Mad as hell: backlash brewing against SAP maintenance fee hike

User anger is growing against SAP's announced increase in maintenance support fees: to 22% of net license cost, up from 17% previously. Computerworld reported last week on the negative reaction of SAP users in the UK and Ireland, as related by Alan Bowling, chairman of SAP's user group in those countries:

The mandatory nature of this change along with the increase in cost has received hugely negative feedback from our membership to date," said Bowling.

The backlash has been growing since SAP's announcement on July 16 to customers that Standard Support, which is currently included in all licensing and maintenance contracts, would be replaced by Enterprise Support.

The pricing will increase from 17% of contract value to 22% of contract value, immediately applicable to new customers and introduced in a phased way for existing customers. In real terms, this is a 29.4% increase in the support element of the contracts over the next four years, said the user group.

Dennis Howlett summarizes the general feeling emerging from SAP customers:

• SAP’s communications have lacked clarity.
• What was once thought to be a new customer only issue will likely impact all SAP customers with the exception of those with a cut off of €30 million in discounted license fees plus BusinessOne customers and those with specially negotiated terms.
• The one size fits all argument is not accepted as appropriate.
• There will be a significant amount of negotiation around individual contracts.
• Business value has yet to be demonstrated as a justification for the price hike.

Joshua Greenbaum recounts his recent conversation with one SAP customer, "who was basically furious at the maintenance hike:"

“We've already done our 2009 budget, and this sure as hell wasn't planned,” she told me. For her company, a long-standing SAP customer that has deployed pretty much everything SAP has to offer, this change to 22 percent is not a trivial matter: “We’re talking hundreds of thousands of dollars here,” she told me. Needless to say, this user asked to remain anonymous.

On the other hand, Josh thinks that SAP's maintenance fee hike can be justified in terms of additional value being delivered through its new "enhancement packs," which SAP claims significantly reduce the cost and pain of upgrades as well as improved response time for service requests.

My view? Don't think SAP is alone in this money grab. It is merely matching the level of maintenance fees already charged by Oracle. This was exactly the sort of duopoly pricing power that observers feared would emerge when Oracle acquired PeopleSoft.

Long term, I think some of the second tier vendors, such as Lawson, IFS, Microsoft, and even Infor, should take advantage of the situation and highlight their lower maintenance costs. They should also look into developing more innovative support models. For example:

• Authorized third-party support. Sell the rights to third-party service providers to provide service, giving them the rights to maintain maintenance versions on their own servers--in other words, a licensed version of what Oracle accuses TomorrowNow of doing.
  
  
• Bare-bones support options. For example, sell maintenance contracts where a customer only gets access to new versions and upgrades, with no help desk support. Some older customers never need or want the support desk services--but they still want access to patches and future upgrades. Why should these customers pay for something they don't want? Or sell access to patches and regulatory updates without access to future versions. Or, provide an option to buy future versions.
  

Why software vendors haven't generally offered such options in the past is a mystery to me. Perhaps some have done so, and I just don't know about them. If you have information on such plans, please let me know.

Otherwise, SAP's and Oracle's pushing the limits of customer tolerance may be just what's needed to spur such innovations.

Update, Aug. 15. The LawsonGuru blog points out that at the same time SAP is narrowing its support options by forcing all customers to a higher, more expensive level of support, Lawson is widening its support options. Lawson's basic level of support with bronze, silver, gold, and platinum options. It's not clear whether the bronze level is as bare-bones as I would like to see, but still Lawson is moving in the right direction.

Related posts
Vendor maintenance fees: just say no
Reading the fine print on ERP contracts
High software maintenance fees and what to do about them

Epicor in transition: revenue up, profits down

Last week, Epicor released second quarter results that were mixed. Revenue rose 21% to $127.9 million. But net income fell sharply to $1.3 million a 79% plunge from the same quarter last year. Epicor blamed the fall in profits on an additional $4.5 million in amortization costs related to the firm's purchase of NSB Retail last year.

