SAP Raises Software Maintenance Fees for New Customers

Market realities, competition from Oracle, and maintenance and support complexity are the reasons behind ERP giant SAP's move to limit service plan choices for new customers of its enterprise software.

By Thomas Wailgum
Thu, April 10, 2008

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

The fees are, quite simply, a gift that keeps on giving.

"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. (See Negotiating Better Maintenance Terms.) In January 2008, SAP quietly announced that as of Feb. 1, 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, and SAP standards for operating its suite of software applications, 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."

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