SAP pushes up software maintenance fees

Maintenance fees have long been the cash cow of enterprise software manufacturers and a source of pain to many end users. As the economy slows, SAP appears to be trying to bolster this income stream, but at whose expense?

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Analyst estimates say recurring maintenance fees can account for nearly 50 percent of most application vendors' total revenues.

The maintenance fee is the sacred cash cow for enterprise software vendors. A vendor's maintenance and support fee on each software license, usually 20 percent to 25 percent of the net license price per year, delivers bountiful margins that annually replenish the coffers of vendors like SAP and Oracle.

"Maintenance is the most profitable part of the business," says Ray Wang, a principal analyst at Forrester Research. "Because by year four or five [of the software contract] there's 60 percent to 80 percent profitability just on maintenance alone."

For those on the other side of the deal (the customers buying the software), the onerous economic realities can be head-scratching.

Typically, companies buy enterprise software packages every 10 years. At an annual rate of 20 percent to 25 percent of the license purchase price, by year five companies have bought the software again-and that's just to maintain the application, says Wang. "In 10 years, you're buying the software twice over."

In talking with Forrester clients, Wang notes that "there are very few people who can tell us that they're getting that value, of two times the cost of the software, over 10 years."

Nevertheless, enterprise software vendors are reluctant to alter any part of this arrangement, which has been going on for decades. In January 2008, SAP quietly announced that as of 1 February, it was phasing out its Basic Support offering (which, at 17 percent, was a bargain for many companies) for all new customers.

Basic Support entitled customers to SAP services relating to: problem resolution, quality management, SAP standards for operating its ERP software, as well as knowledge transfer and continuous improvement. In addition, customers had access to the SAP Solution Manager (a support platform) and the SAP Service Marketplace (a platform that links customers to SAP and its partners' services), according to Wang's report on the fee increase.

Instead, new SAP customers now have to purchase its Enterprise Support plan, priced at 22 percent. According to an e-mail from Andy Kendzie, an SAP spokesman, Enterprise Support is a "next-generation support offering that provides an integrated quality and application management process for the customer's entire solution landscape."

In addition to the base support services, Enterprise Support offers SAP customers more services, the most notable being: a pool of support advisors available 24/7; an enhanced version of the Solution Manager platform; and a new methodology, called Run SAP, for standardising enterprise services-oriented architecture (SOA) processes.

While SAP made this licensing change, there was no formal announcement from the German software giant about it. "This probably wasn't one of those things where SAP wanted to make a big deal or make a large announcement about it," Wang says. "Usually when people raise prices, it's not something you want to talk about.

Why SAP raised its fees

SAP's rationale for the move was a result of growing system complexities (with SAP and non-SAP applications) as well as SAP's recognition of its customer needs, says Kendzie. "Customers are asked to reduce the cost of their IT operations while ensuring innovation in parallel," he says. "The standardisation of operations is the only way to handle both challenges.

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