Forward And Commentary
Software ownership costs continue to escalate as vendors accelerate their efforts to capture support and maintenance revenues. Some vendors have gone to the extreme to eliminate third-party options for their customers. This best practices report examines three strategies to free up unnecessary costs to fund innovation and new projects.
On average, IT budgets are down from 1-5 percent year-over-year, yet software support and maintenance costs continue to escalate ahead of inflation. Hence, continued pressure on IT budgets and a growing need for innovation projects have top business and technology leaders reexamining their software support and maintenance contracts for cost efficiencies.
Based on experience from over 1500 software contract negotiations, Constellation suggests three approaches to reduce the cost of software support and maintenance. Key strategies include third-party maintenance, shelfware reductions and unbundling maintenance contracts as part of every organization’s tech optimization strategy. Successful implementation can lead to savings from 10-25 percent of the IT budget, freeing up cash to fund innovation initiatives.
B. Research Findings – Why Every Organization Should Consider Third-Party Maintenance, Shelfware Reductions and Unbundling Maintenance Contracts
Most organizations suffocate from the high and hidden cost of support and maintenance. On average, Constellation’s surveys reveal global IT budgets trending down from 1-5 percent year-over-year since 2008. Consumerization of IT, rapidly changing business models, and aging infrastructure have exposed the high cost of software support and maintenance. Because most organizations allocate from 60-85 percent of their budget to keeping the lights on, very little of the budget is left to spend on new projects (see Figure 1).
Organizations can unlock millions by considering third-party maintenance (3PM), reducing shelfware, and keeping support and maintenance contracts unbundled. Each strategy on its own creates opportunities to drive cost savings. All three strategies combined, provide a roadmap for funding innovation.
- Third-party maintenance (3PM) delivers the most immediate cost savings and opportunity for innovation. Third-party maintenance describes support and maintenance offerings delivered by non-OEM providers. These vendors can provide a range of options from basic break/fix to bug fixes, performance optimization, tax and regulatory updates, and customization support. Keep in mind, 3PM does not provide access to upgrades and future versions of the OEM’s product. One big driver is the lower cost of delivery, as much as half the cost of the original vendor’s pricing. The report shows a survey of 268 respondents and why organizations choose 3PM and who the key vendors are.
- Reduction of shelfware remains a key pillar in legacy optimization strategies. Shelfware (i.e. purchased software, not deployed, but incurring annual maintenance fees) is one of the biggest drains on operational expenses for enterprises. The simple definition of shelfware is software you buy and don’t use. For example, an organization that buys 1000 licenses of Vendor X’s latest ERP software and uses 905 licenses, becomes the proud owner of 95 licenses not being utilized. That’s 95 licenses of shelfware because the user will pay support and maintenance on the license whether or not they use the software or not. The report details 4 successful and proven approaches.
- Unbundling maintenance contracts prevents future vendor mischief. About a decade back, vendors would offer support and maintenance as two separate line items on their contracts. Support would run about 5-10 percent of the license fee and so would maintenance. Keep in mind, average support and maintenance fees were under 15 percent back then. Unfortunately, many users have expressed a growing and concerning trend with support and maintenance contracts. Vendors concerns about support and maintenance contract retentions have led to new initiatives to consolidate contracts. At first glance, this may appear to be proactive and beneficial to customers, but the report details three rationales vendors provide and three strategies how to avoid bundling.
Figure 1. Visualizing the High Costs of Support And Maintenance
(Right-click to see full image)
The Bottom Line: Users Must Advocate for Third-Party Maintenance Rights Across the Technology Stack
Vendors continue to conspire to remove third-party maintenance as an option for their customers. What’s extremely disturbing is how vendors are working hard to prevent customers from having third-party maintenance options. The notion of perpetual software license rights should include the right to self-support software or engage in a third party to provide tax, regulatory, and additional updates. As many vendors try to close up these loopholes, customers are left in a no-man’s land position of being forced into de-facto maintenance contracts with only the vendor.
End users need to band together and collectively demand clear rights to third-party support options. Based on survey data, most already believe or feel that 3PM should be a right (see Figure 5.) Otherwise, users will face a situation similar to automakers forcing drivers to only go to them for maintenance. If some of the industry’s largest systems integrators actively entered the third-party support market, it would effectively disrupt the balance of power and put more money into the hands of the end-users and the system integrators.
C. Report Links
Learn the secrets to saving millions. Find out how to win against any software vendor including IBM, Microsoft, Oracle, SAP, Infor, Lawson, Epicor, Exact, Salesforce.com, etc.. Buy the full research report on the Constellation Research website.
Need help with your software contract? Contact us throughout the vendor selection process. We can help with a quick contract review or even the complete vendor selection. We provide fix-fee and gain sharing arrangements.
How can we assist?
Buyers, do you need help with your apps strategy and vendor management strategy? Trying to figure out how to infuse innovation into your tech strategy? Ready to put the expertise of over 1200 software contract negotiations to work? Give us a call!
Please let us know if you need help with your next gen apps strategy efforts. Here’s how we can help:
- Providing contract negotiations and software licensing support
- Evaluating SaaS/Cloud options
- Assessing apps strategies (e.g. single instance, two-tier ERP, upgrade, custom dev, packaged deployments”
- Designing innovation into end to end processes and systems
- Comparing SaaS/Cloud integration strategies
- Assisting with legacy ERP migration
- Engaging in an SCRM strategy
- Planning upgrades and migration
- Performing vendor selection
Related Constellation Research
Scavo, Frank & Wang, R. “Big Idea: Constellation’s Business Value Framework.” Constellation Research, Inc. January 31, 2012.
Related Resources And Links
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(Cross-posted @ A Software Insider's Point of View)