Drive Enterprise Software Costs Down – How the Third-Party Support Model Delivers
IT, procurement and asset management professionals often underestimate the true costs of maintaining their application software. It can come as a shock when they become aware of their Total Cost of Maintenance (TCM).
What Is Your Total Cost of Maintenance?
Let’s say you’re paying your software vendor 22 percent of your original license cost annually for maintenance fees. That’s your Total Cost of Maintenance, right?
In fact, that “22 percent of license fees” is only the tip of the iceberg compared to what you are probably spending on maintenance. As Figure 1 shows, annual maintenance fees are only one component of your TCM. The other components include what you spend on upgrades; maintenance resources required to implement fixes and stay compliant; and support for your customizations that you can’t get from your software vendor.
|Total Cost of Maintenance
|Annual Maintenance Fees
Figure 1: Annual maintenance fees typically account for only about a third of a company’s Total Cost of Maintenance.
Today’s leading third-party support providers for enterprise application software are offering world-class support services for a fraction of the price of vendor support. How is that possible? Third-party support is based on an entirely different cost model than vendor support. We’ll get to that in a minute, but first let’s break down your Total Cost of Maintenance, considering how the component costs add up depending on whether you use vendor support or third-party support.
1. Annual Support Fees — 35% of TCM
Annual vendor maintenance support fees typically account for about 35 percent of a company’s Total Cost of Maintenance. You can easily save half that amount with third-party support: for example, Rimini Street simply takes the most recent support invoice from your software vendor and cuts the amount in half.
2. No Forced Expensive Upgrades — 25% of TCM
“Forced” product upgrades are often the largest expense incurred to retain enterprise software support. By enabling you to delay or avoid costly product upgrades, third-party support frees up budget so you can maintain staff levels and invest in strategic technologies that meet your evolving business requirements. For many customers, upgrade costs can balloon; for example, one client was able to avoid an upgrade that would have cost $19 million.
3. Maintenance Resources — 18% of TCM
Your IT staff spends costly time supporting your enterprise software. Third-party support providers offer personalized support methodologies that let you redeploy valuable resources or achieve resource savings. For a complex software environment, the cost savings can be the equivalent of several FTEs. Engaging a third-party support provider can streamline the support process — you’ll get only the software fixes and compliance updates you actually need.
4. Support for Customizations — 22% of TCM
Roughly two-thirds of all support issues involve customized code, but software vendors typically do not support customized code. But a quality third-party support provider will support your customizations as part of its standard support program, at no extra charge. For a highly customized software environment, the savings can be the equivalent of one or more FTEs or the elimination of a consulting expense. Bottom line: third-party support covers your software as it has evolved in the real world and exists today, including all your modifications — not just the vendor’s vanilla code line.
Reducing Out-of-Control TCM with the New Third-Party Support Model
When enterprise software customers run the numbers and become aware of their true Total Cost of Maintenance under software vendor annual support, they are often motivated to pursue less costly alternatives such as third-party support. Indeed, in recent years a growing chorus of customers, analysts and industry commentators has been questioning the value and fairness of the traditional vendor support model — for example, one observer has called that model “broken.”1
Third-party support providers have responded to these rapidly changing industry dynamics by offering support based on a new, less costly model that is focused on the customer’s actual support needs — rather than on padding the software vendor’s profit margins and ensuring that the customer is dutifully following the vendor’s agenda in terms of upgrades. The new third-party support model is summarized in Figure 2.
||Traditional Vendor Support Model
||New Third-Party Support Model
||90+% profit margins for vendor
||Annual support fees 50% less than vendor support
||Vanilla software only
||Custom as well as vanilla
||Book-trained help desk
||Experienced engineers assigned to each customer
||Upgrade when ready
||Vendor as well as leading-edge options
||Keep options open
Figure 2. The software vendor support model is designed to advance the software vendor’s agenda. The third-party support model is designed solely with the customer’s needs in mind.
