Infor announced enhancements to its software maintenance offerings today. The program, dubbed Infor Flex, allows customers at little or no license costs to upgrade to the latest, SOA-enabled versions of their Infor products or to exchange those products for other, newer products in Infor's portfolio.
I won't spend more time describing the program, as Infor has a good blog post on Infor Flex with embedded presentations. On balance, I would say it is a good move on Infor's part.
As I've written in the past, with its huge installed base, Infor has an opportunity to differentiate itself from its competitors in terms of its maintenance program. Many of its customers are on older legacy products, which Infor or its predecessor companies acquired over the past several years. Some of them pay maintenance, others don't. Most of them are going to do something in terms of new systems in the coming years. Infor has some decent up-to-date products in its portfolio, such as Baan and Syteline. But how can they compete against SAP, Oracle at the high end, or Microsoft, Lawson, IFS, and others in the mid-tier? The only way is to make upgrading or exchanging the customer's legacy products a no-brainer. This is what Infor Flex is intended to do.
It remains to be seen whether this program will succeed in moving significant numbers of its installed base to its newer products. On the one hand, I spoke to one early adopter of Infor's Open SOA products a couple months ago, and he was very positive about the experience. He also spoke well of Infor's maintenance and support services. This is a good sign and it says more to me than any number of vendor press releases and statements about future direction.
On the other hand, by my observation, Infor gets "outsold" by other vendors, even in situations where it is the incumbent supplier. Current economic conditions are likely limiting its ability to more aggressively and thoroughly present its leading products, such as Baan and Syteline. Hopefully, the new Infor Flex program will provide a more compelling value proposition, allowing Infor to win more deals where it already has a customer relationship.
I would like to see this program succeed. In these days, customers need more alternatives, not fewer.
Update: I see Vinnie has already posted his view on Infor Flex. Read Flex should also include down, not just up. Vinnie points out that the "flex" option is only for more product and services, not less. A good point, but Infor is reluctant to give customers an option to pay less than they're paying now. Of course, Infor is not alone in this reluctance.
Update: Dennis Howlett weighs in, in his usual style: curmudgeonly. Read the whole piece, at least to see how Dennis can manage a reference to Hulk Hogan when talking about ERP.
Related posts
Infor's opportunity: value in maintenance and support
Infor buying SoftBrands, owner of Fourth Shift
Enterprise software: who wants to be the low-cost leader?
Monday, June 22, 2009
Friday, June 12, 2009
Infor buying SoftBrands, owner of Fourth Shift
Looks like the vendor consolidation trend in ERP is not yet over. Infor announced this morning that it is buying SoftBrands, for $80 million. Softbrands adds two new products to the 50+ ERP systems in Infor's wide-reaching portfolio of enterprise software.
SoftBrands may not be a well-known name, but one of the two products in its portfolio is better know: Fourth Shift, a Tier III ERP system that has been around for some time and has a fairly extensive installed base among small and mid-size manufacturing firms.
What's most interesting about this deal at first glance is that Fourth Shift has had a partnership relationship with SAP since 2004 to offer Fourth Shift as a small plant solution to SAP Business One customers. Business One is SAP's small company ERP system, which does not have extensive manufacturing system functionality of its own.
Whether SAP is going to be willing to extend this relationship with Infor going forward remains to be seen. SAP views Infor's installed base as a target for its own sales efforts, so a continued partner relationship with Fourth Shift may be awkward. Loss of the SAP relationship would no doubt be a significant loss to Fourth Shift, but Infor surely must have considered this risk already.
SoftBrands' other products are systems for the hospitality industry, which it picked up in 2006 with its acquisition of Hotel Information Systems (HIS).
Details on the deal are in Infor's press release.
Update, Jun 15. Jason Carter, in a series of Twitter direct messages to me, raises some interesting question: why didn't SAP buy SoftBrands? It would seem an obvious way for SAP to build out its functionality for Business One. If SAP wasn't in the bidding, what does that say about SAP's commitment to Business One? If SAP was in the bidding, why did Softbrands go with Infor?
Related posts
SAP plugs hole in Business One
SoftBrands may not be a well-known name, but one of the two products in its portfolio is better know: Fourth Shift, a Tier III ERP system that has been around for some time and has a fairly extensive installed base among small and mid-size manufacturing firms.
