The Positive Pricing Impact of Third-Party Maintenance for Oracle and SAP Customers

Report: Trends The Positive Pricing Impact of Third-Party Maintenance for Oracle and SAP Customers Survey Data Shows How Third-Party Maintenance Options Provide Customer Leverage R Ray Wang Principal Analyst and CEO Copy Editor: Maria Shao March 18, 2013 Produced exclusively for Constellation Research clients

Table of Contents Purpose and Intent... 3 Executive Summary... 3 Customers Continue to Feel Locked In to Their Enterprise Software Contracts... 4 Third-Party Maintenance Creates Counter-Balance and Choice for Oracle and SAP Customers... 5 The Bottom Line: 3PM Should Be Part of the Apps Support and Contract Negotiations Strategy... 9 Disclosures... 9 Analyst Bio: R Ray Wang... 10 About Constellation Research... 12 Organizational Highlights... 12 2013 Constellation Research, Inc. All rights reserved. 2

Purpose and Intent Constellation Research recently conducted a survey to identify the impact of third-party maintenance (3PM) providers on maintenance contract negotiations for Oracle and SAP customers. This report discusses the survey findings and provides insights into two of Constellation s primary research themes, Technology Optimization & Innovation and the Consumerization of Information Technology/The New C-Suite. Executive Summary In the first quarter of 2013, Constellation surveyed 184 organizations with maintenance contracts from Oracle or SAP; the purpose was to see what impact third-party maintenance has on contracts from the original software vendors. In the 184 organizations, 149 respondents actively negotiated software license contracts and recognized the availability of 3PM options. Based on the survey results and hands-on experience in assisting clients with contract negotiations, Constellation believes thirdparty maintenance plays a key role in providing pricing leverage and options in overall apps and contract negotiations strategy. While not a statistically significant sample size, these market leader and fast follower respondents, who secured a proposal from a thirdparty maintenance provider when evaluating all maintenance options, on average received a 13.7 percent discount on maintenance if they chose to renew with the software vendor. Respondents who chose to switch to a third-party support provider saved up to 50 percent off Oracle s and SAP s list prices for maintenance fees. 2013 Constellation Research, Inc. All rights reserved. 3

Customers Continue to Feel Locked In to Their Enterprise Software Contracts The business model for on-premises enterprise software vendors relies on winning heavily-discounted upfront licenses, selling additional add-on modules and growing a perpetual stream of maintenance revenues. As part of the tacit agreement, customers pay support and maintenance fees to the software vendor for perpetually licensed onpremises software in order to receive break/fix support; the latest bug fixes; tax, legal, regulatory updates; and upgrades to new functionality. Unfortunately, most customers reach a point five to eight years in the ownership life cycle when the cost of support and maintenance no longer provides a proportionate value to the business. Locked into a vendor and often shackled with minimal switching options, many customers hang on in frustration over their predicament. Consequently, customers seek options beyond vendor-provided maintenance for three reasons: 1. Support and maintenance fees go up despite lower costs to maintain mature software. By Year Five of the software life cycle, vendors have worked out most bugs in the software release and reduced the necessary staffing in research and development. However, vendors seek greater fees for support and maintenance just as the costs drop. Constellation estimates that the profit margin for support and maintenance for releases that are at least five years old ranges from 67 percent to 81 percent. 2. Legacy applications face forced end-of-life deadlines. The shift in technology platforms every 10 years or so often has many vendors creating planned obsolescence scenarios. Almost every software vendor has crafted economic disincentives to remaining on mature releases. Customers who fail to keep up with the patches, bug fixes and support packs often face upgrades that require significant reimplementation efforts or risk losing software support from the vendor despite paying for such support. Customers often revolt when the cost of an upgrade is equivalent to putting in new software, despite paying significant maintenance fees. 3. Market consolidation leads to fewer choices for perpetually licensed software. The enterprise software market has consolidated from hundreds of vendors to several dozen on-premises software vendors. On-premises software mostly is perpetually licensed, meaning customers own the code for life. With fewer options for on-premises software, customers see a dwindling of the core benefit of software ownership. In fact, many will face a new kind of lock-in with the cloud. Why? Cloud software is leased, not owned. 2013 Constellation Research, Inc. All rights reserved. 4

