For perpetually licensed software, 90% of maintenance fee revenues go straight to the bottom lines of companies like Oracle and SAP. If the revenues are going to profits, they’re not funding services or product development.
The good news for businesses like yours is that three related forces are reshaping the maintenance fee landscape. First, more and more companies are holding their IT assets to account for value; maintenance contracts included. Second, companies are successfully exerting pricing pressure on vendors. To wit: we very recently negotiated significantly lower ERP maintenance fees for a manufacturing and distribution client. We’re not the only ones achieve success: a recent Bank of America/Merrill Lynch report showed that, in 2009, 58% to 60% of companies succeeded in negotiating lower maintenance fees with Oracle and SAP. Third, more and more companies are acquiring cloud-based solutions under subscription service agreements.
However, as 5G networking rolls out and as companies adopt Industry 4.0 industrial operating technologies, they will once again be acquiring perpetually licensed and that are locally deployed closer to the edge.
Why A Value-Based Approach Will Work For Your Business
A value-based approach to ERP maintenance serves two purposes: It gives companies opportunities to add a bit more critical analysis to their IT investment decisions. With greater options relating to offerings and providers, analysis is becoming more important than ever; It gives companies a basis to renegotiate their maintenance contracts. Vendors usually price maintenance contracts based on their expectations of how much it will cost to serve you. The 90% profit margins show that their estimates aren’t very realistic. Your business can become a successful contract negotiator if it can convince the vendor that the value of your business’ service needs is lower than their expectations. We recommend the following 3-stage analysis to develop a value-based approach to negotiating ERP maintenance fees:
Stage 1: Categorize Historical Maintenance Usage
This stage can be laborious, but is well worth the work. A good understanding of historical maintenance usage can be a good predictor of future needs (assuming that a wholesale ERP upgrade or replacement isn’t imminent). During this stage, you will need to mine data and look for usage patterns. In terms of time frame, the most recent three-to-five year period is broad enough to show trending and narrow enough to still be relevant. To begin, separate each instance of past maintenance into one of the three main categories: call center support, bug fixes, and updates. Then, continue to drill each category down into subcategories. The deeper the drill-down, the better. Data trends are generally more reliable at lower levels. Examples of lower-level categories include: technical issues, resolution rates, department usage, tax updates, non-tax regulatory updates, etc.
Stage 2: Value Historical Maintenance Usage
Next, you should approximate the true value of your business’ past maintenance activities. We recommend using true value and not actual cost because, in the final stage, you will use the past to predict the future. If you were to use actual cost, you would only be reinforcing the cost structure that you’re trying break away from. The hardest part of this stage is uncovering the “true value” of the different maintenance activities. The intent is to find enough evidence to support your argument that your values are reliable indicators of future service costs. Areas that should be investigated include: user groups (peers and benchmark studies), 3rd party pricing policies and vendor resources (annual reports and salespeople).
Stage 3: Project Future Maintenance Value
At this point, you’ve done most of the heavy lifting. Only two things are left to be done: 1) project future maintenance needs; and 2) quantify those needs. Projecting future maintenance needs should be based on historical trends, vendor update notices and situation-specific information. You have already identified trends through the categorization analysis. With respect to update notices, you can go straight to the source. Vendors usually give advanced notice of intended bug-fixes, patch releases and updates. Once you’ve projected future maintenance needs, apply the true values that you have previously uncovered. Finally, the analysis is complete. You will have quantified the value of your future maintenance needs. With this information, your business will be well positioned to renegotiate its maintenance contract or seek out alternative arrangements.
Jonathan Gross, our VP, is our expert ERP negotiator. He’s also a lawyer. He’s one of those contract geeks who loves talking terms and conditions. Feel free to email him directly at [email protected] if you’d like to discuss your ERP contracts.