What's most interesting about this deal at first glance is that Fourth Shift has had a partnership relationship with SAP since 2004 to offer Fourth Shift as a small plant solution to SAP Business One customers. Business One is SAP's small company ERP system, which does not have extensive manufacturing system functionality of its own.
Whether SAP is going to be willing to extend this relationship with Infor going forward remains to be seen. SAP views Infor's installed base as a target for its own sales efforts, so a continued partner relationship with Fourth Shift may be awkward. Loss of the SAP relationship would no doubt be a significant loss to Fourth Shift, but Infor surely must have considered this risk already.
SoftBrands' other products are systems for the hospitality industry, which it picked up in 2006 with its acquisition of Hotel Information Systems (HIS).
Details on the deal are in Infor's press release.
Update, Jun 15. Jason Carter, in a series of Twitter direct messages to me, raises some interesting question: why didn't SAP buy SoftBrands? It would seem an obvious way for SAP to build out its functionality for Business One. If SAP wasn't in the bidding, what does that say about SAP's commitment to Business One? If SAP was in the bidding, why did Softbrands go with Infor?
Related posts
SAP plugs hole in Business One
Thursday, June 11, 2009
Gartner Mid-Market ERP Magic Quadrant: Should Have Stayed in Retirement
Back in 2007, I noted that Gartner had retired its mid-market ERP Magic Quadrant (MQ). As my source said at the time, the reason was that as a result of consolidation there were not enough vendors left in midmarket ERP to populate the quadrant.
Well, apparently Gartner found some more vendors and has now brought the mid-market ERP MQ back from retirement.
As soon as Gartner had issued its latest Magic Quadrant for Midmarket and Tier 2-Oriented ERP for Product-Centric Companies, resellers for Microsoft Dynamics AX (Axapta) were touting its position in the so-called "leaders quadrant." In fact, according to Gartner, MS Dynamics AX is the only product worthy to occupy a place in the leaders quadrant, a fact that Microsoft itself was quick to proclaim in a press release today.
A quick look at the MQ itself, however, shows some problems. In fact, it is difficult for anyone familiar with these vendors to understand how Gartner could come up with this evaluation. For example:
Nevertheless, my issues with Gartner's Magic Quadrant for Midmarket and Tier 2-Oriented ERP for Product-Centric Companies are several fold:
To be fair to Gartner, the fine print at the bottom of its study says:
Update: Quick on the trigger, Vinnie weighs in.
Update, Jun. 11: Dennis Howlett finds plenty of other shortcomings in this MQ
Update, Jun. 12: Thomas Wailgum, blogging for CIO Magazine, is dripping with sarcasm concerning both Gartner and Microsoft.
Update, Jun 19: Gartner's Jim Holincheck responds.
Related posts
Gartner retires mid-market ERP magic quadrant
Well, apparently Gartner found some more vendors and has now brought the mid-market ERP MQ back from retirement.
As soon as Gartner had issued its latest Magic Quadrant for Midmarket and Tier 2-Oriented ERP for Product-Centric Companies, resellers for Microsoft Dynamics AX (Axapta) were touting its position in the so-called "leaders quadrant." In fact, according to Gartner, MS Dynamics AX is the only product worthy to occupy a place in the leaders quadrant, a fact that Microsoft itself was quick to proclaim in a press release today.
A quick look at the MQ itself, however, shows some problems. In fact, it is difficult for anyone familiar with these vendors to understand how Gartner could come up with this evaluation. For example:
- QAD and Syspro show a better "ability to execute" than any SAP or Oracle product
- Epicor Vantage shows a better "completeness of vision" than any SAP or Oracle product
- Ability to execute: product/service, overall viability, sales execution/pricing, market responsiveness and track record, marketing execution, customer experience, and operations.
- Completeness of Vision: market understanding, marketing strategy, sales strategy, offering (product) strategy, business model, vertical/industry strategy, innovation, geographic strategy.
Nevertheless, my issues with Gartner's Magic Quadrant for Midmarket and Tier 2-Oriented ERP for Product-Centric Companies are several fold:
- As indicated above, the positionings make no sense to anyone familiar with these vendors.
