Tuesday’s Tip: Dealing With Vendor Threats For “All Or Nothing” Maintenance Agreements

Published on July 20, 2010 by R "Ray" Wang

Recent Client Interactions Hint At Increasingly Aggressive Vendor Behavior

Conversations with 11 enterprise apps customers in the past two months indicate stricter enforcement of vendor “All or Nothing” maintenance policies.  “All or Nothing” maintenance policies often require customers to put all licenses on maintenance or receive no maintenance from the vendor.  These policies also prevent customers from reducing the number of licenses covered by maintenance.  The rationale for these policies – customers could potentially apply the patches, bug fixes, and upgrades for covered licenses to the uncovered licenses.  While this may seem reasonable, accounting for changes in revenue recognition appears to be the greater issue.

All Or Nothing Policies Impact Shelfware Reduction The Most

Traditionally, customers with declining revenues and employees sought provisions to reduce shelfware.  Shelfware is software purchased but not deployed.  While customers are not required to purchase maintenance with their new licenses, most modern software maintenance contracts include clauses that prevent flex down and invoke penalties for reducing the number of licenses during the maintenance period.  These policies lock customers in to maintenance contracts to preserve the Total Account Value (TAV).

Purchasing Additional Licenses Challenge The Legality Of All or Nothing Policies

In recent contract negotiations, several customers sought to add additional licenses of a product they owned that was not on maintenance.  Subsequently, the sales teams for both vendors told them to “true up” on maintenance or they could not purchase additional licenses.  The customers found this to be contradictory as they did not have to buy maintenance to own the software to begin with.  The tying of maintenance to purchases may, in fact, be illegal.  Consequently, clients often face a Catch-22 in four typical scenarios (see Figure 1):

  1. Acquiring entity received new licenses in a merger. Acquired organization may not keep current on maintenance.  Organization does not bundle the software contracts.  Organization does not realize they need to be on maintenance to purchase new licenses for combined entity.  Software vendor insists that the entire company pay back maintenance to buy new licenses.
  2. Divested entity inherited licenses from a divestiture. Divested organization keeps licenses from an unbundled contract.  Organization seeks to purchase new licenses.  Organization does not realize they need to be on maintenance to purchase new licenses for combined entity.  Software vendor insists that the entire company pay back maintenance to buy new licenses.  New customers would not have to pay for maintenance with new licenses.
  3. Regional units purchased separate licenses from other units. Some divisions drop maintenance contracts.  Others keep maintenance.  Organization does not realize they need to be on maintenance to purchase new licenses for combined entity.  Software vendor insists that the entire company pay back maintenance to buy new licenses even though buying entity is on maintenance.
  4. Organization dropped maintenance on desupported products. Organization dropped maintenance on some products that were no longer being supported.  Organization does not realize they need to be on maintenance to purchase new licenses for combined entity.  Software vendor insists that the entire company pay back maintenance to buy new licenses even though buying entity is on maintenance.

Figure 1. Four Typical Scenarios Where All Or Nothing Fails Customers

The Bottom Line For Buyers – Organizations Can And Should Push Back On Unfair Policies

In 9 out of the 11 cases, clients pushed back hard during the negotiations process.  Escalation to the legal team proved to be the best route to blow past the sales puffery.  However, clients should use these key negotiations tips to gain leverage in the conversation:

  • Do not bundle contracts, ever. If you bundle, you lose leverage. Period.  Keep your contracts separated so you can flex up or flex down.
  • Download the latest updates and bug fixes. Don’t get caught in a situation where your vendor blocks your access for not being on maintenance.  Always download the latest patches and entitled upgrades as soon as they become available.  Of course, do not apply these entitlements to software where you do not have maintenance rights!
  • Decouple support from maintenance when possible. Seek customer friendly clauses in your contracts.  Use the Microsoft Dynamics example as your guide in contract negotiations..
  • Consider third party maintenance options.  Third party maintenance options exist for many vendors.  Cut the maintenance fees in half while receiving comparable or better levels of support for bug fixes, tax changes, and regulatory updates.  Keep in mind, third party maintenance cuts off access to future upgrades.

Your POV.

Are you preparing for the 2011 maintenance contract renewal cycle? Have you faced this issue with your vendor?  How did you resolve it?  Ready to put the expertise of over 1000 software contract negotiations to work?  Give us a call!  You can post or send on to rwang0 at gmail dot com or r at softwaresinsider dot org and we’ll keep your anonymity.

