Seeking value in software support

What exactly does a 22% annual software maintenance contract buy? Jyoti Banerjee considers the value components of software support, and talks to TomorrowNow, a controversial company that is changing the rules.

A while ago I did a study for a business applications software vendor that was concerned about falling renewal rates among its maintenance customers. The problem was not that the software was poor – in fact, it was too good, and customers were taking a view that they did not want to pay for ongoing maintenance when they needed very little support across the year.

The study did find that customers who felt they had an ongoing relationship with the vendor were six times more likely to renew their maintenance contract than those who received no communications from the vendor through the year. (Really, if you are a software vendor, and not delivering a good programme of communications to your existing customers, you are throwing away good money).

But the gnawing doubt remained. Why should the delivery of a monthly HTML newsletter make that much difference that a software customer would be willing to pay 22% of their original software price on an annually recurring basis?

Recently, the whole software maintenance thing started to make a lot more sense to me. The person who helped me understand it was Andrew Nelson, ceo of that flamboyantly named company, TomorrowNow. A former Accenture consultant concentrating on PeopleSoft implementations, Nelson founded TomorrowNow in 1998 as a third party provider of software maintenance for enterprise applications, but the company has really blossomed since its acquisition by SAP in 2005.

To understand the buzz on third party maintenance, ask yourself this: what does your 22% annual maintenance contract buy you? It gets you three things: bug fixes, compliance with regulatory changes, and pre-funding of the next release of the software. If your software needs regular fixing (why are you using it, I ask you!), and your government keeps moving the goalposts on regulation issues, and you are desperate to move to the next version of your vendor’s software, then an annual maintenance fee of 22% is good value.

Dealing with regulatory fixes
I don’t think anybody can avoid dealing with changing regulation – especially if you live in Europe, where the European Commission employs armies of law-makers whose lives would clearly be very unfulfilled if they were not able to double our regulatory burden every six months or so. So you definitely need to tick the legislative compliance box.

Software support
What about patches and bug fixes? Here, things get rather more interesting. Some software users have realised that the quality of support is inversely related to how much time is left on the maintenance contract – the closer to contract renewal time, the better the support suddenly gets. One way to deal with this situation is to negotiate an out clause or a fee reduction the moment the software vendor fails to meet an agreed service level.

There was a time when it was safe to make the assumption that packaged software came with a host of bugs that needed regular weeding. Today’s enterprise applications are rather better than that. If they were not, you would not even buy them. If you are an experienced user of the software, you also have a related issue to deal with: when you do have a problem, it is probably pretty serious, and you want to speak to a really experienced support person, rather than someone who is still in training.

So it is a half tick in the box regarding support.

Future releases
And then you have the issue of pre-funding the next release of the software. Many companies are patently happy with the software version they run, and feel no need to change. Even if they are not happy, the cost of an upgrade is small in software license terms, compared to the real cost of implementing new software, building new business processes, and training of staff on the new implementation. If version 7.5 works, do you really need v8 or v9? And should you be paying for what you don’t need?

TomorrowNow’s Nelson points to a change in the software market rulebook that also makes users question the value of support: “Users bought into a contract with their software supplier, but a company like Oracle has broken the contract between the buyer and the vendor.” Through its acquisition of ERP vendors such as PeopleSoft, JD Edwards and Siebel, Oracle has made “decent technology products into legacy products,” claims Nelson. “It is not offering innovation on the products that the customers bought, but is requiring them to move to version 1.0 of a new product set from a company they did not choose.” Plus, users get to pay the same 22% that was agreed under the old, now broken, contract.

If you, as the user, want the new software, then by all means please tick the box on pre-funding the next release. But if you don’t want it, then the box remains a blank.

TomorrowNow’s proposition to the customer is straightforward – pay half of whatever you pay your existing software supplier for support. For that you get legislative compliance (especially important in all matters payroll), plus you get patches and bug fixes from experienced support staff. That’s it. No more, no less. And no more forced upgrades.

The company’s clients rate the service as in the top 10% of all IT customer satisfaction benchmarks, according to a Taylor Nelson Sofres report. Andrew Nelson reports that 98% of the company’s customers are reference-grade.