- Gartner's criteria for evaluation are almost certainly going to be different from the criteria of a specific buyer. For example, if I run a manufacturing company with operations solely in the U.S, why do I care about worldwide geographic presence?
- As a buyer, is "completeness of vision" really one of the two primary criteria in evaluation? How about fit to my functional requirements and industry? On this note alone, IFS and Lawson, with their industry-specific focus are being shortchanged in this version of the MQ.
- The MQ is incomplete in terms of vendors. Specifically, as Vinnie Mirchandani pointed out in a private Tweet to me, Gartner has conveniently left out the pure SaaS vendors, such as NetSuite and Intaact, from this MQ.
To be fair to Gartner, the fine print at the bottom of its study says:
Gartner does not endorse any vendor, product or service depicted in the Magic Quadrant, and does not advise technology users to select only those vendors placed in the "Leaders" quadrant. The Magic Quadrant is intended solely as a research tool, and is not meant to be a specific guide to action.Nevertheless, I think this MQ does more harm than good. In my opinion, Gartner should have left it in peace to enjoy its retirement.
Update: Quick on the trigger, Vinnie weighs in.
Update, Jun. 11: Dennis Howlett finds plenty of other shortcomings in this MQ
Update, Jun. 12: Thomas Wailgum, blogging for CIO Magazine, is dripping with sarcasm concerning both Gartner and Microsoft.
Update, Jun 19: Gartner's Jim Holincheck responds.
Related posts
Gartner retires mid-market ERP magic quadrant
Friday, June 05, 2009
Oracle layoffs, June 2009
Go to latest news on Oracle layoffs, November 2009.
Based on the large number of search engine referrals to the Spectator this morning, it appears that another layoff is underway at Oracle. As it turns out, a surge in such hits in the past has been an early indicator of layoffs, as news spreads within the organization and people search for more information.
If you have information or more details on what functions are affected, and numbers of terminated employees, please post a comment to this post or email me. Anonymity is honored, as always.
Update, Jun. 10: I have just received confirmation on one point made by the second and third comments on this post. At least one Oracle sales rep here in Southern California has been laid off and replaced by someone working out of (get this) India. I'm not sure how an India-based salesperson is supposed to rep product in Southern California.
Based on the large number of search engine referrals to the Spectator this morning, it appears that another layoff is underway at Oracle. As it turns out, a surge in such hits in the past has been an early indicator of layoffs, as news spreads within the organization and people search for more information.
If you have information or more details on what functions are affected, and numbers of terminated employees, please post a comment to this post or email me. Anonymity is honored, as always.
Update, Jun. 10: I have just received confirmation on one point made by the second and third comments on this post. At least one Oracle sales rep here in Southern California has been laid off and replaced by someone working out of (get this) India. I'm not sure how an India-based salesperson is supposed to rep product in Southern California.
Wednesday, June 03, 2009
The downside of vendor consolidation
Consolidation is generally an excellent strategy for reducing the cost of IT while maintaining or even improving service levels. Server consolidation, storage consolidation, data center consolidation, and applications consolidation are all examples of strategies that organizations use to accomplish these objectives. Our research at Computer Economics on consolidation consistently points to strong return on investment experiences of organizations that undergo server consolidation, storage consolidation, data center consolidation, and applications consolidation.
Vendor consolidation may also be included in the list. Reducing the number of IT suppliers has a number of benefits: fewer contracts to administer and volume discounts are two obvious examples. But vendor consolidation has one big downside: risk of vendor lock-in.
Vinnie Mirchandani has an excellent post on this subject this morning, Why I am not an Apple Fanboy. He writes,
Larger firms especially have options. It is still the exception, rather than the rule, for large companies to standardize on a single enterprise software vendor. Most have two or more vendors, whether by design, or more likely as the result of mergers and acquisitions. What I am suggesting, which is contrary to conventional wisdom, is that there is some benefit to this situation. Rather than consolidate to a single vendor, rationalize the choices made and consolidate to no fewer than two.
There are several ways this strategy could be maintained. For example:
But when it comes to enterprise applications, beware of vendor consolidation.
Vendor consolidation may also be included in the list. Reducing the number of IT suppliers has a number of benefits: fewer contracts to administer and volume discounts are two obvious examples. But vendor consolidation has one big downside: risk of vendor lock-in.