Digging a little further, the revenue number is not as impressive as it first appears. New license sales actually fell 3%, but the drop was more than made up by increases in consulting revenue (up 20%) and maintenance fees (up 23%). Epicor blamed the drop in new licenses on weak economic conditions in the retail sector.

On the other hand, Epicor's ERP business (primarily Epicor's Vantage product) was strong, said CEO Tom Kelly in an investor conference call:

Our ERP license performance was within our expected range, and we are pleased to see our customers continue to spend and allocating dollars to ERP solutions. ERP implementations remain at the top of the Company’s must-do IT projects as evidenced by the fact that we added a significant number of new name customers, more than 150 in total in Q2. We have not seen a change to the competitive environment, nor have we seen deals disappearing for lack of funding. While our ERP pipelines remain strong, we continue to see some lengthening of the ERP cycles as we’ve talked to you in the past. This is in due part to some of the larger deals we are tracking, but is also due to some customers deciding to implement projects on a stage basis where they initially purchase and rollout smaller parts of their total solution.

How did Epicor manage to increase consulting and maintenance revenue? Kelly said that Epicor won back 177 customers to maintenance contracts. How Epicor managed to entice back these customers, or why they left in the first place--he didn't say. Nevertheless, it's a good sign, as maintenance is a recurring revenue stream.

On the consulting side, Kelly said that results were due to a focus on increasing utilization and a strong backlog of business. What's driving the backlog--in light of weaker new license sales--he didn't say. He did hint, however, to a more aggressive pursuit of consulting opportunities by aligning the services group more closely with sales:

Additionally, our consulting and sales organizations have become intimately late and in the joint pursuit of maximizing Epicor’s revenue opportunity from every customer. We’ve not optimized the synergies in the past and this is the working relationship I believe must exist for Epicor to accelerate on top and bottom line growth rates in the future. Lauri's [Lauri Klaus, EVP Worldwide Consulting] background in sales and her current role in consulting give us the best opportunity from a senior management standpoint to melt these two organizations more closely together.

Read Epicor's conference call transcript at Seeking Alpha for more details.

What does it all mean?
As Kelly indicated in his remarks, Epicor is in a transition year. This is partly due to the management transition from George Klaus, longtime Epicor CEO. Kelly has only taken over the top spot since February. Epicor is also in transition as it broadens its footprint from that of a traditional midmarket ERP vendor to include a focus on the retail industry with its acquisition of NSB Retail Systems last year as well as its earlier pick up of CRS Retail Technology Group in 2005.

The macroeconomic conditions in the retail sector, however, are weak right now, and the fall off in new license revenue for Epicor in that segment is understandable. The increase in maintenance revenue is a positive sign, but the increase in consulting revenue is likely unsustainable if it simply reflects increased utilization and a more aggressive pursuit of consulting deals for new and existing customers. Ultimately, consulting revenue follows new license revenue. Furthermore, some of the new consulting work is likely coming at the expense of Epicor's implementation partners, which live and die by those projects.

Expect a few more quarters to be needed to see if Epicor is successful in its transition.

Update, Aug. 1. A Spectator reader left an anonymous comment on another post indicating that Epicor today terminated five employees from CRS Retail Systems in Newburgh NY. He indicates that such layoffs have been occurring quarterly. Though such layoffs may be necessary for Epicor to maintain its financial performance, conducted in a drip-drop fashion, they are likely hurting staff morale in this unit that is key to Epicor's diversification strategy.

Related posts
More on Epicor's management changes
Epicor replaces CEO and COO: why?
Epicor expands presence in retail sector

Oracle increases accusations in SAP lawsuit

We're finally getting a look into what Oracle has discovered in the discovery phase of its lawsuit against SAP and its subsidiary TomorrowNow (TN), which provided third-party maintenance and support contracts for Oracle products.