Although Oracle’s client list may be ripe for picking when it comes to support contracts, TomorrowNow has realised that users of other applications such as Baan would also see the value of such a proposition.

It goes without saying that SAP can see the value of the proposition; otherwise it would not have bought the company. SAP’s Safe Passage programme is designed to help dissatisfied Oracle customers move to SAP: TomorrowNow gets a lot of business by jointly working with SAP’s sales force in discussing migration issues with Oracle’s customers.

Unsurprisingly, you can’t get half-price support for SAP software at TomorrowNow. Unsurprising, and disappointing for the many SAP customers that I have come across that don’t want to be paying for future upgrades they don’t want.

Larry Ellison is clearly not happy with TomorrowNow's activities - in March 2007 Oracle sued SAP, as TomorrowNow's parent, for "corporate theft on a grand scale" of software products and other materials that Oracle created to service its own support customers. Would it be long before the Larry Ellison – Chuck Philips brains trust at Oracle creates a TomorrowNow mirror for SAP customers? They could call it Yesterday Once More.

Comments

[Michael Panosh]

Well that was a wonderful PR piece for TomorrowNow, so as an ERP vendor who is not associated with SAP or Oracle I felt that it might be worthwhile to counterpoint Jyoti's comments.

First up, I totally agree with the legislative requirement comment -- paying maintenance is your insurance policy against unforseen (but pretty much expected) changes to things like taxation, statutory reporting and industry mandates such as Directive 2002/96/EC on Waste Electrical and Electronic Equipment (WEEE).

But I do wonder whether that 22% figure is generally accurate for mid-market ERP purchases. It is more typical for a mid-market vendor to charge 15% to 20% than 22%.

Also, many vendors will split out the maintenance from the support - the insurance from the help desk if you like - so that you get some choice in what you want to pay for.

Then there is the fact that most mid-market ERP purchases are not JD Edwards, PeopleSoft of Siebel so the 'safe harbour' of TomorrowNow is essentially an irrelevant concept (and since TomorrowNow creates “customized ongoing tax and regulatory updates” there is a clear lock into them as a service provider because it’s hard to have other service providers pick up customised code, especially down the track).

But most importantly, the TomorrowNow model does not offer that overall trusted advisor position that most mid-market ERP vendors (and their partners) achieve in your business. They clearly do not provide networking, server hardware or client desktop support so they are not the ‘one throat to choke’ support organisation that is preferred in the mid-market space.

Notwithstanding all that, for JD Edwards, PeopleSoft and Siebel customers TomorrowNow is worth a look…

…but for the rest of us, consider maintenance on the basis of:

* Insurance against legislative change - obviously a big tick no matter who the vendor is;

* Insurance against bugs - they do happen and you need some way to get over them quickly and cost effectively;

* Access to test and disaster recovery licenses – some maintenance contracts provide the rights to build up a test and/or DR machine, which is critical part of your business continuity planning;

* Access to help desk staff - and if you find them to be ‘someone who is still in training’ escalate the issue as the vendor CEO will be very interested in that feedback;

* Whether you think your company will grow in size - if you plan to get bigger organically or via acquisition then you are more likely to need the business and process innovations that will come through the upgrades available from the maintenance contract;

* Whether you think you will spread geographically - if you plan to spread your wings then you are more likely to need the language, country specific aspects and legislative updates that maintenance provides;

* Whether your business insurance or compliance regime requires you to have access to updated software - in some cases you may be compelled to at least show you have access to current releases to prove you can reasonably manage business risk, even if you don’t utilise it.

And by the way, if you want a TomorrowNow-style relationship with your vendor talk to them as they are likely to structure a deal to deliver it. Only want to pay for “Customized ongoing tax and regulatory updates and Fixes for serious issues”? Then put that on the table and negotiate the outcome.

At the end of the day having a maintenance contract - of whatever type - gives you leverage over your supplier. Any relationship is a two way street of course, but if you don’t take out maintenance or support, then you are essentially a non-customer to the vendor.