Oracle, SAP and the Value of Maintenance & Support Contracts

When a customer buys a solution, they expect to receive value for their purchase. Some customers are taking a fresh look at the value of their Oracle and SAP maintenance and support contracts.

Value is equal to the total benefit to the customer less the total cost. As you might expect, today’s buyers are scrutinizing the value equation, comparing their slimmed-down needs and expected benefits to the total cost of meeting and achieving those needs and benefits.

V = B – C Value = Benefit – Total Cost

Because they can be expensive and loaded with unneeded features, software vendor-provided maintenance and support contracts are facing new scrutiny, as described by The Wall Street Journal last week.  The Journal reports that Oracle maintenance and support fees are fixed at 22% of the license price, generate 85% margins and have accounted for roughly 50% of the company’s revenues. Clearly maintenance and support is a major source of revenue – and profits – for Oracle. Some analysts, including Citigroup, expect Oracle maintenance fees to grow by 8% – but Jeffries and Company expects maintenance revenue to slow. With such high margins, maintenance and support outsourcers like Rimini Street can easily undercut Oracle by 50% or more.

According to The Wall Street Journal,

“Customers pay maintenance fees to Oracle and rivals like SAP AG for the right to get upgrades to their products, bug fixes and help-desk support. The contracts typically come up for renewal every year and are paid for annually.”

Software vendors like Oracle and SAP are well-positioned to provide these contracts because, after all, they designed the software and continue to have the in-house expertise to provide upgrades and technical support (although this is not always the case with acquired software). Oracle and SAP provide broad maintenance and support contracts but customers have complained about the expense.  (For more, check out the last page of the US Oracle Applications Commercial Price List).

Where’s the Value?

Customers run into two challenges with software vendor support. First, at more than 20% of license fee cost, software vendor-provided support can be expensive. And it often includes features, such as upgrades, that some customers just don’t need. For these customers, the high prices and superfluous benefits don’t provide adequate value.  Remember, value is based on what the customer needs, not just what the vendor offers.  Low Benefit + High Cost = LOW VALUE.

So as companies reexamine their needs and the price they’re paying for maintenance and support services, some are moving to more flexible outsourced support. In The Wall Street Journal article, Rusty Gaston, CIO of Sante Fe said that,

“”We were paying higher fees …and getting no more for it.”

Forrester Research analyst R. Ray Wang agreed:

“There’s going to be a breaking point soon where customers say they’re spending too much on maintenance and not getting enough value.”

Customers have a choice and, especially in today’s economic environment, they’ll go where they can get the greatest value. And that value will depend heavily on their requirements. If their needs and requirements match the software provider’s maintenance and support offering, they’ll want to purchase maintenance and support contracts from the software provider. If not, they’ll want to consider outsourcing.

For vendors, this may mean offering more flexible maintenance and support that can be tailored to the customers’ specific needs. Otherwise, those customers may quickly become ex-customers – of maintenance and support – and the company’s other products and services as well.