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Buried in software licensing

Robert L. Mitchell | Aug. 13, 2013
The transition to cloud-based services is ratcheting up traditional enterprise software costs and adding layers of complexity.

Third-party maintenance providers such as Rimini Street and CedarCrestone have incurred the wrath of Oracle's lawyers -- and for good reason, says Frank Scavo, president of Strativa, a management consulting firm that advises enterprises on business and technology decisions: The vendors' lucrative contracts carry profit margins as high as 90%. (Oracle didn't respond to several requests to comment on its licensing policies.)

There's a reason why traditional ERP software costs are rising. Sales of core ERP systems have slowed, with projected growth of just 5.8% through 2016. And much of the new sales are of cloud-based services, which are seeing double- and even triple-digit growth, says Christine Dover, an analyst at IDC.

"These companies are under earnings pressure," Scavo says, and while traditional ERP software vendors are moving aggressively to compete, they have lost market share to SaaS providers like Workday, Salesforce.com and NetSuite. And the transition to a cloud service model, where a deal might bring $100 per user per month versus several million upfront and a 22% annual maintenance fee, is a difficult one for traditional ERP vendors to make because the money comes in gradually rather than in a big lump sum.

So vendors have been pursuing ways to get more revenue from their existing customers while they make the transition. "Both SAP and Oracle are being very opportunistic in accounts where they already have a strong presence," and that's being driven from the top down, says David Blake, CEO of Boston-based management consultancy UpperEdge.

One way they're doing that is by extracting additional maintenance and support fees, Scavo says. His clients have also seen an increase in the number of on-site audits.

Yet another gotcha for SAP users in the past year or two has been the vendor's aggressive enforcement of its indirect access fees, which are additional licensing charges for users of other applications that access SAP applications or data stored in SAP systems. Scavo says the practice represents a potentially large liability for the unwary, since SAP systems are often integrated with third-party applications on the edge of core ERP systems.

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Pros and Cons

The Politics of Going Off Maintenance

When Eric Robinson put forth the idea that Color Spot Nurseries might want to move to a third-party maintenance and support provider for its SAP ERP software, he was careful to present both the rewards and risks to management. "I do everything I can to present the advantages and disadvantages while acting indifferently to allow the business to make the decision," Robinson says.

The benefits included the following:

Maintenance and support costs would decline by 50%.

  • The third-party maintenance provider would support Color Spot's ERP customizations -- something that SAP didn't do.
  • There wouldn't be as much of a need for labor to test updates in order to stay on a release that SAP supported.
  • It would be possible to modify the system without worrying about an SAP update overlapping with a modification.
  • The potential downsides included the following:
  • The third-party support provider might not be able to fix a core system failure because it wouldn't have the source code.
  • The provider might have difficulty recruiting IT professionals to work on stale systems.
  • At some point, the older ERP system might not be compatible with new software or hardware.
  • The third party might not be able to provide tax regulation updates for payroll systems.
  • The move might hurt Color Spot's relationship with SAP -- which could affect negotiations for additional SAP licenses.

 

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