Maintenance is comprised of regular upgrades and fixes to the software while support is the ability to get help for questions or problems. On-going maintenance and support contracts for applications cost an organization a considerable amount of money year after year. Depending on your needs and the vendor, you buy maintenance and support separately or bundled together. Typically, software maintenance costs range 11 to 15 percent of the purchase price, and support cost is approximately 7 percent of the purchase price on an annual basis for a total of 18 to 22 percent per year with potential annual increases. Therefore, you are essentially paying the entire cost of the software every four to five years. For obvious reasons, this on-going revenue stream is very important to software vendors. This section outlines specific tactics for reducing the costs of vendor maintenance and support.
Annual Cost
It is well worth your time and effort to try to negotiate the annual maintenance and support costs as much as you are able. In theory, these costs are even more important than the software license fees, and they often go by without even a discussion or negotiation. Maintenance fees are based on your negotiated purchase price, not the list price of the software. Often, you will be able to reduce a 22 or 25 percent total maintenance and support fee down to 18 percent per year. Some vendors are more likely to negotiate than others but the major ERP vendors (Oracle, SAP, and Microsoft) often do not budge at all on maintenance costs.
Top Tip: Consider extending term of contract
"To get good pricing in vendor negotiations, consider extending the term of the deal from a 1-year to 3-year contract for possible pricing reductions."
—Randy Witt
Restaurant Technologies
Restaurant Technologies
For some vendors, maintenance revenue accounts for 50 percent of total revenue so this is a very important revenue stream from the vendor's perspective. Work with user groups to resist maintenance fee increases. Get guarantees from the vendor for the percent reinvested in product support and enhancements in future releases.
Negotiate the first year maintenance as part of the purchase agreement. Include a ramp-up option if you believe full implementation will take a significant amount of time. Only pay the percent on licenses you purchased or right-sized, not future quantities or amounts. You are also able to negotiate quarterly payments that more closely relate to how you consume the value rather than prepaid annual fees. This also provides more options and flexibility on when to stop maintenance costs and when they hit your budget. If it is possible, time the maintenance and support costs to be due at or near the go-live date, not prior to the implementation date as you typically have partners or qualified consultants involved through the implementation. However, this is only possible with a privately held vendor as public companies are subject to revenue recognition rules so it may take the form of an additional software discount for the amount waived. Other licenses purchased after the initial implementation would be subject to immediate maintenance and support fees prorated to the next quarter.
Know how you are using the software products and negotiate maintenance changes accordingly. As mentioned, know the type of users that you have and separate employees into groups so that they have only the software they are using rather than paying the same fee for all employees. Reduce the number of seats for which you pay maintenance to the precise number needed to receive value.
Beware of the statement that software maintenance can increase up to a set percent for a maximum per year. Make sure you have terms that limit the rate of maintenance fee increases each year, as well as provisions to stop paying maintenance and support fees without any penalty or fees. Do not link license transactions to maintenance transactions. You are often able to negotiate lower rates for longer-term contracts. Specify that they must publish any changes in rates 120 days prior to the contract change date.
If you consider dropping maintenance, get an agreement on the price at which you can subscribe later if you are able. At times, particularly in the first 12 months of a warranty period, you are able to negotiate so that the vendor supplies fixes at no charge even if you are off maintenance. However, after a certain period, the vendor integrates fixes in new releases rather than old software so this will not be beneficial over the long term. Verify that your software license is perpetual and does not terminate if maintenance is not renewed.
Consider renegotiating maintenance fees. Particularly in difficult economic times, application vendors rely on the steady stream of maintenance revenue. When faced with the prospect of losing a maintenance and support customer, a vendor might consider renegotiating the agreement altogether. Even the larger, more inflexible application vendors sometimes circumvent their own policies by having a customer terminate and then again license the software at a much lower price to reduce the on-going annual maintenance fees.
Support Options
One option for the support contract is to look at how much you have used support in the past and the value it has provided the organization. It is frightening to drop support as the vendor is your lifeline in the event of application problems. However, if the application has been fairly stable in the past, your business needs are relatively stable, and you have had the software for a number of years, consider dropping the support agreement and switching to a pay per hour or pay per incident model. This could result in significant immediate savings. However, it might be useful to negotiate and have in the contract an established price should you decide to go back on support in the future, although many vendors are reluctant to do this. You should also investigate the possibility of receiving support from a third party provider.
Top Tip: Negotiate support and maintenance contracts
"The first place to save is in maintenance contracts. I tell the vendors that I need 20% or they will lose the business. Negotiate flat increases if you re-up. If you don't ask, you don't get it. There are alternatives, and in some cases you may be OK dropping maintenance and going with time and materials support. We saved 60% by going with a third-party alternative for mainframe support and have a higher service level."
—Dave Brady
Starkey Laboratories
Starkey Laboratories
Support Service Level
Be sure to negotiate financial performance penalties if the vendor does not meet agreed upon and reasonable service levels. Specify standards for response and resolution of different categories of issues in a service level agreement. The tactics for support contracts apply not only to the initial support agreement purchase, but if you track support activity, you are able to leverage the information as a way to obtain relief on costs if the quality of support provided has been an issue.
In the strategy on reducing service levels, match the service level to the business needs and do not overbuy. Vendors typically have different levels of service offering different responses, escalation, access to resources, hours of support, etc. Work with the business to identify the level that meets the business needs given the various costs. Consider downgrading the support level. Many vendors offer multiple levels of support from which to choose. Re-evaluate whether you need premium (i.e., 24/7/365) support based on how stable the application runs and the consequences of unplanned downtime. Dropping to a less expensive support plan can save a company up to 20 percent of the annual expense.
Cost-Justify Upgrades
Do not blindly upgrade just because the software vendor is your strategic partner. Any application software upgrade is a major expense and business disruption. Implementing a new release takes 10 to 50 percent of the original implementation effort, depending upon the degree of change as well as the number of interfaces and customizations that you need to redo and test. Evaluate and justify any upgrade based on the individual costs and benefits just like any other project.
Continue to stay abreast of vendor changes in direction, and re-evaluate your upgrade options every three to five years. When considering upgrades, plan the timing after considering your budget and project bandwidth, the vendor's product strategy plans, the vendors installed base, and your specific need for the business functionality provided in new release. Try to steer away from orphaned (through acquisition or vendor strategy direction) or old products, or releases that are likely to receive smaller investments in the future for new features and releases.
Although you should cost-justify upgrades and occasionally validate the direction to stay with a vendor, it does not mean that you should not implement upgrades. Rather, make sure you understand and communicate the business value of each upgrade. If you go beyond skipping every other upgrade, you are likely to fall victim to the pay-it-now or pay-it-and-a-lot-more-later syndrome because the bigger the gap between the production version and the upgrade version, the more difficult the upgrade project. In addition, staying on an old version puts a company at risk due to a lack of support and technical expertise from the vendor.
No comments:
Post a Comment