Critical features of the new support model:
- Focus and Cost Model — What does “90+ percent profit margins for vendor” mean? Fair or not, it means that for every dollar you spend on vendor maintenance programs, the vendor spends only 10 cents on actually fixing your issues and keeping your software compliant. Traditional software vendor support is all about the vendor’s need to keep its lucrative maintenance revenue streams flowing; third-party support puts the focus squarely back on the customer’s needs.
- Support Coverage — Standard software vendor programs do not cover your customized code. Why is that important? Consider that at Rimini Street, 65 percent of all issues submitted by customers involve customized code. That means that nearly two-thirds of issues that we fix for our customers are issues that the vendor’s support program would not have covered, period.
- Delivery Model — Leading third-party support providers are really specialized consulting firms; they are able to operate a service model specifically built to get your showstopper issues fixed much more quickly than the vendors’ cumbersome, self-serving response models allow. For example, with a third-party support provider your first call is to your known, named senior Primary Support Engineer, not an anonymous overseas help desk staffer.
- Upgrades — A recent Oracle Application User Group (OAUG) customer survey demonstrated that 73 percent of customers are upgrading just because support for their current release was ending — not for new features or capabilities.2 With third-party support, you can run your current releases for the next decade or longer, upgrading only when it makes sense for your business. And if you’re not on the very latest release, you can take possession of it now and upgrade down the road.
- Innovation — Analysts agree that innovation isn’t coming from the big ERP vendors. For true innovation that can be deployed quickly across the enterprise and utilized today to create competitive advantage, application software licensees are increasingly looking to smaller niche SaaS and cloud companies for solutions around the edges of core ERP. Third-party support gives you freedom from vendor agendas, letting you shop around for the next-generation solutions that address your business needs.
- Flexibility — Third-party support helps keep your future strategic roadmap options open. How? Every upgrade you deploy may further lock you into your software vendor’s application and technology stack offerings. This may severely limit your flexibility down the road in choosing the next-generation system that best fits your needs.
Driving the Move to Third-Party Support
It’s not always C-level executives who drive a company’s move from vendor support to third-party support. Often, it’s IT and procurement managers who feel the daily pain and cost-ineffectiveness of their vendor support program.
For example, a large school district in upstate New York was challenged with an across-the-board 15 percent budget reduction. The district’s manager of business enterprise applications and its director of procurement and supply got together and researched ways of reducing the district’s ongoing, out-of-control IT maintenance costs. A detailed calculation showed that the district could save more than $500,000 annually in its Total Cost of Maintenance by switching from Oracle to third-party support for its PeopleSoft 8.9 and 9.1 applications.
The IT manager and procurement director took their money-saving proposal to the district’s executive management and board of directors. Management and the board happily approved the switch. And why not? In addition to improved responsiveness to support issues, the district projects a 10-year ROI of 70.6 percent, which translates into a cumulative Total Cost of Maintenance Savings of USD $8.9 million.
The district plans to run its stable, robust, fully functional PeopleSoft applications into the foreseeable future, avoiding expensive, complex, disruptive upgrades while accruing substantial savings on annual support fees. And those savings have enabled the district to retain critical engineering headcount that otherwise would have had to be eliminated due to the budget cut.
Putting Your Savings from Third-Party Support to Good Use
Hundreds of companies have discovered the value of third-party support and are using that knowledge to drive down their Total Cost of Maintenance. Many third-party support customers achieve TCM savings of up to 80 percent. And with a radically reduced TCM, they are using a portion of the savings from third-party support to relicense their applications, acquire their next-generation systems, retain headcount and fund innovation.
Do yourself a favor: calculate your Total Cost of Maintenance. And when you get over the “sticker shock,” consider moving to third-party support.
 “The packaged software maintenance model is broken. Don’t reward software vendors for it by staying on their upgrade treadmill at their arbitrary 18 or 22 percent a year of software ‘license value.’ … ” Vinnie Mirchandani, Deal Architect, September 26, 2010.
2 OAUG Research Line, “ERP Upgrades: What’s Your Philosophy? 2012 OAUG Survey on Enterprise Application/ERP Suite Upgrade Strategies,” February, 2012, pp. 11, 16.