SAP and annual maintenance - a defence

If you are a regular reader of some of the popular IT industry bloggers, during the past year you will have noticed a backlash against SAP, caused in the main by its decision to increase its maintenance costs.

Two things have amazed me as the situation has unfolded.  Firstly, to my mind SAP hasn’t done a very good job of defending the validity of its decision and as a result its reputation is suffering.  Secondly, why have so few people placed those increased costs within the context of what SAP delivers for their enterprise?

Ah, but wait.  Most of the people castigating SAP don’t actually use the software.  Unlike the SAP users who they try to whip into a frenzy, their business model doesn’t rely on SAP at all!

In the past I’ve criticised SAP over issues like “business process rigidity forcing an increase in home-grown workarounds” and how “change can be difficult once the SAP concrete has been poured over a business”…but I’m batting for them this time.  (I, and my company, have no business dealings of any kind with SAP)

Until about ten years ago I used to fly around the world doing IT stuff for one of the oil majors and part of my role was vendor clarification for ERP systems.  Visiting new chemical manufacturing plants in places like Cilegon, Indonesia, then almost a one bar town on the edge of the jungle, was an eye-opening experience.  And eye-watering – there is wildlife there that bite your body in places you don’t know you have.

Anyway, it was through scoring the ERP vendors against project criteria that I formed my opinion that, while SAP can be large, clumsy and unwieldy, it is actually a great product that can add huge value across a range of sectors...the oil companies wouldn’t buy it unless it was worth at least tens of millions annually to each of them.

SAP maintenance has been raised from 17% to 22%, a rise which came into effect on 1st Jan 2009.  This was during a period where 85% of 203 SAP clients in a Forrester survey thought they weren’t getting the benefit of the existing 17% never mind 22%.

Is this a PR disaster for a good service?  Or is it an increase in cost for an ongoing poor or unnecessary service? If it is a PR disaster, then should SAP base it’s business model on the mistaken perceptions of customers and pundits?  Or is SAP simply capitalising on the fear and cost of changing to a competitor?

Reading the posts of regular SAP critics like Dennis Howlett, Vinnie Merchandani, Ray Wang, and many others, there are seven key themes which just keep being regurgitated:

1) Why a raise, and why to 22%?

Oracle and other competitors were already charging 22%.  SAP isn’t just offering the same support at a higher price, it has increased the level of support. SAP gives 24/7 end-to-end support unlike most other vendors.  Although we can question the merits of SAP’s move towards SOA, the integration of SAP with other systems is becoming tighter and tighter.  And with that comes more complex support requirements.

2) We've just not seen the functionality gaps decrease and we’ve been asking for “xyz” to be added for the past 4 years.

This is a well worn argument.  SAP has a development plan and it sticks to it.  This will include some of the features requested by users - but usually software vendors only do this when it is in line with the strategic direction for the product.

3) We've not had value - the total support interactions divided by the cost of support makes SAP call off too expensive.

OK, but what if only a single call to SAP saved your organisation millions?  Would it be worth it then?  We’ve got to see the support and maintenance as an insurance policy too.  Quantify the loss to the business should something go wrong and place support in that context.  SAP covers sufficient areas of the business/supply chain that if support is needed the consequences of not swiftly receiving first class support can equally quickly affect a business financially and operationally, with knock on effects to business reputation and sales.

4) SAPs cost base for support has decreased with the advent of Off-shoring, Outsourcing, Knowledge Bases, Community Support, Regional User Group support etc., so why doesn’t the price of maintenance fall?

We can take the same argument about any product.  Should we really look at the cost of the component parts of an item on sale and add, say, a 10% margin and only be willing to pay that price?  I think not.  We all like to feel we are getting a bargain and not being ripped off, but companies do have to earn a living and reinvest for the future.  After all, making money is what your business, and my business, is all about.  SAP is not a charity.

5) Established companies use less support than new adopters so why doesn’t the price of maintenance decrease over time?

Because of the way the sale was structured in the first place.  Any ‘traditional’ software sale is based around an upfront payment and regular support payments.  If you made an increase in support calls over the first few years and fewer towards the back end of the contract then sure, slap yourself on the back and consider you had the upper hand at the start.  Perhaps things just average out over the length of a contract.

6) Other parts of the world seem to always be phoning for support and the profile of support requirements changes in different cultures, but there is a one price fits all mentality. Doesn’t that mean I’m subsidising another part of the world?

No.  Just ensure you get your own value for money.  You are not subsidising other cultures, you are allowing SAP to provide support for your organisation and you are funding the future of the product which is making your company money.

7) We’ve already bought the big ticket item and spent millions.  The maintenance cost is way too high.

I think you should try to figure out if you are taking an aggressive stance for negotiating the next contract renewal, or if this was actually how you perceived the service to be.  If it is perception, can I suggest you try to assess the value SAP contributes to your business.  If it isn’t just a perception issue or you find SAP isn’t contributing then you should definitely change your vendor.  

Equating the contribution that any IT makes to the business is very difficult to establish, so it’s no wonder that people don’t understand how to value the service SAP offers in financial terms in order to see if they are getting value for money.

In a previous blog, “Understand Value to Enable Communication”, I mentioned that a difficult problem to crack is how to value IT and quantify how this spend contributes to business performance.  I quoted figures from some research that made for interesting reading:

Micro Focus research, carried out in companies with revenues from $100m up to over $1bn, shows that less than half of all CIOs & CFOs (48%) ever try to quantify the financial value of their IT assets. Only 37% of CIOs have tried, compared to 60% of Finance Heads. Less than a third of all respondents (29%) from both groups, ever try to quantify the contribution all their IT assets make to the business' performance.

