The maintenance fee is the sacred cash cow for\n enterprise software vendors. A vendor's maintenance and support\n fee on each software license, usually 20 percent to 25 percent\n of the net license price per year, delivers bountiful margins\n that annually replenish the coffers of vendors like \n \n\t\n SAP\n \n and\n \n\t\n Oracle\n \n. Analyst estimates say recurring maintenance fees can\n account for nearly 50 percent of most application vendors'\n total revenues.\n \n \n\n \n \n MORE ON CIO.com\n \n SAP's Purchase (and Attempt to Sell Off) TomorrowNow\n \n The Man Behind 'Half Off' Third-Party Software Maintenance\n \n Negotiating Better Maintenance Terms\n The fees are, quite simply, a gift that keeps on giving."Maintenance is the most profitable part of the business,"\n says Ray Wang, a principal analyst at \n\t\n Forrester Research\n \n.\n "Because by year four or five [of the software contract]\n there's 60 percent to 80 percent profitability just on\n maintenance alone."\n \n \n\n For those on the other side of the deal (the customers\n buying the software), the onerous economic realities can be\n head-scratching. Typically, companies buy enterprise software\n packages every 10 years. At an annual rate of 20 percent to 25\n percent of the license purchase price, by year five companies\n have bought the software again\u2014and that's just to\n maintain the application, says Wang. "In 10 years, you're\n buying the software twice over."In talking with Forrester clients, Wang notes that "there\n are very few people who can tell us that they're getting that\n value, of two times the cost of the software, over 10\n years."Nevertheless, enterprise software vendors are reluctant to\n alter any part of this arrangement, which has been going on for\n decades. (See Negotiating Better Maintenance Terms.) In January 2008, SAP quietly announced that as\n of Feb. 1, it was phasing out its Basic Support offering\n (which, at 17 percent, was a bargain for many companies) for\n all new customers.Basic Support entitled customers to SAP services relating\n to: problem resolution, quality management, and SAP standards for\n operating its suite of software applications, as well as knowledge transfer and\n continuous improvement. In addition, customers had access to\n the SAP Solution Manager (a support platform) and the SAP\n Service Marketplace (a platform that links customers to SAP and\n its partners' services), according to Wang's report on the fee increase.Instead, new SAP customers now have to purchase its\n Enterprise Support plan, priced at 22 percent. According to an\n e-mail from Andy Kendzie, an SAP spokesman, Enterprise Support\n is a "next-generation support offering that provides an\n integrated quality and application management process for the\n customer's entire solution landscape."In addition to the base support services, Enterprise Support\n offers SAP customers more services, the most notable being a\n pool of support advisers available 24\/7; an enhanced version of\n the Solution Manager platform; and a new methodology, called\n Run SAP, for standardizing enterprise services-oriented\n architecture (SOA) processes.When SAP made this licensing change, however, there was no formal\n or public announcement from the German software giant about it. "This\n probably wasn't one of those things where SAP wanted to make a\n big deal or make a large announcement about it," Wang says.\n "Usually when people raise prices, it's not something you want\n to talk about."Why SAP Raised Its FeesSAP's rationale for the move was a result of growing system\n complexities (with SAP and non-SAP applications) as well as\n SAP's recognition of its customer needs, says Kendzie.\n "Customers are asked to reduce the cost of their IT operations\n while ensuring innovation in parallel," he says. "The\n standardization of operations is the only way to handle both\n challenges."As such, Enterprise Support "offers increased service value\n considering the technology stacks and integration needs that\n exist today," Kendzie says. "It also provides mission-critical\n capabilities that mitigate customer risk." (Kendzie notes that\n there has been "no decision or communication from SAP to\n current customers" as to whether they will be forced to move\n from Basic Support to Enterprise Support.)In the recent Forrester report, Wang notes that SAP wanted\n to eliminate multiple support offerings. "SAP cites the growing\n complexity of IT landscapes and the movement toward enterprise\n service-oriented architecture environments as key drivers for a\n more comprehensive, differentiated and streamlined support\n offering," he writes.In short, Wang says, SAP's move "reflects their view that\n software maintenance has gotten a little bit more complex."The Oracle FactorAnother reason for SAP\u2019s shift had to have been the\n competitive financial pressures exerted by its chief rival:\n Oracle. During the last several years, Oracle's operating\n margins have hovered around 40 percent, and the company\u2019s\n long-standing goal has been to increase that to 50 percent,\n