Vinnie Mirchandani has an excellent post on this subject this morning, Why I am not an Apple Fanboy. He writes,
The benefits of vendor consolidation are grossly overrated. Split your dollars across many vendors. Also, vendors often misinterpret long term relationships as license to pull lock-in shenanigans. Benchmark them constantly and refresh your vendor base periodically.This is especially true in the case of enterprise software, such as ERP, CRM, business intelligence, and supply chain management systems. Once these systems are in place, it is very difficult to switch. Hence, enterprise software vendors promote the concept of vendor consolidation, with all of its benefits to the customer, realizing that it is also of immense value to the vendor that remains. Nowhere is this better seen than in the drive by major vendors, such as SAP and Oracle, in charging their software maintenance fees at 22% of original software license cost.
Larger firms especially have options. It is still the exception, rather than the rule, for large companies to standardize on a single enterprise software vendor. Most have two or more vendors, whether by design, or more likely as the result of mergers and acquisitions. What I am suggesting, which is contrary to conventional wisdom, is that there is some benefit to this situation. Rather than consolidate to a single vendor, rationalize the choices made and consolidate to no fewer than two.
There are several ways this strategy could be maintained. For example:
- Consolidate to a single vendor for worldwide financials, but standardize operational systems on another vendor's platform. Always leave the option open to replace one with the other.
- Consolidate to a single vendor for centralized CRM and order management, while allowing one or two different vendors to provide operational systems at the plant level, perhaps one for large plants and one for small plants.
- Revive a best of breed approach. Leave HR, asset management, and other non-core systems outside the scope of the primary vendor's implementation.
- Test vendors' touted SOA capabilities to build composite applications. If these capabilities really are what vendors say they are, they ought to allow "seamless integration" with third party applications.
But when it comes to enterprise applications, beware of vendor consolidation.
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
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
Sunday, May 03, 2009
i2 doubles up on patent litigation, sues Oracle
i2 is in a litigious mood these days. In 2007, i2 sued SAP for infringement of seven U.S. patents awarded to i2 between 1998 and 2006. SAP settled that case in 2008 for $83.3 million.
Now a Spectator reader calls my attention to i2's lawsuit against Oracle for allegedly infringing on 11 of its supply chain management patents.
i2's civil complaint against Oracle is on i2's website. The complaint was filed in the US District Court for the Eastern District of Texas, the same court that i2 chose for its SAP litigation and one that is generally regarded as friendly to patent litigants.
i2's complaint against Oracle does not indicate which Oracle products i2 believes infringe on i2's intellectual property. The 11 i2 patents are listed below, and some of these appear to be the same patents that were the subject of i2's lawsuit against SAP:
Update, May 4: Vinnie Mirchandani follows up with his view, which is pretty funny, about the state of software industry today. Must read his short post.
Related posts
i2 layoffs underway, March 2009
JDA calls off merger with i2
SAP: If you can't beat 'em, sue 'em
Now a Spectator reader calls my attention to i2's lawsuit against Oracle for allegedly infringing on 11 of its supply chain management patents.
i2's civil complaint against Oracle is on i2's website. The complaint was filed in the US District Court for the Eastern District of Texas, the same court that i2 chose for its SAP litigation and one that is generally regarded as friendly to patent litigants.
i2's complaint against Oracle does not indicate which Oracle products i2 believes infringe on i2's intellectual property. The 11 i2 patents are listed below, and some of these appear to be the same patents that were the subject of i2's lawsuit against SAP:
- Extensible Model Network Representation System for Process Planning (two patents)
- Planning Coordination Systems for Coordinating Separate Factory Planning Systems and a Method of Operation
- System and Method for Allocating Manufactured Products to Sellers (two patents)
- Computer Security System
- System and Method for Remotely Monitoring and Managing Applications Across Multiple Domains
- Intelligent Order Promising
- Generating, Updating, and Managing Multi-Taxonomy Environments
- Value Chain Management
- Extreme Capacity Management in an Electronic Marketplace Environment
Update, May 4: Vinnie Mirchandani follows up with his view, which is pretty funny, about the state of software industry today. Must read his short post.
