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Tuesday, July 20, 2010

Countering aggressive software maintenance terms

There are two developments this week on the analyst front, dealing with the issue of software maintenance contracts. First, Gartner issued what it calls a "code of conduct" for vendors in crafting maintenance contracts. Second, Ray Wang wrote a hard-hitting blog post dealing with what he calls "all-or-nothing" vendor maintenance agreements.

Code of Conduct
Gartner's press release on its code of conduct is quite detailed, outlining specific points that vendors should address in software contracts. In short, Gartner addresses the following points:
  • The right to regular, appropriate, predictable updates to software products
  • The right to clearly defined response times and stratified IT support levels based on application criticality and other business factors
  • The right to reasonable, predictable percentage ranges for yearly maintenance fee increases--or decreases--as well as long-term caps on increases in maintenance costs
  • The right to end or change support at any time for products that are not in use
  • The right to reasonable, predictable levels of support throughout product and contract life cycles
  • The right to reasonable, clearly defined maintenance and support for legacy systems
  • The right to explicit statement and approval of support details at the line-item level
There's not much to argue with in Gartner's recommendations. They provide a common-sense checklist for evaluating any software vendor maintenance relationship.

If I see any lack in Gartner's code of conduct, it is that it fails to mention the third-party maintenance option. Gartner is completely silent on this point. Some vendors these days are attempting to preclude customers from seeking service and support from third-parties. A customer-friendly maintenance contract should explicitly allow customer the right to go to a third-party provider for software maintenance, without jeopardizing warranties or future support.

"All-or-Nothing" Tactics
Ray's post drills down more deeply on one tactic that he sees vendors adopting these days--that is, forcing customers to put all software licenses under contract, and paying up any back maintenance, when buying new licenses.

Ray writes:
Conversations with 11 enterprise apps customers in the past two months indicate stricter enforcement of vendor "All or Nothing" maintenance policies. “All or Nothing” maintenance policies often require customers to put all licenses on maintenance or receive no maintenance from the vendor. These policies also prevent customers from reducing the number of licenses covered by maintenance. The rationale for these policies – customers could potentially apply the patches, bug fixes, and upgrades for covered licenses to the uncovered licenses.
At first glance, it all sounds fair and reasonable. But Ray points out four cases where such clauses can cost an organization dearly. For example, one division of a large company may drop maintenance on a software product. When another division then goes to buy additional seats for the same software product, the vendor invokes the contract to demand that the entire company pay up all maintenance, or forgo buying new seats. Read Ray's entire post to see how easily an organization can run afoul of such contracts.

Ray has some good advice for negotiating hard against such tactics, and--in contrast to Gartner--includes consideration of third-party maintenance options as a counter-tactic.

My take
Ray and I and other Enterprise Advocates Vinnie Mirchandani and Dennis Howlett, have been beating the drum for years on this issue of software maintenance contracts (see the Related Posts at the end of this post for a sample). The situation over these many years has not gotten better. In fact it could be getting worse. As traditional vendors see new license revenues shrinking in the current IT spending recession they become even more adamant at pursuing revenue from their installed customer base. This motivates them to push maintenance fees even harder. There are a few exceptions, such as RightNow's Cloud Services Agreement, Infor's Flex program, and Microsoft Dynamics' separation of maintenance fees from support fees. But the big players--SAP and Oracle in particular--show no signs of softening their approach.

I am coming to the conclusion that there are only two things that will ultimately shift the balance of power to something that is more equitable between vendors and customers. Unfortunately, both of them involve the legal system.
  1. A thriving third-party software maintenance industry. As long as customers have no choice in maintenance providers, there can be no competition. But the best existence proof for third-party maintenance--Rimini Street--is now mired in a lawsuit by Oracle. Oracle fired the first shot, but Rimini Street appears to be itching for a battle by filing an aggressive counter-suit. That's good news. Hopefully this case will be decided in a way that provides legal precedent for the right of third-parties to offer software maintenance that does not infringe on the OEM's intellectual property rights.
  2. Antitrust rulings by the US Department of Justice and the European Union. Although the enterprise software marketplace is not a monopoly, when a customer commits to a certain vendor the vendor-client relationship at that point becomes less of a free market. The customer has committed enormous amounts of time, effort, and business process design that is now intricately linked to that vendor. Undoing such a decision is expensive--even prohibitive. Therefore, there needs to be some legal protections for customers once they commit to a vendor relationship. The tech industry is no stranger to such antitrust rulings in the past (e.g. the ruling against IBM, forcing it to unbundle mainframe hardware from operating systems, which provided the legal framework for the plug-compatible industry comes to mind). A legal requirement for vendors to unbundle software licenses from maintenance services and maintenance services from support services is one area crying out for similar rulings.
In the meantime, customers need to fight back. Gartner's list and Ray's recent post provide good ammunition.

Related posts
Rimini Street, SAP, and the future of third-party maintenance
Rimini Street to provide third-party support for SAP
Legal basis for third-party ERP support industry
Flash: SAP backs down on 22% maintenance fees
SAP postpones its maintenance fee price hike
Enterprise software: who wants to be the low-cost leader?
Attacking and defending software vendor maintenance fees
SAP and third-party maintenance: good for me but not for thee
SAP maintenance fees: where is the value?
Mad as hell: backlash brewing against SAP maintenance fee hike
Why vendors resist negotiating software maintenance fees
Pushing back on software vendor maintenance fees
SAP under the spotlight for "broken promises"
Vendor software maintenance programs: top 10 wish list
Mad as hell: backlash brewing against SAP maintenance fee hike
Oracle confirms: maintenance fees are virtually all profit
Oracle profits strong, thanks to your maintenance payments
Vendor maintenance fees: just say no
High software maintenance fees and what to do about them

by Frank Scavo, 7/20/2010 09:55:00 AM | permalink | e-mail this!

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