In an amended complaint filed today, Oracle paints a vivid picture of TN knowingly misappropriating Oracle's intellectual property and SAP knowingly choosing to allow TN to continue in its allegedly illegal operations. Oracle claims that documents uncovered during the discovery phase have "revealed that [SAP] knew from the start that SAP TN's business depended on this extensive illegal scheme...One of the key members of SAP's due diligence team--a former PeopleSoft employee--reported directly to board member [Shai] Agassi: "I am not sure how TomorrowNow gets access to Peoplesoft software, but its [sic] very likely that TomorrowNow is using the software outside the contractual use rights granted to them."

Oracle also claims that during the acquisition of TN by SAP that TN's owners "flatly refused to give any such assurances" that TN respected Oracle's IP rights.

Furthermore, Oracle claims to have uncovered evidence of an effort within SAP to move to a more conservative approach to delivering support services, a so-called "Project Blue." As I read Oracle's complaint, it appears that Project Blue would have involved TN giving up the maintenance of centralized copies of PeopleSoft and JDE and doing all customer support remotely on the customer's system. Oracle claims that SAP and TN eventually decided against Project Blue.

The complaint is now 70 pages, with substantial detail, and is quite an interesting read. Computerworld has a short article on it. But read Oracle's complaint to get a full picture.

Oracle chose to file this amended complaint today, the day before SAP reports its second quarter earnings, guaranteeing that analysts will be asking questions about this tomorrow.

This case puts a real obstacle in the path of the third-party maintenance model, a model that I hope will prove viable in the long run. Major software vendors, such as both Oracle and SAP, have too much power, too much control over their installed base customers and too little competition. Third-party maintenance gives customers another option and leverage over the unrestrained pricing power of the major vendors. When you buy a Lexus, you are not obligated to go to the Lexus dealer for maintenance. Why should enterprise software be any different?

Nevertheless, third-party service providers have to operate within the restraints of fair competition. Hopefully this case will be resolved in a way that makes the boundaries clear, so that clients have choices.

Update, July 29: SAP issued a terse statement acknowledging Oracle's amended complaint, simply: "Today, Oracle filed an amended complaint in Oracle v. SAP. SAP’s response is due to the Court on September 11, 2008. This amended complaint repeats many of the themes and allegations in Oracle’s amended complaint filed in 2007. SAP will respond to this amended complaint in Court."

I'm sure SAP would rather focus on its earning announcement today. SAP is reporting second-quarter results that beat most analyst estimates and gave a more positive outlook on its full-year guidance.

Related posts
SAP puts TomorrowNow out of its misery
Vendor maintenance fees: just say no
Legal basis for third-party ERP support industry
Oracle wants to broaden lawsuit against SAP and TomorrowNow

SAP puts TomorrowNow out of its misery

It's not been a good month for SAP. Last week, it came under fire for botching up transition of support for its Business Objects customers. Now, SAP is announcing that it is killing off its TomorrowNow subsidiary, which provides third-party support for several Oracle products, such as J.D. Edwards, PeopleSoft, and Siebel.

TomorrowNow and SAP are the target of a lawsuit by Oracle alleging theft of Oracle's intellectual property. SAP has been trying to sell TomorrowNow since last year, but to no avail.

In its press release, SAP said that it is "working directly with TomorrowNow’s more than 225 current customers to help them return to support from Oracle...or to smoothly transition to new support options."

On the surface, SAP's troubles with TomorrowNow might seem to tarnish the image of third-party support, but I don't think so. SAP was asking for trouble by offering support for a competitor's products, especially those of a competitor as aggressive as Oracle. But, in my opinion, as long as vendors--such as SAP and Oracle--continue to charge 22% of the net license fee for ongoing support, the financial benefits of third-party support are simply too attractive for some customers to ignore. This is especially true for customers that have highly modified their vendor's systems, have no intention of upgrading, or are planning a migration to a different system at some point in the future.

Where will TomorrowNow customer's go? Some will return to the Oracle fold. But some will likely go to another third-party support provider, such as Rimini Street or netCustomer.

A quick email reply from David Rowe at Rimini Street this morning indicates that "the phone is ringing off the hook"--not only because of TomorrowNow's shutdown, but also because of SAP's recent announcement of support fee increases. (An equal opportunity provider, Rimini Street offers third party support to both Oracle and SAP customers).

