Being an analyst and observer of the enterprise and B2B supply chain technology market for many years, I have observed that certain software companies often develop their own personalities and mannerisms. Some are market innovators, some are very in-tune to customer pain points and some just do not get it when it comes to the needs of you, the customer. In the latter category, unfortunately, is SAP, which continues to deploy product strategies that are sometimes good for SAP, perhaps not so for its universe of customers.
This week, the blogosphere of enterprise software bloggers are abuzz with SAP’s latest indications of a price increase in standard maintenance services. The enterprise software provider has intentions to raise its standard support maintenance fee from 18 percent to 19 percent, effective July 15, 2013.
SAP installed base customers might recall that the standard support option was reintroduced in January of 2010 after the global customer base rebelled against SAP’s introduction of more expensive annual software agreements. Many speculate that the customer rebellion was the downfall of former CEO Leo Apoteker. Once again, SAP comes to the well demanding an increase in support fees.
In essence, the latest announced hike amounts to an effective 5.5 percent increase. Customers however, have the option to either renew an existing, or place a new standard maintenance contract before July 15 to avoid the price increase. While SAP’s probable intent is to allow customers a six month window to make a decision on annual maintenance, the blowback is just beginning. Keep in mind that annual maintenance often provides the most profitable margins for enterprise software providers and in-turn, either fuel other activities or add to free cash to make acquisitions.
The timing of this price increase announcement once again comes in challenging budget times, given the ongoing economic conditions across the Eurozone and other countries. Operating budgets demand the abilities to respond to any upside business opportunities and not to pay increased costs to maintain existing software. Rather than recreate various perspectives related to this SAP announcement, we provide some references to noteworthy insights.
On the Software Insider blog, Ray Wang penned a commentary noting that SAP appears to be harmonizing the price increases for both new and existing maintenance customers. While this rate hike comes under the guise of maintaining high quality of support, Ray argues that the current support tools do not offer much in value. ZD Net enterprise software blogger and longtime SAP mentor Dennis Howlett questions why now? Dennis provides strong arguments that any increased revenues garnered by this price increase are marginal at best, and that the announcement opens the door yet again for third party maintenance providers to come swooping in and make a cost saving play. Howlett concludes: “Add it all up and you get a powerful cocktail that can only drive animosity between SAP and some customers at a time when a price reduction, however small, would have had a much more positive impact. Put another way, if you pass on cost savings than the chances of selling more product later are vastly improved”
Functional supply chain teams normally would not be concerned about such developments over annual software maintenance, but they had better pay close attention. SAP continues to message on helping to deploy a more responsive supply network for its customers, but the components continue to be a work-in-process, especially those related to SAP Business Suite Powered by HANA. SAP Supply Chain Management customers are therefore compelled to be in constant update mode. A very real consideration that needs to be factored is added integration services from a competent third party systems integrator as well as overall total cost of ownership related to a collection of SAP applications. A supply chain automation initiative built on SAP components therefore takes on multiple cost dimensions, and senior management does not want surprises. Potentially excessive annual maintenance costs for both old and newer applications add up to be an overhead burden that is sure to catch added pushback from the CFO. As has also been noted, there are some real questions as to the value delivered for this maintenance, and that opens the door to explore other alternatives, including non-SAP components.
In his blog commentary, Frank Scavo outlines four good questions for SAP:
- What improvements in SAP support will be delivered to justify such a price increase?
- What is the gross margin of SAP’s maintenance business today, and how will that change with this price increase?
- How have support costs changed to justify an increase?
- Since SAP uses some of its revenue to fund development for new products or make acquisitions, will SAP provide these new products to customers at no charge?
While it is not likely that SAP will provide definitive answers, if there is enough of a backlash groundswell, there well may be another collective message delivered: Stop abusing customers with your need for added margins, and instead focus on delivering cost competitive solutions to our business needs.
Support your IT teams and add your functional and business voices that enough is enough. No more taxation without benefit justification. The needs of you, the customer, must be balanced with those of the business needs of SAP.
By the way, least we mention, we hold Oracle to these same standards.