So because it has traditionally been difficult to assess the contribution IT makes to the business, it is easy to understand why the aforementioned 85% of those surveyed SAP clients thought they weren’t getting the benefit of the existing maintenance and support contract levied at 17%.  In the main it is just their gut feeling.

There are natural, sensible and logical questions we should consider at this point.

How can we understand and value the contribution any part of our IT infrastructure (hardware or software) makes to the business?  How can we see if we are getting value for money out of our contracts?  How can we show the business in terms they understand (and that’s financial terms) why we should be paying for these contracts?

I’ll be blogging with my take on the answers to these and other questions during the next few weeks, but a short answer is that we have to understand precisely how data flows through the business.

Despite its faults, and there are plenty of blogs which highlight them, SAP's software can and does, give huge value to thousands of businesses across many business sectors. 

The notion that these clients could get greater business benefit by changing to a competitor with lower maintenance fees is something other vendors will try to capitalise on, especially as SAP doesn’t seem to be doing a particularly good job of defending itself at least in public.

The sheer scale of the implementations of SAP within many multinationals give them a size and reach which perhaps gives the impression that they are complacent and aren’t too concerned about their client base.  I don't know of many large software companies who never leave themselves open to criticism, and SAP certainly has its critics.



What I would like to see, however, is that criticism made from a business standpoint.  And that can only take place when it is set fairly and squarely within a business context, don't you think?

We all love lower prices but sometimes we need to make the distinction between cost, value and worth.

Next blog will be about how, if you understand precisely how data flows, you can connect silos, create clarity and minimise risk.  If you would like to subscribe you’ll find the links on the right of the blog.

Comments

[vinnie mirchandani]

Paul appreciate your comments here and on my blog

While sw vendors should commend you for trying, the reality is their formal SEC and other filings clearly show only 10 to 12% of revenues in R&D - out of which only a fraction goes into new product development and 30, 40, 50% goes towards SG&A and most of the rest towards to impress investors. Unless they say they are misstating their financial statements it is there for everyone to see.

as I like to say if the Red Cross only contributed 5-10% towards actual charity, there would be all kinds of protests and Congressional and other government inquiries, but we have let sw vendors get away with it...

[Paul Wallis]

Vinnie,

Thanks for the comment back, but I think we’re in danger of looking too deeply into the spend and ROI within the software vendor rather than the spend and ROI within the customer.

Surely, it’s up to vendors how they spend their money, it’s up to us to ensure we get value for our money. It’s vendor shareholders, investors, auditors and governments that will hold the directors accountable - not us.

If I buy a fleet of vans and ask the manufacturer to maintain them, it’s up to them to maintain the vans so my business benefits and when the contract is up for renewal I’ll look to see if I can win even more benefit. That’s human nature.

But it’s not up to me to say how they can spend the money I give them. If the vans are saving me more than I’m paying out then it is bringing a positive result to my business.

I was once told that a good accountant would always save me more than he charged. I think the same about software - we shouldn’t look at the costs in isolation, but try to see and value them in the context of business contribution.

[vinnie mirchandani]

Paul, of course vendors spend as their boards and managements decide...that's part of the flaw in tech spend where even the BP's and GE's have less than 0.5% share of vendor revenues. But as groups of consumers they should be able to influence . The reality is only 5% is going into new product R&D. Imagine a company where a CIO was only delivering that little value. Business Execs would have him fired in a heart beat. Just because software vendors are more locked in does not mean we have to just sit back and accept the low payback for the dollar.

From a personal perspective, I have always been a buy versus build bigot. At WwC, at Gartner I built my career around packaged software. It is jarring that building is now in many cases better value than buying - why because packaged sw vendors cost so much to implement, take so much effort to upgrade, deliver little for the maintenance dollar. They have killed the "golden goose"

[Paul Wallis]

In advance of their Sapphire09 annual conference next month, SAP has modified their maintenance pricing program and will use KPIs to benchmark the new Enterprise Support offering.

Obviously, announcing this will save some blushes at the conference, but for me the interesting thing is how they are conducting the benchmarking.

The are using the KPIs to “measure and verify the ongoing value of SAP Enterprise Support” and “This effort will help customers by providing a transparent mechanism to link their support investment to the value delivered.”

The KPIs are aggregated into 4 categories :Business Continuity, Business Process Improvement, Protection of Investment and Total Cost of Operations.

I finished the blog above by saying:

"What I would like to see, however, is that criticism made from a business standpoint. And that can only take place when it is set fairly and squarely within a business context, don't you think?

We all love lower prices but sometimes we need to make the distinction between cost, value and worth."

What SAP is doing by using these KPIs is just that, placing the support within a business context and showing the value, thus showing the worth and justifying the cost of the increase.

[vinnie mirchandani]

Paul, as I asked in my blog what if the KPIs show that even the 17% - forget SAP's desire to increase to 22% - is over priced? It will be for a decent segment of the customer base.

In any large set of customers you have a bell curve. There are plenty of customers who are happy on 4.X - would just want bug fixes, regulatory updates and may be a few hours of support a year. On the other extreme there are some customers who want the new functionality in 7...charge the former single digit maitnenance, charge the latter 22%

My issue is a single rate which does not vary each year. Let it "float" with customer needs and SAP's delivery intensity...

[Paul Wallis]

Vinnie,

My two central points in these discussions have been:

1. SAP haven’t made a good job of defending themselves and
2. People are not putting maintenance costs in any business context.

Now SAP has come back with it’s SUGEN KPI offering and engaging the user community - which I’m pleased to see happening as it addresses both points.

Some companies with a very expensive upfront license cost may well find themselves on a lower percentage than a company with a smaller installation cost. Normalised out, I guess where they fit on the bell curve will depend on how well they can negotiate ... and rather than everyone knowing where they are with a fixed percentage it will be down to individual bargaining again.