News Feature

Negotiating Better Maintenance Terms

By Ben Worthen

June 01, 2003 — CIO — If there’s one thing that CIOs agree on, it’s maintenance fees. They’re a great value for the money; the upgrades that the fees entitle you to provide the right solution at the right time. In fact, most CIOs write that yearly check with a smile.

And pigs fly. CIOs put maintenance fees in the same category as death and taxes—dreaded yet unavoidable. Licensing a piece of software buys you only the right to use it; if your organization wants support, upgrades and patches, vendors demand an additional annual fee in the ballpark of 17 percent to 20 percent of the up-front cost. A company that purchased a million-dollar ERP package, for example, could pay $200,000 for maintenance every year. Well, that’s $200,000 for the first year of the contract, really, since rates often increase as the contract wears on. "We always have the 3 percent updraft, kind of a cost-of-living increase on all maintenance fees," said Mark Ain, CEO of Kronos, in a conference call discussing his company’s fourth-quarter results for 2002. Ain was explaining to financial analysts that the HR systems manufacturer’s revenue stream would grow every year because Kronos’s customers had no choice but to pay those fees.

It’s precisely that attitude that makes CIOs feel they’re being taken advantage of. "I don’t want to go to an extreme and call it extortion," says Doron Cohen, senior vice president and CIO of Canada Life Financial, searching for the right word to express his frustration. But he does, after an extra minute of stewing hardens his conviction. "I’m looking at extortion money, and I’m not happy about it," he says.

"Very often the focus of the people buying is more on ’How much do I have to buy, and What kind of discount can I get?’" says Scott Rosenberg, whose Leonia, N.J.-based company, Miro Consulting, specializes in helping companies negotiate contracts with Oracle. "There’s less focus on ’Now that we have gotten married, what is that marriage going to be like?’"

Until now. The frustration over maintenance fees has taught CIOs to focus on the terms that will shape the vendor-customer relationship before entering into a deal. While in the past those fees have been nonnegotiable, CIOs’ recent insistence on working out favorable terms—combined with the slumping economy—has changed that. They are negotiating better terms up front, renegotiating midcontract and, in some cases, running software without maintenance.

The Problems with Vendors

The problems start with the term maintenance fee, which implies that it covers help desk calls, tech support and other such expenses. The truth, however, is that most of the benefits to a user company are indirect. Twenty percent to 50 percent of the maintenance fees collected by the top 10 major ERP vendors actually go toward the development of future releases, according to a 2002 AMR Research survey of those companies. In this regard, "maintenance" is a misnomer, since the fees represent a steady source of income for software vendors. The annual payment helps them make projections and balance their budgets, both bottom-line boons. Furthermore, annual fees keep the licensing cost artificially low; if vendors charged for support and R&D costs up front, software would be prohibitive for all but the wealthiest of organizations.