There has been an escalation in talk, chatter and arguing during the past two years about software vendors and the traditional "license+maintenance" business models that they have relied on for decades. As I have written previously, the SaaS model and its lack of upfront licenses and ongoing maintenance fees, as well as its much lower "lock-in barrier" (the ability for customers to leave) brought a refreshing and simple model to customers. Basically it has established for the customer: "Pay us monthly at a set user/month price, that can be adapted at intervals depending on your number of users, and at the end of the day, if you don't think we are doing a good job or delivering a good value, then simply leave." Of course, leaving a SaaS solution for another is not without its pain and expense, but moving from Salesforce.com to Microsoft CRM Online is in an entirely different cost stratosphere than implementing on-premise Siebel CRM or SAP CRM!
So SaaS has brought up new questions for customers... questions we now hear everyday (and please note “traditional vendors”: questions that are not going away!). The central questions have been: What value am I really getting for this 17, 18, 20 or 22% maintenance fees? And do I really want to get locked into this? Lawson’s CEO took it one step further last year, comparing the traditional license/maintenance model to cocaine addiction! He then went on to say that the SaaS model would collapse in 2 years (which would be next August).
Here are some other curious responses that seem to be motivated by a similar mix of perceived "Wall Street pressure," fear and complacency:
On its June 2008 earnings call, the always quotable Larry Ellison posed this answer to the question of why Oracle wasn’t a bigger player in the on-demand market?
"We've been in this business 10 years, and we've only now turned a profit……the last thing we want to do is have a very large business that's not profitable and drags our margins down."
In response, during Oracle’s last quarterly results call, the company basically made enormous margin gains, despite a poor economy, based on maintenance (license updates and product support):
“Software license updates and product support revenues grew 11%, to $3.1 billion, for
the quarter when adjusted for the change in the US dollar since last year,” said Oracle Executive
Vice President and CFO, Jeff Epstein. “This growth, coupled with our disciplined expense
management, was key to our ability to generate a record $8.5 billion in free cash flow over the
last twelve months.”
A very similar message came from SAP’s last quarterly results:
"Despite the challenging economic conditions, the strength of our business model combined with a strong cost discipline has proven itself once again by enabling us to report another quarter of strong operating margin growth," said Chief Financial Officer Werner Brandt.
Again on the topic of SaaS; last year, SAP CEO (then co-CEO), Leo Apotheker, had this to say in regards to Business ByDesign not going GA:
"We would be hurting our margin, and hurting our stock.”
And according to a purportedly internal memo described in SAPInside, SAP is in fact aiming for a 35% margin from its current 24-25% level today.
I believe these statements only reinforce the idea that the long-term benefits (both for the vendor and customer) are being overshadowed by some very short-term gains.
Don't get me wrong, I am all for SAP, Oracle, Microsoft, Lawson and other vendors to become more profitable companies, but the question that I would like to pose: are higher maintenance fees, which in turn should bring higher margins and better stock performance (I would argue, only in the short-term) mutually exclusive from customer value and satisfaction (ensuring a vendor's long-term viability)?
Granted, it’s a tough question. Essentially I am asking where should a software vendor draw the line between shareholders and customers. Right now, I believe that most customers feel like shareholders are the priority, and generally, I would agree. But I don’t believe they need to be mutually exclusive, and here’s why….
It is absolutely true that raising maintenance fee percentages across all customers will boost margins. We all know this… even if vendors want to gussy-up these higher rates with a bunch of “added value” offering, services and marketing/PR fodder. Many of its customers don’t see the added value, they see higher rates during a difficult economy… certainly not a message to secure a long-term relationship! To be fair, there are many customers who have a multitude of integrations into third-party and homegrown systems, modifications to application code, etc. Such customers should pay more to maintain their systems, and would most likely value from some of the higher level maintenance offerings from the leading vendors.
On the other hand, there are also a large portion of customers who are just doing basic legal and regulatory updates. They are using the applications in pure vanilla code, and are not overloading vendors help desks… these customers certainly deserve to pay less! The fundamental flaw of the "license+maintenance" fee model is that the same maintenance percentage (generally…) is applied across an uneven playing field, not taking into consideration system complexity. To make a comparison to SaaS yet again, everyone is running off of the same code. Yes, there is a lot of integration going on, but this is ad-hoc and offered outside of the subscription provided by and maintained by the ISV/Services partners.
Many analysts would agree with me that there is a good chance that the traditional “license+maintenance” model as it exists today will go the way of the dinosaur over the next 10-15 years (some peers peg it sooner, but I wouldn’t be so quick). So tell me exactly what kind of long-term shareholder value this business model is offering? Yes, vendors can hit-up customers for a few more years with higher maintenance fees, but these seem customers will only be looking over the fence to the ever maturing SaaS model and the freedom and value that it brings.
But, like any technology and delivery shift, there is always a chance for an evolution. Here is what I propose, which I believe makes sense for vendors, shareholders and customers alike, and I am shocked that none of the “traditional” vendors have taken this opportunity yet.
Why not a tiered maintenance strategy?
Account managers and customers themselves today can rather easily run a diagnostic test of their ERP systems (given the plethora of tools available today due to the upgrades market) to understand what is their system complexity (e.g. number of modifications, instances, integrations and how much core code is being run), and in a standardized way (agreed between the vendor and major user groups) to create a scoring for each customer. Additional KPI’s can come from the vendor, in the form of the amount of helpdesk tickets and escalations that have occurred over the past year. In fact, the major vendors can put some of their own BI software to work in order to have a better view of customer profitability, in order to help develop this scoring and ensure a fair profit.
Then, things can become quite simple by using a 1 to 100 scoring (1 being the lowest complexity, 100, the highest).
If your company is:
- between 1-25, you pay 15% maintenance
- 25-50, 17%
- 50-75, 19%... and onward
These ranges and scores are obviously not technical, I am only giving an example, but if done properly, it should make everyone happy.
"Lower complexity" customers pay LESS than today in maintenance fees, while the vendor can assure they are still making a reasonable profit on these customers.
"Higher complexity" customers pay MORE than today in maintenance fees. While of course many may “whine” at first, but from the vendors perspective, this customer can either stay and be a profitable customer, or go to another vendor, where they may very well become an unprofitable or low-profit customer for someone else! Shareholders would like that too!
In the end, the vendor, customer and shareholder should all be happy under such a model… these really are not mutually exclusive forces after all! Some may argue that Wall Street may dump the stock anyway for such a shift and disruption... but I believe that is related to the street's very short-term thinking. Short-term thinking is what got the whole economy in a mess to begin with, so why stick to this old, dated logic? So my final question is, who has the guts to do this?
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3 comments:
The reason companies don't have tiered maintenance pricing is that a huge number of companies with mature installations would drop themselves down to the lowest tier as fast as they ever-loving could.
David Dobrin
The point David of having tiered maintenance as I have described, is to do it in a standardized way, based on a diagnostic.
So it wouldn't be up to the customer to decide where they think they should be, it would be based on standardized KPI's.
Based on this, if a customer wanted to move down in maintenance "as fast as they ever-loving could," that would be fine, because they would need to standardize and prove it in a diagnostic... then they pay less and remain highly profitable for the vendor.
That's an interesting idea, Peter - it makes sense to put the support cost burden on those who use more support services. You could take that to a more extreme pay-as-you-go model, too. Pay for each support incident, for each new release, etc.
I always advise my customers that there is a cost to complexity, that keeping business and system processes simpler means a lower cost of ownership.
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