I recently read an interesting InformationWeek article titled “Global CIO: Will Oracle or SAP Blink First on 22% Maintenance Fees?”. Having spent 16 of the last 18 years implementing on-premise, perpetual licensed ERP solutions, I found the topic compelling. It was compelling because the author is trying to determine whether Oracle or SAP will be more Wall Street focused or customer focused as it relates to their maintenance and support structure. The IT marketplace is more competitive now and customers are more savvy in looking for ways to cut costs. The author suggests that there are three possible scenarios on how this may play out.
- “SAP and Oracle stick to their guns.” This scenario is where they change nothing and customer satisfaction decreases.
- “One of them seizes the initiative and flips the model.” This scenario assumes that one chooses to change their model to be more progressive and win the customer satisfaction game.
- “Outsiders crash the party, but Oracle and SAP get the hangovers.” This scenario is where another company offers support for Oracle and SAP at a lower price.
But the real question is whether the on-premise, perpetual software license model even makes sense anymore in this cost conscious environment. The maintenance fees are primarily for bug fixes, enhancements and upgrades. However, most customers do not take advantage of the enhancements (let alone the majority of the functionality delivered at time of sale) because they do not stay on current release of product and the cost of upgrading is way too high. So, I think there is a fourth scenario to consider which is the SaaS model many software companies are adopting.
The SaaS model delivers a lower cost of entry, as well as lower costs for IT staff and hardware infrastructure (assuming on-demand hosting). Every SaaS company is different, but on average the subscription term is 3 years, thereby forcing the software company to provide a compelling value proposition for the customer in order to have the customer renew their subscription. This should drive product innovation, high levels of customer support, and engagement from the software vendor to help the customer assure end user adoption. All of which are good for the customer. In addition, the software vendor has a significant incentive to provide easy upgrades at low or no cost particularly if the customer is hosted. If the customer is hosted, then typically the vendor keeps the customer current on the new version of software for no additional charge, which allows the customer to take advantage of new product features and functions thereby deepening the use of the product at the customer site and hopefully ensuring a subscription renewal. The SaaS model should drive customer satisfaction by its focus on ensuring subscription renewals.
While every model has it’s pros and cons, I think that at this point in time the focus on the customer that the SaaS model forces is something that should be considered by companies when evaluating their software choices. I suppose that is why even the big guys, Oracle and SAP, are offering some of their products in a SaaS model. It will be interesting to sit back and watch how it all plays out.
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Tags: Enterprise resource planning (ERP), On-demand (SaaS), Supply chain management software
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This is an interesting question.
If SAP or Oracle does blink on the maintenance I think it will be a PR move, not a business necessity. You’ve just spent four years and $80 million putting in SAP / Oracle. And now the maintenance is high. What are you going to do? Switch to another ERP? Not likely.
And you are right that people do not get the benefits of maintenance because it is too difficult and expensive to upgrade. But the reason people get maintenance today is not for the upgrade. It is because all of the C boys (and girls) have a lawyer frame of mind. No body can afford to put themselves in a position where they didn’t ‘do everything possible to ensure the continued success of the product’. So what happens if Microsoft or somebody comes along with an operating system that the old SAP product won’t run under and you have to upgrade? If you have dropped maintenance you are screwed. Nobody wants to take a chance on that as it is a career ender. So people won’t drop maintenance no matter what.
I don’t think somebody will come along and take over the maintenance task. At least not easily they won’t. Talk about making instant enemies of both SAP and Oracle. They have too much invested in this to let somebody else control the show.
SaaS does seem an interesting alternative but I think a lot of people will distrust it (although we as a society are getting very used to the idea of renting, not owning stuff). And, if you tie SaaS into Cloud Computing then it’s even worse. I know a lot of CIO’s who would never put the security and reliability of their ERP in the hands of the web. But many, particularly at smaller companies will see this as a solid alternative. No doubt about it. I just don’t know if it threatens S/O.
What it comes down to is this. The basic logic of ERP is mature. It is not going to change. And every package that does ERP has the same common core. Maybe it’s already too late, but what we need is a base ERP package that has a solid file structure behind it and provides all of the basic functionality you would need. And this core will be like a black box. It will never be opened, never be touched, never be upgraded. And it will be cheap because there is no development or update costs.
Surrounding this will be a set of completely integrated packages that perform specific functions and each software vendor could have their own take on this. There would be no integration required to attach one of these and what you would end up with is a cafeteria style ERP; the base core that everyone uses plus whatever additional packages you really feel you need (or you could build some of the packages yourself.
The only problem with this scenario is that it will never happen. It’s too logical to ever catch on. The closest we would get (unless IBM does it) is a consortium of retailers or somebody to start building a common system and so scare S/O into backing down. But it would never be completed because no agreement could ever be reached over what the core should contain.
So the question remains, of the people who don’t go to SaaS (and eventually SaaS will be very expensive too), how expensive does it have to get for the people who voted for SAP or Oracle to say enough, and retrench back to a smaller, cheaper ERP system.