Please let us know if you need help with your next gen apps strategy efforts.  Here’s how we can help:

  • Providing contract negotiations and software licensing support
  • Evaluating SaaS/Cloud options
  • Assessing apps strategies (e.g. single instance, two-tier ERP, upgrade, custom dev, packaged deployments”
  • Designing end to end processes and systems
  • Comparing SaaS/Cloud integration strategies
  • Assisting with legacy ERP migration
  • Engaging in an SCRM strategy
  • Planning upgrades and migration
  • Performing vendor selection

Resources And Related Research:

20100308 Monday’s Musings: Decoupling Support From Maintenance – What Apps Vendors Can Learn From Microsoft Dynamics

20100222 Monday’s Musings: Why Users Should Preserve Their Third Party Maintenance Rights

20100104 News Analysis: SAP Revives Two-Tier Maintenance Options

20090210 Tuesday’s Tip: Software Licensing and Pricing – Do Not Give Away Your Third Party Maintenance And Access Rights

20090709 Tuesday’s Tip: Do Not Bundle Your Support and Maintenance Contracts!

20091222 Tuesday’s Tip: 10 Cloud And SaaS Apps Strategies For 2010

20091208 Tuesday’s Tip: 2010 Apps Strategies Should Start With Business Value

20091102 Best Practices: Lessons Learned In What SMB’s Want From Their ERP Provider

20091006 Tuesday’s Tip: Why Free Software Ain’t Really Free

20090504 News Analysis: Oracle Waives Fees On Extended Support Offerings

20080909 Trends: What Customers Want From Maintenance And Support

20080215 Software Licensing and Pricing: Stop the Anti-Competitive Maintenance Fee Madness

20090405 Monday’s Musings: Total Account Value, True Cost of Ownership, And Software Vendor Business Models

20090324 Tuesday’s Tips: Five Simple Steps To Reduce Your Software Maintenance Costs

20090223 Monday’s Musings: Five Programs Some Vendors Have Implemented To Help Clients In An Economic Recession

20091012 Research Report: Customer Bill of Rights – Software-as-a Service

20090910 Tuesday’s Tip: Note To Self – Start Renegotiating Your Q4 Software Maintenance Contracts Now!

20090721 Tuesday’s Tip: 3 Approaches To Return Shelfware

20090127 Tuesday’s Tip: Software Licensing and Pricing – Now’s The Time To Remove “Gag Rule” Clauses In Your Software Contracts

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  • . Gartner is completely silent on this point. Some vendors these days are attempting to preclude customers from seeking service and support from third-parties. A customer-friendly maintenance contract should explicitly allow customer the right to go to a third-party provider for software maintenance, without jeopardizing warranties or future support.

  • Ricky – this is exactly why its important to have a contract negotiations expert who also understands SAP and apps strategy when you review your maintenance contracts. In these cases, you may want to see if third party maintenance could be an option or whether or not self support will work. It depends where you are in your adoption life cycle of SAP or any other ERP. Send an email if you would like more detailed discussions – Ray

  • ..but I don’t think SAP is going to change its maintenance support scheme.

    SAP is operated by lawyers and beancounters …try to read their SAP agreement and you will feel depress as 100% of the terms mentioned are in favour of them , not the customer

    Although SAP now offers SAP Standard Support at 18% ( + CPI) , they reserve the rights to increase the CPI after 2012. The Standard Support will then probably close to Enterprise Support @22% . In a way , SAP is going all out to discourage customers to opt for Standard Support

  • Maintenance Enforcement isn’t a Strategy – It’s a Warning Sign

    The traditional enterprise software business model is on it’s last legs. Here’s the evidence:

    1) Maintenance has become the model accounting for greater ratios of enterprise software company revenue = vendors not providing sufficient value to ignite new license sales.

    2) Lack of upgrade value where customers can no longer consume or need many additional features – or the incremental value isn’t worth the internal upgrade cost and the added system complexity. Maintenance no longer means paying to get more good stuff in future releases.

    3) Consolidation vs commoditization where large vendors get larger (and lack of organic growth) to ‘own’ customers at the point where much of the software stack has become commoditized.

    4) Mature markets require customer intimacy rather than heavy-handed tactics. Most enterprise software companies have optimized internal processes (after all, that’s what they are selling). Being customer centric is inefficient. SAP learned this lesson when trying to implement the 22% plan. The result was a better alignment of customers with support, according to SAP. The problem is that SAP had to create a disaster in order to realize that they had customers.

    Where is this all going?

    My view is that we’re in the midst of change. Clever ways to extract more revenue from existing customers, as documented in the post, isn’t sustainable by software vendors. The survival of the fittest will include the following characteristics:

    1) New Value Models like SaaS will grow. After all, with SaaS, you pay for what you use – no shelfware. Maintenance is included. Upgrades happen at no cost to you. (Or relatively low cost).

    2) Customer-centric models dominate where vendors who support and engage with customers win. Software vendors will adopt models that optimize customer engagement for specific markets – not one-size-fits all.

    3) Alternative seeking where fast mover technology adopter will consider completely different software vendors. Consolidation has created a “red ocean” where vendors compete on the same value metrics. As choices reduce and the differentiation narrows, organizations will begin to look at alternatives – vertical specialists, Enterprise 2.0 start-ups, open source etc.

  • Ricky – Thanks for your comments. If you want to twist their arm, you’ll have to fight this with the European Union Trade Commission or US Anti trust. – Ray

  • ..but SAP bundles maintenance and support in to either 22% SAP Enterprise Support or 18% SAP Standard Support. They don’t separate

    I am in Asia Pacific , is there anyone out there willing to join force with me to twist arm with SAP ?

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