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Monday, May 11, 2009

Rimini Street, SAP, and the future of third-party maintenance

At last year's SAP SAPPHIRE conference, Rimini Street indicated its intention to expand into third-party maintenance for SAP customers. Now, right on schedule, at this year's SAPPHIRE event, Rimini Street is announcing the availability of its support services for SAP customers, building on its similar offerings for Oracle's J.D. Edwards, PeopleSoft, and Siebel customers. It's a good move for Rimini Street and hopefully provides further validation for the third-party maintenance model.

I spoke with Rimini Street's CEO, Seth Ravin this morning about the launch. Seth indicated that his firm already has several SAP customers on board, with strong interest from many others driven by SAP's increasing prices for its own maintenance program. SAP has since backtracked on its forced march to Enterprise Support, but its original stated intention to increase maintenance fees to 22% of original license cost appears to have been enough to start SAP customers looking for alternatives.

The mood is nowhere better evidenced than by the response of German SAP users. Until now, few competitors dared challenge SAP on its home turf. But that changed when 30 CIOs invited Rimini Street to present to them in Berlin, according to Ravin. Rimini Street already has several of them as early adopters of its SAP support services.

Spread Thin?
Seth assured me that his resources are adequate to support multiple ERP vendors. Each product is supported by a separate leader and dedicated resources. In the case of Rimini Street's SAP unit, the leader is Shawn du Plessis, a "16 year SAP veteran who has held leadership roles across more than 15 major SAP full life cycle implementations with global companies such as Nestle, Sebastian International and Siemens," according to Rimini Street's press release.

But the launch of its SAP offerings has forced Rimini Street to go global. It has put up a German version of its website, and it plans to hire local resources in Europe and the Far East, complementing its workforce that until now has been limited to North America. Contrary to the practice of SAP and Oracle, it does not believe in an offshore service delivery model.

Flexible Contract Options
Seth indicated that the phrase "flexible contract options" in his press release does not refer to tiered pricing options. Rather it indicates flexibility in the contracting period. Most customers sign up for a five year term, but others buy into ten or even 15 year periods. Others adopt shorter periods, for "gap coverage," while they migrate from one system to another. Flexibility refers to the ability to tailor the contract length to the actual need. I also note that Rimini Street provides support for customer modifications or extensions to the base system, something that goes beyond what SAP or Oracle offer to their own customers. Generally, modifying base code "voids the warranty" with SAP or Oracle, as so to speak.

Why Not More Third-Party Maintenance Providers?
Why haven't there been more players like Rimini Street rising up to meet the market demand for third-party maintenance? Seth believes there are significant barriers to entry. In the case of SAP or Oracle, a potential service provider has to be willing to take on two powerful multinational organizations. Existing business partners of SAP and Oracle, those that are best qualified to offer third-party maintenance, are reluctant to offer services that compete with the parties that they rely on for sales leads, training, product access, and general good will. Finally, it takes significant resources, including funding, to build a 24/7 support organization, much of which must be built before the first customer is brought on board.

My Take
I agree with Seth that the barriers to entry are significant, though not insurmountable. The Tier I enterprise software market is ripe for disruption by third-party maintenance providers. With SAP and Oracle realizing gross margins in the neighborhood of 90% on their maintenance business, the economics are simply too strong for third party maintenance providers not to rise up.

Rumor has it that there are smaller, niche players besides Rimini Street already offering third-party maintenance contracts "under the radar," on a case-by-case basis. But they are reluctant to publicize their offerings out of fear of incurring the wrath of their business partners. Oracle's lawsuit against SAP and its former TomorrowNow unit, which provided third-party maintenance for Oracle products, only heightened these fears.

As I've written before, it may take one or two antitrust lawsuits before larger service providers feel comfortable venturing into meeting this market need. Interestingly, today's Wall Street Journal notes that the U.S. Department of Justice plans to step up antitrust actions against illegal monopoly conduct. One can only hope that one of the first markets they explore is enterprise software maintenance and support.

Related posts
Rimini Street to provide third-party support for SAP
Legal basis for third-party ERP support industry

by Frank Scavo, 5/11/2009 09:02:00 AM | permalink | e-mail this!

 Reader Comments:

Why haven't there been more players like Rimini Street rising up to meet the market demand for third-party maintenance?
Who wants their livelihood to be a constant battle with a sure-to-be-hostile vendor?
 
I believe the greatest strength of the third party support model will be in its ability to support those organisations having diverse application landscapes from multiple software vendors, having come about through either acquisition or centralisation of business units or through SOA enabled blending of best-of-breed applications. By using this "single source" support model these organisations can simplify their communication pathways and contractual agreements with external support parties.

No more disputes between a database support provider and an application provider, or between one application provider and another (over the root cause of a problem). These conflicts are instead handled internally by the third party support provider.

Furthermore, in the case of Remini Street, having support professionals in the same time zone (as the customer) and in the same building (as the other third party support teams) improves communication and knowledge crossover between the areas of expertise, together driving better root cause identification and resolution, and an overall reduction incident reduction.

Some large software vendors want to cover all the bases themselves, but a horizontally integrated and service oriented way of doing business allows for more flexible resourcing and a wide customer base.

If the third party model gains significant ground the large software vendors might focus more on software infrastructure and development technologies, handing functional consulting, support and application development over to an "ecosystem" of professional services and innovative service oriented application development vendors.
 
Matthew, great observation. We forget sometimes how complex the application portfolios of many companies are. For organizations on older, highly modified, or heterogeneous applications, the value of third-party support is more than just "cheaper than Oracle." It is the willingness of the provider to support such a complex environment.
 
Maybe Rimini Street will acquire one or more open source enterprise vendors. They could then offer more that just a "safe haven" type of service, giving disenchanted customers a strategic way forward, and a growth market for Rimini Street. Rimini street could gradually replace the proprietory legacy products with their own open source products, reducing risk and smoothing cash flow for all involved.

This is similar in some ways to what SAP tried to do with TomorrowNow by offering the "safe passage" strategy. But the difference is that Rimini Street has the benefit of hindsight, so they can avoid falling into the same trap as TomorrowNow, and open source based products would provide a point of difference and an attractive proposition to customers who don't like the closed nature and lock-in effect of the big proprietory vendors.
 
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