Related posts
SAP botching up support transition for Business Objects
SAP lists TomorrowNow as a discontinued operation
SAP considering sale of TomorrowNow
Oracle sues SAP and its TomorrowNow unit

SAP botching up support transition for Business Objects

SAP bought Business Objects last year and is now getting around to transitioning support to SAP's own website. But it looks like a case study in how to NOT please your customers.

First, this in the comments area on Bob Cringley's website tipped me off to the problem:

SAP bought out Business Objects last fall. This week, they switched the Business Objects Support site over to the SAP Support Portal. They also replaced the Business Objects Support telephone numbers with a recording directing users to the SAP Support Portal.

Now, did they notify all the users of Business Objects Support in advance of the change? Did they supply users of Business Object Support with the SAP Support Portal access codes needed to enter the site? Did they convert over the existing support incidents from the Business Objects Support site to the new SAP Support Portal?

No, no, and no.

The net result is that all the Business Objects Customers have been effectively cut off of all Support this week.

The problems are confirmed by postings on the Business Objects Board (not affiliated with Business Objects or SAP). As of this writing, there are seven pages of posts, showing a complete lack of coordination for the migration of support. It sounds like a deadline-date-driven migration for which SAP was not prepared.

This is not the first trouble SAP has had in its relationships with Business Objects customers. Things got so bad earlier this year that Business Objects emailed its customers to apologize for "issues related to poor service including delayed deliveries of the company’s technology."

If SAP is going to make major strategic acquisitions in the future, it is going to have to learn how to make them painless for customers.

Update, July 16: PC World has picked up on my post and contacted SAP about the problems with Business Objects support. Their reporting confirms that SAP simply blew the migration. For example, SAP didn't have email addresses for all users, so they sent notification and new login credentials by snail mail.

Update, July 17: Be sure to read the comments section for a long note from an SAP/Business Objects support professional. In spite of his claims that some of my information is not accurate, he essentially confirms just about everything. This is a real mess.

Related posts
SAP encounters rough patch with Business Objects
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2008 IT spending and budget metrics online

Over at Computer Economics, we've just published our 19th annual study of IT spending metrics. The 2008/2009 IT Spending, Staffing, and Technology Trends study is over 1,100 pages and nearly 800 charts on IT budget trends, ratios, and metrics for 18 industry sectors/sub-sectors.

The study is used by IT organizations to compare their levels of IT spending and staffing with other organizations, and by consultants and technology providers to better understand current trends. This year's study also includes special chapters on technology adoption and ROI/TCO trends, IT management best practices, and IT outsourcing metrics.

Chapter 1 is an executive summary of the full report and is available for free download.

Intel says no to Vista

This has got to hurt. From the NY Times comes this interesting anecdote: Intel has decided not to upgrade employee PCs to Microsoft Vista.

Intel, the giant chip maker and longtime partner of Microsoft, has decided against upgrading the computers of its own 80,000 employees to Microsoft’s Vista operating system, a person with direct knowledge of the company’s plans said.

The person, who has been briefed on the situation but requested anonymity because of the sensitivity of Intel’s relationship with Microsoft, said the company made its decision after a lengthy analysis by its internal technology staff of the costs and potential benefits of moving to Windows Vista, which has drawn fire from many customers as a buggy, bloated program that requires costly hardware upgrades to run smoothly.

Earlier this month, at Computer Economics, we reported findings from our annual study of technology trends, which indicate that Intel is not alone in its decision to say no to Vista. We found that most organizations are still not including Vista in their plans for 2008. In fact, there were not even enough early adopters to provide a large enough sample for an ROI/TCO analysis.

Microsoft's misstep with Vista is unlikely to boost very much the desktop share of competing operating systems, such as Linux or Apple's OS/X. Most organization's staying on XP will eventually upgrade to Vista, or wait for Microsoft's next generation of desktop OS, Windows 7, scheduled for release in 2010.