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Sunday, February 12, 2006

Time To Relook At Enteprise Software Maintenance Models & Revenue Stream

While writing on the mid life crisis of enterprise software, I wrote that four years ago corporate IT departments devoted 65 percent of their budgets to maintenance of existing systems and 35 percent to acquiring new technology. Today maintenance spending has increased to 75 percent and new acquisitions are down to 25 percent. Out of this substantial money goes towards maintenance of annual support paid to software companies besides other overheads. Even in the SAP- Microsoft talks on potential merger sometime back, the quantum of assured maintenance revenue was a major attraction. As I noted here, during the acquisition proceedings of Peoplesoft, Oracle was predicting huge maintenance revenue stream – irritating some customers. As I wrote,The pressures of competition & pricing makes companies try out new models – these sometimes force companies to think for the customers as well – no more proof is needed to be convinced about massive changes that are bound to happen in the enterprise landscape. Vinnie points to a white paper titled “Taking the “Entitlement” Out of Enterprise Software” prepared by Erik Keller - there are no arguments to be made – Erik is simply hitting the nail on the head. It is indeed very real that a combination of lower cost models, new maintenance options, and a focus on value are compelling companies to reassess spending models in order to free up dollars from constrained IT budgets. Erik captures it well:
For software sellers,the value of maintenance-based revenue streams was minimal in the 1990s as their growth was predicated on new software license sales. Product upgrades – and maintenance releases – were targeted to satisfy promises made to current customers and meet the needs of new ones.Maintenance revenue on these
products was low but steadily growing quarter to quarter. However,in the fi rst few years of this century this value equation changed.Maintenance revenue streams
have become the primary driver of profitability for software companies as growth in new software licenses has tumbled. Sellers realize that maintenance revenue has the highest margins and lowest incremental costs of anything they sell.It is also the most jealously guarded revenue stream and is carefully managed and negotiated
by sellers.For buyers, the value equation has also flipped as enterprise software has became much more stable as well as functional. The need (either technological or business) to consider a major upgrade has decreased tremendously.Thus the value from maintenance payments is decreasing constantly for many companies
While SAP complains about increasing expenses at offshore locations and oracle talks about huge setups in India, the market is not seeing any move in the direction towards bringing down the maintenance & support burdens on existing customers on account of these moves. Enlightened customers are today looking towards value and time based maintenance strategies as against flat percentage bills on a recurring basis. It is true as I see it from multiple experiences across geographies that software buyers and sellers are at the cusp of a major change that will be more business-model and deployment driven than technological. Two factors—better value extraction from buyers and much lower cost models from sellers—are colliding to facilitate this change. Hopefully new phenomenon like third party maintenance and disruptions that forces like internet can heap on enterprise software should hopefully bring about the desired change.Its time enterprise software vendors realise that leadership does not come just our of sale revenue or marketshare - innovative leadership in providing better value to customers would matter a lot more, given all other things becoming equal.

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Sadagopan's Weblog on Emerging Technologies, Trends,Thoughts, Ideas & Cyberworld
"All views expressed are my personal views are not related in any way to my employer"