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Sunday, March 25, 2007

Enterprise Software Customers & Need For More Maintenance Choices

The Oracle-SAP imbroglio is opening up discussions at different levels. While,I said issues like this may help smaller vendors to sneek in with new offering when the big vendors get embroiled in legal issues( am not for a moment supporting in any form any illegal/unethical activities), Vinnie comes out questioning the maintenance revenue stream of product vendors.
Maintenance, direct from most software vendors, is over priced by a long shot. Customers should have alternatives. Calling for Fed’s intervention in the Oracle-SAP imbroglio, he wants Fed involvement in the case. He writes,

“During the PeopleSoft takeover battle, the DOJ tried to stop Oracle on antitrust grounds. It chose to define the software market very narrowly and Oracle easily proved it was not being anti-competitive. This time around the Feds should use maintenance as the filter. Oracle (and other software companies) have an overwhelmingly dominant position around that revenue stream around their software. He points out that the government action against IBM in 1969 led to the formation of today's software industry. And it has been a glorious one. No reason why similar action today against the software industry will not spawn new services and software options - and make the maintenance from the software publishers themselves much better value".

Vinnie – completely agreed. besides the US government, the EU and some other asian government/government bodies can also play a role here. The EU and the Korean government have in the past come down heavily on Microsoft on issues). There are enough reasons to believe that the software companies are sucking customer’s resources. The discretionary spending of CIO’s are less than 25% on an average and several arbitrarily forced expense items like maintenance tie the hands of the CIO and in turn limit the ability of business to spend more on technology and go after innovation centered on technologies abilities. This does not see any chances of reversal. I have never been able to get a convincing reply from product vendors on why the maintenance cost structure never changes much. With product maturity, increasing community of users and with options like offshoring, the net effect should reach the consumer. Its time to question the logic behind the maintenance revenue stream of product vendors – in every other industry with scale, the maintenance charges or for that matter the service charges shall come down-benefits of scale would reach the customer. Strangely, software industry has no such compulsions. Customers need to have credible alternatives for maintenance and the time to create such options are now – particularly when the enterprise software industry is undergoing massive changes.

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. As I wrote here, 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.

Update :Dennis Howlett writes quite perceptively on the topic -“If you must use traditionally licensed software, remember this. You pay for it it twice over under the current prevailing software industry model. Bear that in mind when you next negotiate a license deal. It may be a relatively small figure in the beginning but it adds up over the lifetime of the application”. How true!!

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