Economic Downturn Challenges Enterprise Software Executives To Uphold The Sanctity Of The Vendor – Customer Relationships
Conventional wisdom would assume that in a challenging economy, strong relationships would be a key success factor to retaining business and mitigating loss of revenue. Unfortunately, this does not appear to be the case for many companies, including vendors in enterprise software. Blame it on the economy, fear of depending on their people, or plain greed, but a good number of executives have taken an approach that attempts to preserve shareholder value at the expense of their vendor – stakeholder relationships (i.e.employee, customer, and partner). Now in their defense, these muckety mucks face dire times and hard decisions need to be made. However, they are not in a unique situation and risk jeopardizing brand value, trust, and market credibility for short term gain. Let’s look at five common value destruction strategies:
- Part 1: Commoditizing the client facing workforce at the expense of the client
- Part 2: Slashing the quality of support and maintenance while failing to deliver value
- Part 3: Pushing products that clients don’t need in order to grow revenues
- Part 4: Under-investing in R&D and then repackaging existing content as new innovation
- Part 5: Living in denial by ignoring stakeholders
Part 2: Slashing the quality of support and maintenance while failing to deliver value.
Declining prospects in growing new license revenue in 2009 leave many vendors with few levers to grow margins. As vendors focus on mining the install base, support and maintenance remains the most lucrative driver for growing software revenue. Though not all vendors have done this, one approach is to raise maintenance fees. Another approach that some vendors have put forth is to reduce the cost of delivery of the support. Some strategies such as web based and self service resources help mitigate the costs. Other strategies such as community support groups provide improved value. However, as clients become cognizant of the 70 to 85% margins in maintenance, software vendors can expect a backlash from customers seeking choice, value, and predictablity from support and maintenance contracts. Here are a few examples of what end users are experiencing from the “bad” vendors:
- Moving to the lowest cost support model without regard for quality. “Recently, they replaced our client support team with more junior hires and college grads and we noticed a significant change in quality. The reps no longer understood our business and we spent more time educating them then got value from them. While they met their service level agreements for response, they failed at resolving issues. We had better luck with the free online support forums. In the end, this was a major factor in switching to a third party maintenance provider who gave us just what we needed – regulatory, tax updates, and bug fixes. ” Global 2000 discrete manufacturing company, Director of ERP
- Reduction in the overall stream of innovation despite soft commits to product direction. “When we met 4 years ago to discuss our product direction, the vendor invited us to join an advisory group of fellow industry experts. We found this helpful and thought we would have a role in influencing product direction. However, their shift in focus to different industries and market segments left us with great plans that never were delivered. Instead, we ended up with the same list of enhancement requests as our competitors and we are all waiting for our maintenance dollars to go towards more innovation. We thought we had a great relationship. Well, at least we got the regulatory requirements!” Global Pharma, CIO
- Increasing the cost to remain on stable products despite a customers desire not to upgrade. “We’ve been using the product for 7 years and don’t plan to upgrade. Our margins are too low to justify this. We want to still receive tax and regulatory updates but we now must pay double the maintenance fee we started to pay even though we don’t intend to do any more for this stable release. The vendor won’t budge and threatens to withhold the software license keys if we don’t pay up even though this is a perpetual license! What kind of long term relationship is this?” NA based CPG firm, Director of IT
The bottom line for end users – keep seeking value for support and maintenance
Keep in mind that not all vendors are out to squeeze the customer. In fact, we see a resurgence in hiring of senior support executives to run “world class” support teams. Just recently, the number of openings in the market place reflect this renewed emphasis in hiring by vendors. At one vendor, they’ve added 90 support personnel in the past 3 months. But as a precautionary measure, clients can take the following actions to improve value for maintenance:
- Track interaction history. Keep a log of support calls, requests, and correspondence with the vendor. This will help in undestanding who uses support resources and for what purpose and provide proof points with the vendor and to the internal team. Identify how often patches and updates are applied. Many clients who pay over $1M in maintenance a year often just call the vendor no more than 10 times a year. That’s the equivalent of $100k a call. Someone better show up with white gloves on the next plane and handle the support request in person!
- Stay on the current release when possible. Despite the high levels of ERP “upgrade fatigue”, being on the latest version or at least the latest technology foundation allows users to keep all options open without going through the whole process of a full upgrade cycle. When ready, clients can then deploy and access new features or enhancements that have already been paid for in the maintenance fees.
- Separate support and maintenance contracts. About a decade back it was common to have 2 line items. Support covered help desk requests, bug fixes, and troubleshooting. Meanwhile, maintenance provided access to regulatory updates, tax changes, enhancements and sometimes point releases. Today the bundling of both support and maintenance prevents customers from choosing to keep maintenance without support or vice versa. In new contracts, clients should push for separate line items so they can eventually engage the vendor in deciding what they would like to pay for going forward.
- Reduce overall maintenance costs where possible. With an understanding of the value currently provided by the vendor, now’s the time to engage the vendor in conversations on what value can be extracted from existing agreements. Determine a win-win go forward strategy.
Click here for more contract negotiation strategy tips.
The bottom line for vendors – create market differentiation with good service
Most vendors I’ve spoken with recognize that now’s not the time to raise maintenance fees. Instead, the top vendors proactively provide programs for clients facing this economic downturn. A combination of leading techniques focus on a few key areas:
- Securing proper funding. Though it goes without saying, proper funding does correlate to higher satisfaction scores which result in higher retention and loyalty. Often, only a small portion (i.e. 2.5 to 7%) of the support and maintenance fees paid by clients actually reach the support organizations. Now’s the time to step up funding to prevent a customer backlash for the biggest revenue stream.
- Investing in the support staff. Beef up your support staff with skilled resources who actually understand the product. Improve training on relationship management, problem solving and resolution, and expectations management.
- Aligning client facing teams. Sales, consulting, and service teams need to collaborate to solve the clients needs. While natural conflicts will arise between sales and support, determine the rules of engagement that will preserve a client first philosophy without breaking the bank!
- Delivering proactive and periodic outreach. Craft an outreach plan to help customers understand their existing investments, where they can gain value, and how they can optimize usage. New customers should have an on boarding plan. Balance the frequency of touch points with a prescribed plan that shows how the vendor can earn a more trusted adviser status. Push out more frequent updates and patches. Reduce time between major releases.
- Embracing client feedback. Its one thing to solicit input but another to actually implement suggestions. Whether it be feedback on product direction or suggestions to improve support and maintenance policies, leading vendors provide multiple mechanisms to put feedback into action. Some vendors leave open lists that are ranked order by clients. These vendors openly and frequently communicate the progress on issues and concerns.
- Providing choices. Customers need to have different options. Tiered maintenance programs allow customers to adapt the right level of support and maintenance to their circumstance. Vendors who have only one support option should create new tiers that reflect customer requirements. Those with multiple tiers should help customers understand the trade offs. If possible, separate support from maintenance. Include version upgrades with maintenance.
Got a success story where your vendor has put a value creation strategy based on improving the quality of their support and maintenance? Has your firm changed their policies to improve the relationship? Or got a great story on the bone-headed thing your vendor or your employer has done to destroy value in the relationship! Send me a private email to rwang0 at gmail dot com. Posts are preferred! Thanks and looking forward to your POV!
Copyright © 2009 R Wang. All rights reserved.