Premium-priced support opens the door for third-party vendors 10 June, 2008 By Erin Bell

PromoPipeline Exclusive Channel Promotions Find Out How You Can Make Money Today! ENROLL FREE! >> Underpromising William Vanderbilt - Innovative Learning Channels Services: I Can See Clearly Now Beth Vanni - Amazon Consulting Cutting the margin so many times William Vanderbilt - Innovative Learning Channels The Sign of Success - High Maintenance William Vanderbilt - Innovative Learning Channels Question for the Times: Build or Resell? Gary Bixler - AMD

According to Madan Sheina, principal analyst at Ovum, the time is ripe for SAP customers whose Basic support contracts are about to expire to consider the extent to which they actually need and use such deep support, and whether it's worth the price.

"Admittedly, companies that have spent millions on ERP software that is mission-critical to their core business will be ready to pay maintenance and support to make sure it keeps ticking," said Sheina. "But at the same time vendors are desperate to keep them on board. So perhaps it's time to haul in your ERP supplier of choice for some serious contract negotiations."

SAP announced the Enterprise Support package at the SAPPHIRE 2008 conference in Orlando earlier this year. The package offers round-the-clock support to SAP ERP customers, which is a first. SAP is charging 22 percent of net licensing for the package, which is the same as Oracle's equivalent offering. It means, however, that new customers will no longer have access to SAP's Basic package, priced at 17 percent of licensing.

Ovum estimates that maintenance fees contribute to about 45 percent of application software vendors' overall revenues. It's also extremely profitable, at a return of about 75 percent after five years of software licensing.

"Both SAP and Oracle and even other vendors in the space have been really relying on this revenue stream to fund their R&D and new product development, and now that customers in many cases are not interested in that new product, the divergence becomes even more acute," explained Punita Pandey, founder and CEO of netCustomer, a third-party provider of maintenance and support services for ERP applications.

Ovum has noticed a trend with ERP customers who are growing wary of overpaying for annual maintenance services that they are underused. "Ironically," noted Sheina, "the money they spend on maintenance -- pegged at around a third of the software budget -- might well be keeping people from actually upgrading and pushing forward with SOA."

Sheina pointed out that companies that spend 25 percent on maintenance are essentially "buying" the software twice over every 10 years. "But are companies really getting twice the value of their software investment?" she asked. "Probably not. And what about those customers that have been content with their existing Basic support? They certainly won't take kindly to paying a 5 percent premium over what they used to pay, regardless of whether SAP says they are getting a lot more for their buck."

Because third-party vendors focus exclusively on support and have no R&D to invest in, they can supply support services at a drastically reduced cost while typically delivering a more flexible and personalized service.

Sheina urged SAP and other on-premise business applications software vendors to "carefully consider" their support and maintenance pricing -- especially as new SaaS vendors like Salesforce.com and NetSuite have started to include support as part of the built-in monthly charge for the software.

The reason companies like SAP and Oracle are still offering premium pricing for their maintenance and support offerings, according to Pandey, is that they still don't see third-party support providers as a significant threat -- in other words, SAP and Oracle are more concerned with what the other is doing as opposed to third-party vendors.

"For certain types of customers, third-party support offers a great opportunity for them to save on costs, get better quality support, and continue their investment for a longer horizon than they otherwise could," said Pandey.