mostly by making strategic acquisitions. In its most\n recent quarterly announcement, Oracle CFO Safra Catz\n reported that operating margins had increased to 41 percent compared with 39\n percent in the quarter the year before."Our operating margins are now substantially higher than our\n competitors," Catz said. \n\nSAP's year-end financial data showed an\n operating margin of 27 percent last year. And those numbers,\n Wang says, needed to change. "They want to have some parity\n or at least get close in achieving those same margins," Wang\n says. \n\nWhether Oracle's financial successes pressured SAP to\n alter its maintenance fees is known only to those inside\n SAP. Kendzie says that in keeping with SAP policy, "we do\n not to comment on speculation."To its credit, SAP has historically offered some of the\n lowest maintenance fees in the industry. "SAP has resisted the\n temptation to raise support subscription prices for several\n years," Wang says, "focusing primarily on growing license\n revenues." By resisting that temptation and leaving its Basic\n Support offering at 17 percent, SAP had a "major competitive\n differentiator" when compared with Oracle, which, according to\n Wang, has priced its application support at 22 percent for\n several years.However, Wang says, it appears that the maturity of the\n enterprise applications market and decreasing number of large\n customers, coupled with Oracle's success in achieving higher\n profit margins and investor pressure on SAP to grow top-line\n revenues and margins, made raising support prices\n inevitable."By raising maintenance fees 5 percent," Wang writes in the\n Forrester report, "SAP joins other large vendors in trying to\n extract more revenue from customers who lack reasonable\n third-party alternatives, without a corresponding increase in\n value."A recent Forrester survey of 215 business process and\n applications professionals found that maintenance fees are\n still too high. The result was not surprising. "We are hearing\n many more complaints about maintenance than ever before," Wang\n says of Forrester's clients.A Suggested Alternative to Maintenance FeesSo just what is a fair value for enterprise software\n maintenance and support? More than half of the respondents to a\n Forrester survey (57 percent) said that a fair maintenance fee\n should fall below 16 percent. And they'd be happy to pay that,\n Wang notes. "But when you actually look at what they paid, it's\n about 26 percent."Those percentage points add up, of course: Every percent\n reduction in a $1 million deal equates to an annual savings of\n $10,000, Wang points out.Vinnie Mirchandani is a former Gartner analyst and founder\n of Deal Architect, a consultancy that works with technology\n buyers in the vendor selection process. He contends that\n maintenance should be priced on tiered levels, not a one-size-fits-all\n rate.For example, Mirchandani suggests that there's one category\n of customers who are content with the software's current\n release, just want bug fixes and application tweaks that come\n with base support, and have no desire to upgrade. They would\n pay 10 percent in maintenance fees.A second category of customers (charged 15 to 17 percent) is\n one that plans to stick with the product and carry out\n upgrades, as well as receive base support. And a third category\n (charged full maintenance rates) is one that is looking for\n high-level support and all the bells and\n whistles\u2014next-generation software-as-service (SaaS) and\n service-oriented architecture (SOA) applications, for\n example.Forrester's Wang notes that the typical maintenance and\n support cycle has a big drop-off of customers' needs at the end\n of an application's life. "When you get to year six, seven or\n eight, when there's really nothing going on\u2014just\n regulatory updates or patches, maybe some changes to\n hardware\u2014you really should be paying somewhere between 5\n percent and 10 percent then," he says.The result of "maintenance discontent," Mirchandani writes\n in an e-mail, is that CIOs have to fight harder for initial\n license discount, since maintenance is usually a percent of net\n license cost. Annual maintenance renewals are more\n contentious\u2014"vendors love to sell multiyear renewals to\n avoid that scenario each year," he says. And lastly, lots of\n companies are evaluating third-party maintenance options."Many\n just use it to negotiate the software vendor down,"\n Mirchandani says. "But a growing number are walking away to\n a third-party provider like Rimini Street." (To read an interview with the CEO of Rimini Street, Seth Ravin, see "The Man Behind 'Half Off' Third-Party Software Maintenance.") In the end, it's important that IT executives and business\n leaders remember when they have the most leverage with their\n vendors. "Use licensing, maintenance fees and provisions for\n the software licensing contract as part of vendor selection\n criteria upfront," Wang says. "The only time you have leverage\n is when you first sign that deal, so how you structure that\n contract is so important."