Third-Party Maintenance Creates Counter- Balance and Choice for Oracle and SAP Customers Oracle and SAP customers, fortunately, have third-party maintenance (3PM) options for their software portfolios. While, third-party maintenance providers do not provide new features, they do deliver regulatory updates, tax updates, bug fixes and performance enhancements at reduced rate. Often, the fees can be as low as half the cost of original vendor-provided maintenance. The advent of third-party maintenance providers creates choice in a highly-consolidated and increasingly non-competitive market. Constellation s recent survey sought to identify the impact of third-party maintenance providers on maintenance contract negotiations with Oracle and SAP. The Oracle and SAP maintenance survey identified 149 respondents who were aware of 3PM out of 184 who played a role in Oracle or SAP maintenance contract negotiations. Of the 149 respondents actively involved in Oracle or SAP contract negotiations, the results show the following: Awareness of third-party maintenance options remains high. More than 79.2 percent of respondents indicated general awareness of an option to receive maintenance from a provider other than the software vendor (See Figure 1). Once thought of as a novelty, third-party maintenance options continue to grow in the overall apps strategy for customers. More than half used a competitive proposal in negotiating deals. Over half of respondents (51.7 percent) had applied a competitive proposal from a thirdparty maintenance provider to a deal (See Figure 2). As customers explore 3PM options, they will increasingly use a competitive proposal in contract negotiations, regardless of whether the customer chooses ro remain with the software vendor or switch to a third-party provider. Over 60 percent of organizations believed that third-party maintenance improved negotiation leverage. For 62.3 percent of respondents, growing awareness of options has led to some price pressures on vendors in contract negotiations (See Figure 3). The availability of options has provided much-needed competition in a traditionally captive market for software vendors. A majority of respondents found using a competitive quote effective in contract negotiation. Competitive quotes provided 71.9 percent of customers with an advantage in contract negotiations (See Figure 4). In fact, for those customers choosing to remain with the software vendor for support, deeper conversations revealed reductions in maintenance fees ranging from 5 percent to 25 percent off Oracle and SAP list prices. Respondents who secured a proposal from a third-party maintenance provider on average received a 13.7 percent discount on annual vendor maintenance fees. More than 70 percent stayed with the original vendor for maintenance and support. Most respondents remained with their software vendor for convenience 2013 Constellation Research, Inc. All rights reserved. 5

and for relationship reasons (See Figure 5). However, nearly 30 percent moved their maintenance and support to 3PM providers in order to upgrade, modernize or support a two-tier Enterprises Resources Planning (ERP) strategy. Figure 1. Awareness of Third-Party Maintenance Options Is High 2013 Constellation Research, Inc. All rights reserved. 6

Figure 4. Competitive Quotes Result in Contract Negotiations Leverage Figure 5. 3PM Providers Gaining Market Share, though Oracle and SAP Keep a Large Majority of Respondents 2013 Constellation Research, Inc. All rights reserved. 8

The Bottom Line: 3PM Should Be Part of the Apps Support and Contract Negotiations Strategy The consolidated enterprise software market has led to monopolistic practices by software vendors in dictating support and maintenance fees and policies. Some vendors have sued third-party support providers to keep customers from having a choice in third-party options. Others vendors have bought out their potential competitors. The growing range of options and the awareness of 3PM providers for support and maintenance give Oracle and SAP customers additional choice and leverage that customers of other vendors do not have. Consequently, every CFO, CIO and procurement officer must apply due diligence in exploring these 3PM options when initiating contract negotiations or planning applications strategy. At a minimum, organizations should seek a competitive proposal from a thirdparty maintenance provider. Failure to explore all options may result in higher costs for less value with existing vendors. For example, a 10 percent discount on a 20 percent annual maintenance fee for a $1 million license is the equivalent of $100,000 in savings over five years with the software vendor. Customers seeking to maximize savings should consider moving to third-party maintenance providers. For instance, a 50 percent discount on a 20 percent annual maintenance fee for a $1 million license is the equivalent of $500,000 in savings over five years. Not considering third-party maintenance is not an option with today s competitive offerings. Disclosures Your trust is important to us, and as such, we believe in being open and transparent about our financial relationships. With our clients permission, we publish their names on our website. 2013 Constellation Research, Inc. All rights reserved. 9