Related posts
i2 layoffs underway, March 2009
JDA calls off merger with i2
SAP: If you can't beat 'em, sue 'em
Wednesday, April 29, 2009
Enterprise software vendor R&D investments declining
Enterprise software vendors such as SAP, Oracle, Lawson, and others often argue that their maintenance revenues are essential in funding their R&D efforts. These ensure that their products are kept current with new technologies and customer investments in their systems are preserved.
But Jason Carter just blew a hole in that argument. He calculates a new metric: R&D spending as a percentage of maintenance revenue. His calculations show that for SAP, Oracle, Lawson, and Epicor, R&D spending as a ratio to maintenance revenue has actually declined since 2001. (He also reports on Sage, but the results are confusing because of how Sage reports its financials.)
Jason can tell you the whole story. Read his post, The Broken Promise of Software Maintenance Fees.
Further thought: The vendors' argument in defense of maintenance revenue makes no sense.
Related posts
SAP postpones its maintenance fee price hike
Enterprise software: who wants to be the low-cost leader?
Attacking and defending software vendor maintenance fees
Crack in the dike for SAP maintenance fee hike
SAP maintenance fees: where is the value?
Mad as hell: backlash brewing against SAP maintenance fee hike
But Jason Carter just blew a hole in that argument. He calculates a new metric: R&D spending as a percentage of maintenance revenue. His calculations show that for SAP, Oracle, Lawson, and Epicor, R&D spending as a ratio to maintenance revenue has actually declined since 2001. (He also reports on Sage, but the results are confusing because of how Sage reports its financials.)
Jason can tell you the whole story. Read his post, The Broken Promise of Software Maintenance Fees.
Further thought: The vendors' argument in defense of maintenance revenue makes no sense.
- First, they argue that their maintenance revenue is needed to fund their new development. But Jason's findings show that R&D as a percentage of maintenance revenues are declining. So much for that rationale.
- Second, it is without a doubt that recurring maintenance revenues are the way that Oracle and SAP, among others, have been funding their acquisition programs. But most of the functionality acquired by SAP and Oracle is not available freely to existing customers. For example, SAP does not make Business Objects products freely available to SAP customers. So customers pay twice: first to fund the vendors' acquisition programs, and then again if they want to use those acquired products.
Related posts
SAP postpones its maintenance fee price hike
Enterprise software: who wants to be the low-cost leader?
Attacking and defending software vendor maintenance fees
Crack in the dike for SAP maintenance fee hike
SAP maintenance fees: where is the value?
Mad as hell: backlash brewing against SAP maintenance fee hike
SAP postpones its maintenance fee price hike
Well, well, well. SAP announced today that it is deferring its scheduled increase in maintenance fees. The price hike, from 17% to 22% of software license fees was scheduled to kick in as SAP moved all of its customers to its high-end Enterprise Support program.
The rationale provided by SAP is that it has not yet met the improvements in key performance indicators that it worked out with its user group executive network to "measure and verify the ongoing value of SAP Enterprise Support." My understanding was that these measures should have already been reported.
Still, SAP has good reason to back-pedal:
Dennis Howlett gives his take. He writes, "I’m convinced SAP had no choice but to take these steps as a way of mollifying a very unhappy and increasingly vocal customer group. Even so, it is good to see that SAP has finally bent to the inevitable and now has an opportunity to put this fiasco behind it."
Related posts
Enterprise software: who wants to be the low-cost leader?
Attacking and defending software vendor maintenance fees
Crack in the dike for SAP maintenance fee hike
SAP maintenance fees: where is the value?
Mad as hell: backlash brewing against SAP maintenance fee hike
The rationale provided by SAP is that it has not yet met the improvements in key performance indicators that it worked out with its user group executive network to "measure and verify the ongoing value of SAP Enterprise Support." My understanding was that these measures should have already been reported.
Still, SAP has good reason to back-pedal:
- Current economic conditions are no time to be raising prices for customers. Due to the vendor lock-in effect, SAP might get away with it short-term, but at the risk of long term customer relationships.
- SAP was already forced in December to let its customers in Germany and Austria stay on on their current maintenance contracts through 2009. This was a crack in the dike, as so to speak as customers in other geographies wonder why they should be different from Germany and Austria.
- Other customers have been exercising contract rights to limit maintenance fee increases. I know of at least one customer here in Southern California who was thrilled to discover that his consultant had negotiated such a limit in his original contract.
