Pushback on the SAP Support Costs
The announcement at the 2007 SAPPHIRE in Atlanta, GA that got the biggest ovation was SAP’s message that, in the future, they would not be pushing upgrades based on new functionality. Instead, future upgrades would be less frequent and based almost entirely upon technological breakthroughs.
One year later, SAP raised its annual maintenance fee from 17% of base license costs to 22%, a 30% hike based upon…”that’s what Oracle charges”.
Prior to 2007, nearly every SAP upgrade announcement was keyed by a laundry list of new functionality. But Hasso Plattner’s message “How many ways can you enter an order?” signals that SAP now possesses full-blown do-it-however-you-like business functionality. So what’s in the next upgrades? Technology and something called Enterprise Support, the latter of which has generated close to zero enthusiasm.
http://www.computerworlduk.com/management/it-business/services-sourcing/news/index.cfm?newsid=14158agement/it-business/services-sourcing/news/index.cfm?newsid=14158
Further, if you want all the new stuff, you have to be on version 6.0. More than two thirds of SAP clients are not on this version, so they have to upgrade to, uh, upgrade.
So if you have no need or interest in Enterprise Support, you may just be sitting tight with a less-than-contemporary version and a 22% maintenance fee.
Ray Wang (http://blog.softwareinsider.org/) notes the difference between support and maintenance:
About a decade back it was common to have 2 line items. Support covered help desk requests, bug fixes, and troubleshooting. Meanwhile, maintenance provided access to regulatory updates, tax changes, enhancements and sometimes point releases. Today the bundling of both support and maintenance prevents customers from choosing to keep maintenance without support or vice versa. In new contracts, clients should push for separate line items so they can eventually engage the vendor in deciding what they would like to pay for going forward.
Under these definitions, the support may be worthwhile unless you have your own help desk and a viable center of excellence. The value of maintenance is variable; tax change stuff is probably being handled by Vertex but regulatory changes, many of which are on the horizon, will be useful.
That said, there has been a considerable amount of howling among SAP clients, SAP prospects, and industry analysts, none of which has been adequately addressed by SAP. While most current clients are moving incrementally from 17% to 22%, four of five German and Austrian clients are holding at 17%. No such break is being accorded to U.S.-based clients.
As Dennis Howlett concludes in his recent blog post (Corrupting Consolidation, March 29, 2009) (http://blogs.zdnet.com/Howlett/?p=768):
Denial is a common attribute of those who believe they are unassailable but as Wall Street discovered, no-one is too big to fail except through the complicity of those who let them continue. The applications vendor consolidation of the last five or so years was fine in the good times when the idea of having a single throat to choke seemed sensible. It led to what I believe is a corrupted industry that refuses to give customers relief. We’re living through disruptive economic conditions yet that doesn’t seem to impact the mega vendors’ relentless pursuit of Wall Street approval. That cannot be right. It cannot continue.
To date, SAP is determined that it will continue. Clients will pay 22% maintenance and SAP will bank the profit. Some angry clients will dream of alternatives such as Cloud Computing (was ever an IT concept so aptly named?), some will consider moving (sunk costs be damned) to other vendors (like Oracle with its 22% maintenance?), some will turn to build rather than buy, and some will simply Shut up And Pay (note the acronym). This is not client satisfaction. It is SAP corporate economics 2009-2010.
The Economics of SAP Support
What follows is based upon SAP’s 2008 results.
http://www.sap.com/about/investor/reports/annualreport/2008/pdf/SAP_2008_Annual_Report.pdf
Euro amounts have been uniformly converted to USD at 1.33 to address the U.S. audience.
Not a bad year, despite a 4Q slump.
However, looking at just the support side, before the hike from 17% to 22%, the picture is really bright:
Without these support margins, SAP is running at -2% operating profit.
In 2010, that support revenue will be based on an average rate much higher than 17%. Assuming 5% rise in costs and an average support rate of 20%, this would yield.
Investment analysts love software firms. They love them because software requires no refrigeration, has no (perceived) shelf life, engages zero storage or transfer costs, and includes maintenance fees that defy the imagination. But how much love does SAP need? And how might they balance investment analyst love with a reduction of client rage?
A Client-Vendor Partnership: Tiered Support Rates
SAP has been in business for nearly forty years and regularly touts its dedication to client satisfaction and value. Never in its history has it faced such a revolt from its client base and I believe the core of that revolt is lousy justification for the rate increase aggravated by inconsistent application thereof.
SAP could slip this noose and truly distinguish itself as a viable vendor partner by instituting a client-vendor partnership by which excellent clients (those not tapping the SAP support operating expenses) would be given a break and those who are flat out maintenance hogs will know why they are paying so much. In such an arrangement, clients will have added incentive to improve their operations. If enough of them do so, SAP will have a tangibly lesser maintenance burden and, yes, better client satisfaction.
There are myriad ways to measure a client’s stress on SAP support resources. A thumbnail tier system could include reductions from 22% as follows:
Call Volume/Severity: High = 0%, Medium 1%, Low 2%
Version: 4.6 = 0%, 4.7 .5%, 6.0 = 2%
Solution Manager: None = 0%, Installed = 1%, Complete = 2%
In this simplistic scenario, “great citizen” clients would be paying 16%. “Medium citizens”, such as a client on version 4.7 with a medium level of calls and an installed Solution Manager would be paying 19.5%. Only the truly woeful, of which there are admittedly a boatload, would be paying the full 22%.
Refinements to the scale would include “contribution” activities such as active ASUG participation (how much does client-to-client support relieve the burden on SAP?) and other less measurable factors that still have a positive impact on SAP resource requirements.
Though lacking exact figures as to the current state of the SAP client base, I can extrapolate that the over-all percentage of banked maintenance fees may drop a few points but isn’t that worth it to the SAP ecology? Or this just “the cloud” that I am huffing?
(See, “SAP: Stop Chopping Off the Tallest Heads to Make Everyone Equal”) http://sapsearchlight.blogspot.com/2009/03/sap-stop-chopping-off-tallest-heads-to_25.html
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