Analyst Bio: R Ray Wang Enterprise Strategist and Disruptive Technologies Expert R "Ray" Wang is Principal Analyst and CEO of Constellation Research, Inc. and the author of the popular enterprise software blog, "A Software Insider s Point of View." He previously was a founding partner and research analyst for enterprise strategy at Altimeter Group. With viewership in the millions of page views a year, his blog provides insight into how disruptive technologies and new business models affect the enterprise. A background in emerging business and technology trends, enterprise apps strategy, technology selection and contract negotiations enables Ray to provide clients and readers with the bridge between business leadership and technology adoption. Expertise Buyers seek Ray s research in disruptive technologies and their impact on business processes, business models and organizational design. Business topics focus on harnessing innovation, creating next-generation business and IT leadership and applying the new rules of business. Technology topics include Social, Mobile, Cloud, Big Data, Next- Gen ERP and apps, business analytics, business process transformation, Project-Based Solutions, Order Management, Master Data Management and middleware technologies. For technology sellers, Ray provides strategic guidance in go-to-market strategies, reviews and designs software licensing, pricing, support and maintenance policies, delivers competitive assessments, evaluates software partner ecosystems and researches business processes such as the perfect order and customer experience for the enterprise and SMB markets. Media Influence Ray blogs at The Wall Street Journal s CIO Journal and for Harvard Business Review. News organizations such as The Wall Street Journal, Bloomberg, Business Week, Fortune, The Associated Press, CIO Magazine, Information Week, ComputerWorld, Financial Times, eweek, CRM Magazine, IDG News, ZDNet, TechTarget and Tech Crunch frequently seek his point of view. Ray is an energetic and passionate keynote speaker and has also been featured on major TV news outlets such as CNBC. Industry Recognition In 2008, 2009 and 2012, Ray was recognized by the prestigious Institute of Industry Analyst Relations (IIAR) as the Analyst of the Year, and in 2009, he was recognized as one of the most important analysts for Enterprise, SMB, and Software. In 2009, A Software Insider s POV was listed in the top 20 of Jonny Bentwood s Technobabble 2.0 Top Industry Analyst Blogs. In 2010, Ray was listed as one of the Top 5 Analyst Tweeters in Edelman s TweetLevel Index, recorded as part of the ARInsights Power 100 List Of Industry Analysts, and named one of the top Influential Leaders in the CRM Magazine 2010 Market Awards. 2013 Constellation Research, Inc. All rights reserved. 10

Education Ray graduated from the Johns Hopkins University with a B.A. in natural sciences and public health. His graduate training includes a master s degree from the Johns Hopkins University in health policy and management, and health finance and management. He is also certified in SAP FI/CO modules, facilitation techniques and program management office. Ray currently serves on the Board of Advisors for the University of Toronto s Rotman School of Management s Centre for CRM Excellence. Ray can be reached at R@Constellationrg.com. 2013 Constellation Research, Inc. All rights reserved. 11

About Constellation Research Constellation Research explores the technologies and business models that not only disrupt established players, but also create transformational innovation. We share our research insights with business leaders seeking more than just rubber stamp approval or rearview mirror confirmation by traditional legacy analyst firms. Every piece of research begins by understanding how to deliver business value, applying real world experience and insights and incorporating disruptive technologies and innovative business models as appropriate. Our mission is to identify, validate and share these insights with our clients. As a result, our research community includes members of boards of directors, C-suite executives, line of business leaders and IT visionaries who are not afraid to challenge the status quo. Most of our clients share a common trait - the passion for learning, innovating and delivering impactful results. Organizational Highlights Founded and headquartered in the San Francisco Bay Area, United States, in 2010. Named Institute of Industry Analyst Relations (IIAR) New Analyst Firm of the Year in 2011. Serving over 170 buy-side and sell-side clients around the globe. Experienced research team with an average of 21 years of practitioner, management and industry experience. Creators of the Constellation Supernova Awards - the industry's first and largest recognition of innovators, pioneers and teams who apply emerging and disruptive technology to drive business value. Organizers of the Constellation Connected Enterprise - an innovation summit and best practices knowledge-sharing retreat for business leaders. Website: www.constellationrg.com Contact: info@constellationrg.com Twitter: @ConstellationRG Sales: sales@constellationrg.com Unauthorized reproduction or distribution in whole or in part in any form, including photocopying, faxing, image scanning, e-mailing, digitization, or making available for electronic downloading is prohibited without written permission from Constellation Research, Inc. Prior to photocopying, scanning, and digitizing items for internal or personal use, please contact Constellation Research, Inc. All trade names, trademarks, or registered trademarks are trade names, trademarks, or registered trademarks of their respective owners. Information contained in this publication has been compiled from sources believed to be reliable, but the accuracy of this information is not guaranteed. Constellation Research, Inc. disclaims all warranties and conditions with regard to the content, express or implied, including warranties of merchantability and fitness for a particular purpose, nor assumes any legal liability for the accuracy, completeness, or usefulness of any information contained herein. Any reference to a commercial product, process, or service does not imply or constitute an endorsement of the same by Constellation Research, Inc. This publication is designed to provide accurate and authoritative information in regard to the subject matter covered. It is sold or distributed with the understanding that Constellation Research, Inc. is not engaged in rendering legal, accounting, or other professional service. If legal advice or other expert assistance is required, the services of a competent professional person should be sought. Constellation Research, Inc. assumes no liability for how this information is used or applied nor makes any express warranties on outcomes. (Modified from the Declaration of Principles jointly adopted by the American Bar Association and a Committee of Publishers and Associations.) Andalucia Belfast Boston Chicago Colorado Springs Denver Geneva Irvine London Los Angeles Madrid New York Pune Sacramento San Francisco Santa Monica Salt Lake City Sedona Sydney Tel Aviv Tokyo Toronto Washington D.C. 2013 Constellation Research, Inc. All rights reserved. 12