- In the larger picture, there are growing signs that some providers, especially the SaaS vendors, see excessive maintenance fees as an opportunity to adopt a low-price-leader strategy, something that is long overdue in the enterprise software industry.
Dennis Howlett gives his take. He writes, "I’m convinced SAP had no choice but to take these steps as a way of mollifying a very unhappy and increasingly vocal customer group. Even so, it is good to see that SAP has finally bent to the inevitable and now has an opportunity to put this fiasco behind it."
Related posts
Enterprise software: who wants to be the low-cost leader?
Attacking and defending software vendor maintenance fees
Crack in the dike for SAP maintenance fee hike
SAP maintenance fees: where is the value?
Mad as hell: backlash brewing against SAP maintenance fee hike
Tuesday, April 28, 2009
Enterprise software: who wants to be the low-cost leader?
As enterprise software matures as an industry, why haven't we yet seen a major player competing on the basis of lowest cost? If anything, the major players--SAP and Oracle--seem to be moving in the opposite direction, raising maintenance fees and pursuing even higher margins.
SaaS as One Answer
As I wrote in the previous post, Attacking and defending software vendor maintenance fees, I think this situation is unsustainable in terms of the economics. I also listed several possible market responses to this situation, including the rise of software-as-a-service providers to provide a low-cost alternative.
Then today, I received a confirmation: Chris Kanaracus at Computerworld emailed me the latest missive from Marc Benioff, CEO of Salesforce.com. It's supposedly an email to his management team, but Chris received it from Benioff's PR group, so the audience is clearly the general public.
Benioff writes,
And this does not take into consideration the fact that SAP and Oracle are realizing gross margins somewhere in the neighborhood of 90% on their software maintenance revenue. It would seem that beating these guys on the basis of price should be a pretty easy target.
Disruption of a low-cost strategy
As industries mature, the basis of competition generally moves to price. In fact, there are really only two strategic alternatives for a business: low-cost leader and differentiation (everything else). For example, in retailing, Wal-Mart competes as the low-cost leader. Wal-Mart's entire business model is designed to give it a cost-advantage, resulting in its ability to be the low-cost leader.
Nordstrom, on the other hand, competes on the basis of being different, mainly on the basis of customer service. Nordstrom's entire operation is organized to give excellent customer service.
Today, nearly all of the traditional software vendors compete on the basis of their products being better, and therefore commanding a higher price--either the initial license fee, or more commonly, high annual maintenance fees. But these days it is difficult to differentiate SAP, Oracle, or other vendors on the basis of functionality. In many ERP vendor selections, the leading enterprise software products can check all the boxes—so where is the differentiation?
Perhaps the large vendors think they can be the Nordstrom of enterprise software. If so, they should learn from Nordstrom, as it is difficult to find any buyer that would describe the customer service experience of enterprise software vendors to be "excellent."
So, the time may be right--especially in light of current economic conditions--for some vendors, especially the SaaS providers, to come out and use their inherent cost advantage to compete on price.
If Marc Benioff wants to take the lead, more power to him.
Side note: as I'm writing this, I see Dennis Howlett is making a similar point, about open source business apps gaining ground due to their lower cost. "Low-cost leader" may not sound like the place where enterprise software providers would want to be. But there's nothing special about business applications: as the industry matures, cost must become a dominant element of competition.
Update, Apr. 29. Read Vinnie Mirchandani's post on the same theme today: What Cloud vendors can learn from Southwest Airlines.
And, Dennis Howlett points out that open source CRM SaaS provider SugarCRM just announced a price cut yesterday. It's a long post, worth reading, as Dennis goes into the economic advantage that SugarCRM is enjoying. This very much confirms my point that we may very well be entering into a phase where some enterprise software providers can succeed with a low-cost-leader strategy. Read: Sugar CRM reduces prices across the board, looking for broad adoption.
Now Vinnie points out that SAP has announced a postponement of its maintenance price hike. Maybe SAP is finally seeing that raising maintenance fees is an untenable position, especially in this economy.
And be sure to read the comments on this post, as there is much good discussion.
