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SAP is taking a one-size-fits-all approach to product maintenance, in which customers of all sizes will be switched to an Enterprise Support program regardless of their size or IT budgets.
SAP will start transitioning current customers into Enterprise Support this month at no additional cost, but it will start phasing in pricing for this level of service at the rate of 8 percent per year over the next four years starting in 2009, until it reaches the standard cost of 22 percent of product license fees.
Current customers will pay 18.4 percent of license fees in 2009, 19.8 percent in 2010, 21.4 percent in 2011 and 22 percent in 2012, said Mark Cordrey, vice president of SAP Active Global Support.
Analysts suggested that SAP is making this move because it needs to boost revenue in the face of profit margin pressure from archrival Oracle and because of the scaled-back launch of Business ByDesign.
Existing customers previously had the option of selecting Standard or Premium support levels. However, the company announced early in February 2008 that it would market the Enterprise Support program to new customers. The company reported that more than 350 customers have signed on to Enterprise Support. The next move is to transition all existing customers to this level of service.
While 22 percent is fairly typical of what enterprise software companies charge for support and maintenance, there is a concern that this will be more than some small or midsize companies are willing to pay. This move could spur some companies to switch to SAAS (software as a service) applications if they are convinced it will save them money.
It’s a valid question whether “overall is the industry served by [charging] an average 22 percent maintenance cost for enterprise software,” said Josh Greenbaum, principal analyst with Enterprise Applications Consulting in Berkeley, Calif.
For smaller companies that can only afford basic levels of support, requiring them to enroll in a program “for a 22 percent maintenance burden is not cost-effective,” Greenbaum said.
“These are companies that more and more will be looking at on-demand options for that very reason,” he said. But then on-demand software users will have to consider whether SAAS remains cost-effective when it is used five years or more, he said.
However, Greenbaum said he believed that the move to a single Enterprise Support program “in general should be a good thing for SAP customers” since many of them are in the process of upgrading their existing systems and buying new SAP products that are delivering new technology.
“I think it’s clear that these strategies are often potentially more beneficial to the vendor than they are to the user community and the onus is going to be on SAP to show these customers that haven’t been in Enterprise Support that it’s advantageous to them,” said Greenbaum.
Ray Wang, a Forrester Research analyst, said SAP’s move is driven by the increasing complexity of customer’s IT and application infrastructure and by a pressing need to bolster revenue.
One of those pressing reasons is what Wang said was the “failure of the business ByDesign launch.” The “inability to scale BBD in a cost-effective manner and delays in moving BBD onto the new NetWeaver 7.1 platform have led to a major loss in potential revenue growth. Most notably, SAP will not reach the 1,000 customer target by 2008 as promised in its Q4 2007 earnings call.”
Wang also took note of Oracle CEO Larry Ellison’s statement that his company was pursuing “an overall goal of reaching 50 percent margin and 20 percent earnings annual growth. The effect: SAP has had to react with an equivalent profit margin growth strategy. Combined with the recent payout to i2 and the pending TomorrowNow legal issues, SAP has been left little choice but to respond with a maintenance fee increase to achieve double-digit earnings growth.”
In late June, SAP agreed to pay supply chain management software maker i2 $83.3 million to settle a patent infringement lawsuit. Oracle is also suing SAP, claiming that its TomorrowNow subsidiary stole copyrighted customer support documentation and code from an Oracle Web site.
SAP contends that the cost of Enterprise Support is below the average maintenance fees charged by other software companies. Cordrey said that the phased-in price increases will help make Enterprise Support affordable for customers of all sizes.
Enterprise support provides a 24/7 service-level agreement, continuous quality checks, produce support advisories, and advanced support for implementing ERP application enhancements and support packages.
SAP officials said they decided to move existing customers to the Enterprise Support program only after substantial discussions with SAP user groups. SAP crafted the transition plan based on the results of those talks, Cordrey said.