  Thanks and look forward to your input!

*Caveats are as follows:  1) This does not constitute legal advice.  Please consult your legal counsel for an official opinion and wording.  2) This does not consider any procurement or vendor management rules that must be applied to your enterprise.  Please work with your vendor management teams for compliance.  3)  Contract negotiation support provides insight into overall trends and price points.  Benchmarks are not provided as each user scenario is unique.

Copyright © 2009 R Wang. All rights reserved.

  • I have a few others to consider…

    Consider going unsupported if you don’t intend to upgrade, the system is stable and the impact of a downtime is minimal.

    Work with the technical people to understand how important the software is, and whether there are alternatives. Is it a credible alternative (switching costs etc). So long as the vendor believes you can swap out, there is a good opportunity to renegotiate.

    Consider whether there are alternate support offerings from the vendor (you may not need 24×7)

    Consider whether you are paying from more than one product that can do the same job.

    Check contracts for annual uplift clauses. Check whether they have been invoiced correctly over time.

    Is there an opportunity to consolidate contracts or consolidate support & maintenance payments in a new purchase (e.g. within an ELA).

    Try and understand what it actually costs the supplier to support you (how many times do you call them? how many different resources are required to fix? Do they provide remote or onsite support). If you can do a bit of cost breakdown analysis it gives some opportunity to challenge costs.

    Ensure that you are on a version that is actually supported.

  • Some companies get stuck with their mission critical ERP system just because they’re afraid to go through that implementation nightmare all over again. If you gather all the maintenance related costs as mentioned here, it seems worthwhile to review the costs of alternative solutions. We have a web-enabled ERP solution on WPF. Our subscription plan (or SaaS if it includes hosting) for example, is based on per-user/per-month fees which include maintenance charges and updates. It provides a comprehensive list of modules and allows the company to start out small and extend its usage to include additional modules. Same goes for the number of users. The pricing model and enhanced scalability is a win-win situation.

    Another very important matter which Ray refers too between the lines is upgrades. Version upgrades and service pack installations involve precious resources. The implementer/user-level customization capabilities available in our solution enable private customizations and product configurations to carry forward with each upgrade so that end users continue to benefit from customizations, configurations, product enhancements, and upgrades throughout the lifespan of their use of the product. Seamless upgradability is priceless but not all software vendors can stand behind their promises in this issue.

  • Ray,

    thanks again for all your help. your strategies save us $M’s each time! keep up the good work. the standing offer for dinner in W. Hollywood still holds.

    Rahul

  • You forgot users of Oracle, SAP and others who charge 20+% in maintenance can just move to Dynamics which only charges 16% – saving thousands annually! :-) Sorry for the self promotion here.

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