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Friday, September 25, 2009

The Product Maintenance Paradox!

There was a mild tremor in the IT market few weeks back when Siemens threatened to terminate its annual maintenance contract with SAP owing to high price being charged by SAP. I have noted four years back that around half of Oracle's total revenue of $11.8 billion(in 2005)came from maintenance. As a matter-of-fact oracle sometimes used to justify its roll-up strategy based on attractive maintenance revenue streams of acquired products! The current maintenance stream revenue for Oracle continues to be very high. These open the questions :Why do customers pay vendors annual maintenance? What do they get in return to justify this substantial outgo year after year? For end customers, switching software providers is not easy. Most experts and customers agree that replacing big applications from one company with those from another is far too costly (millions at minimum) and time consuming to be worth the bother.
Now Wall street seems to be waking up to the fragile nature of the solid natured maintenance revenue stream of enterprise software vendors.

Courtesy Vinnie saw this CGCowen report written by Peter Goldmacher, Joe del Callar dated Sep 25 - focusing on the license revenue stream of enterprise software vendors.The report highlights

“As we interpret this data, we can't tell if vendors aren’t investing in R&D because customers aren.t buying products, or customers aren’t buying products because vendors aren.t investing in R&D. Regardless of the cause and effect, the trend is clear. Absolute investments in ERP are down dramatically, way beyond the synergies created by scale via M&A. The net result is that customers no longer look at material ERP upgrades as a competitive advantage and therefore vendors are unwilling to increase investments. Customers are watching their ERP vendors generate expanding margins without plowing that profit back into the product and we believe customers are getting resentful”

I certainly believe that the time is now ripe for the Tier I enterprise software market to be disrupted by third-party maintenance providers. With SAP and Oracle said to be realizing gross margins in the neighborhood of 90% on their maintenance business, the economics are simply too strong for third party maintenance providers not to rise up. Some regulatory interventions like antitrust suits may help accelerate the shift,this would embolden service providers to look at the maintenance market form a fresh value perspective.

I must also agree that with the moderate success of some pure play third party service providers, the landscape is changing and customer expectations are increasing and we shall begin to see third party supports coming in and several customers are also demanding annual lease contracts in place of perpetual license – at least in emerging economies. The era of enterprise software as we know may be over. The straightforward calculations about existing customers continuing to pay very high maintenance revenue year after year may prove to be wrong moving forward and in fact may choose to converge into one homogeneous platform and look at saving lot more costs. The real test of one's ability to hang onto customers will not come when maintenance contracts expire but when the major software companies, transition to so-called "service oriented architectures," a fundamental change in the way applications are deployed, integrated and accessed which should accentuate the ability of different vendors to provide ongoing maintenance support and create a new vibrant win-win business therein.

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Sadagopan's Weblog on Emerging Technologies, Trends,Thoughts, Ideas & Cyberworld
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