It's no secret that maintenance and support for enterprise applications is wildly profitable for vendors and, likewise, incredibly expensive for IT shops. Some of those IT shops, in fact, are overwhelmed by the cost and find too little return to justify paying for it.
Even as the economy worsens, IT service contracts are growing pricier. The Yankee Group puts that hike at 10 to 15 per cent year over year. IT budgets, meanwhile, are softening, according to Gartner, which found that while overall IT spending is expected to expand, that growth rate has slowed from 3.1 per cent to 2.3 per cent.
Yet companies still shell out millions for support and maintenance contracts to stay on the software upgrade treadmill despite, Yankee says, 80 per cent of customers' IT budgets going toward operational expenses, while a paltry 20 per cent is available for capital expenditures.
According to a June 2008 Forrester report, 21 per cent of companies are undergoing major application upgrades, while a similar percentage will face minor upgrades. "To a large extent, these upgrades are driven by vendor-imposed support deadlines where customers will face increasing maintenance costs or the decommissioning of specific releases if the upgrades are delayed further," the report said.
What's more, Oracle last month ratcheted up its prices, again, this time by as much as 20 per cent, while rival SAP ended its low-price support option in late May. Previously, customers could choose the lower tier that cost 17 per cent of their license fees; now they are left with the Enterprise Support package, which runs at 22 per cent.
So what is a company facing the now-cliched mantra "do more with less" to do about those high-ticket enterprise application support and maintenance contracts?
Basically, IT shops have three options: renegotiate existing contracts, switch to a third-party service provider to extend the life of your applications, or in certain instances, the extreme case: drop support altogether.
Revisit contracts already in place
Customers have more power than they might think in negotiating an existing contract. "A customer's leverage is not just to go to a competitor," explains Frank Scavo, president of Computer Economics, a 28-year-old IT research firm.
According to Scavo, customers can use "events" in the normal course of a relationship as opportunities to negotiate, such as buying more user licenses or modules, or upping the ante to a longer-term contract.
"If you're planning to buy additional modules from an apps vendor, use that as an opportunity to negotiate better terms and conditions," Scavo advises, "perhaps to get a refund on other modules not implemented, or to lock in maintenance fees at some fixed rate. Or to get computer-based training thrown in for free. Roll that discussion in as part of the transaction. You may not get what you want, but there's no better time to ask than at the point where the vendor wants to make a new sale to you."
Also, Scavo suggests assessing what you have and what actually gets used -- for both support options and application modules -- since some customers inevitably wind up paying for more than they ultimately put into practice.