Related posts
Attacking and defending software vendor maintenance fees
Infor's opportunity: value in maintenance and support
Open source ERP and CRM carry strong ROI
Computer Economics: The Business Case for Software as a Service
SaaS as One Answer
As I wrote in the previous post, Attacking and defending software vendor maintenance fees, I think this situation is unsustainable in terms of the economics. I also listed several possible market responses to this situation, including the rise of software-as-a-service providers to provide a low-cost alternative.
Then today, I received a confirmation: Chris Kanaracus at Computerworld emailed me the latest missive from Marc Benioff, CEO of Salesforce.com. It's supposedly an email to his management team, but Chris received it from Benioff's PR group, so the audience is clearly the general public.
Benioff writes,
It's time for The End of Maintenance. Every year, companies spend billions on maintenance fees and get relatively little in return. Maintenance fees cover updates that are mostly patches and fixes, but they stop far short of the kind of innovation every that enterprise needs to survive. Companies pay to keep the past working and they end up doubling down on technology that can never keep up with their needs. The fees that companies pay have actually been rising, from something like 17% a few years ago to numbers more like 22% today. Every four or five years, companies are paying for their software all over again.Benioff is right to take this approach. A large part of the so-called investment that traditional on-premise software vendors, such as SAP and Oracle, make in product development does not go toward new products or new functionality. Rather it goes into porting and regression testing every product change against myriad combinations of databases, versions, server and desktop OS releases, middleware, third-party products, and other platform components. SaaS vendors avoid many of these costs as they write to a single platform: their own. Therefore, they ought to be able to deliver the same functionality for lower cost. In other words, they have a natural cost advantage that they can exploit in competing with traditional on-premise software vendors.
And this does not take into consideration the fact that SAP and Oracle are realizing gross margins somewhere in the neighborhood of 90% on their software maintenance revenue. It would seem that beating these guys on the basis of price should be a pretty easy target.
Disruption of a low-cost strategy
As industries mature, the basis of competition generally moves to price. In fact, there are really only two strategic alternatives for a business: low-cost leader and differentiation (everything else). For example, in retailing, Wal-Mart competes as the low-cost leader. Wal-Mart's entire business model is designed to give it a cost-advantage, resulting in its ability to be the low-cost leader.
Nordstrom, on the other hand, competes on the basis of being different, mainly on the basis of customer service. Nordstrom's entire operation is organized to give excellent customer service.
Today, nearly all of the traditional software vendors compete on the basis of their products being better, and therefore commanding a higher price--either the initial license fee, or more commonly, high annual maintenance fees. But these days it is difficult to differentiate SAP, Oracle, or other vendors on the basis of functionality. In many ERP vendor selections, the leading enterprise software products can check all the boxes—so where is the differentiation?
Perhaps the large vendors think they can be the Nordstrom of enterprise software. If so, they should learn from Nordstrom, as it is difficult to find any buyer that would describe the customer service experience of enterprise software vendors to be "excellent."
So, the time may be right--especially in light of current economic conditions--for some vendors, especially the SaaS providers, to come out and use their inherent cost advantage to compete on price.
If Marc Benioff wants to take the lead, more power to him.
Side note: as I'm writing this, I see Dennis Howlett is making a similar point, about open source business apps gaining ground due to their lower cost. "Low-cost leader" may not sound like the place where enterprise software providers would want to be. But there's nothing special about business applications: as the industry matures, cost must become a dominant element of competition.
Update, Apr. 29. Read Vinnie Mirchandani's post on the same theme today: What Cloud vendors can learn from Southwest Airlines.
And, Dennis Howlett points out that open source CRM SaaS provider SugarCRM just announced a price cut yesterday. It's a long post, worth reading, as Dennis goes into the economic advantage that SugarCRM is enjoying. This very much confirms my point that we may very well be entering into a phase where some enterprise software providers can succeed with a low-cost-leader strategy. Read: Sugar CRM reduces prices across the board, looking for broad adoption.
Now Vinnie points out that SAP has announced a postponement of its maintenance price hike. Maybe SAP is finally seeing that raising maintenance fees is an untenable position, especially in this economy.
And be sure to read the comments on this post, as there is much good discussion.
Related posts
Attacking and defending software vendor maintenance fees
Infor's opportunity: value in maintenance and support
Open source ERP and CRM carry strong ROI
Computer Economics: The Business Case for Software as a Service
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