Maintenance Fees, a Cash Cow for Vendors, Under Attack From Users
Some customers are pushing back on software maintenance agreements, threatening vendors with the loss of their most predictable, profitable continuing revenue stream.
Priced at 15% or 18% (or more) of the up-front purchase price of the software, maintenance agreements provide customers with updates and enhancements as well as support. For endors, they generate profit margins as high as 85%. But the great recession, years of familiarity with enterprise software and the growing maturity of customer’s own IT departments has led many customers question why they pay, year after year, for fixes to software that should have worked right in the first place, or for updates they don’t really want or need.
Several consultants who help customers negotiate software contracts told me, as part of a story I reported for InfoWorld, that a growing number of customers are ditching maintenance. Some simply don’t want to risk that an update, even if it had some value, would disrupt a critical system that had been working fine for years. Ending maintenance agreement might mean an end to technical support as well, but that’s less of an issue for companies with years of experience maintaining a mature application.
Another consultant told me that support from major vendors isn’t that good unless the customer pays more for a premium plan. If the customer has good skills in-house (or if the deployment is fairly stable), the question arises again: Why pay for maintenance?
Some consultants suggested turning the table on vendors, with concepts such as “reverse maintenance” (paying only for updates they want). Another idea is “pay for performance”, in which the customer pays maintenance fees up front, but is entitled to reimbursement if the vendor fails to produce upgrades of value. Besides the hassle of trying to get a rebate from a vendor, good luck trying to quantify the value of an upgrade. Yet another, and maybe the simplest option, is to get the vendor to agree, during the up-front negotiations, to fix problems under warranty, no maintenance agreement required.
With so many software sales coming from new, emerging economies with less experience with enterprise apps, maintenance agreements aren’t going away completely anytime soon. But a few takeaways for software vendors:
· At the very least, smart customers will start pushing back on standard maintenance agreements. Vendors should be ready with flexible terms that provide more value to customers.
· Over time, customers will demand more value from updates. Vendors need better systems for evaluating which updates which users need, and more flexible ways to provide them only the updates they need.
· Consultants also tell me some hungry, off-shore support firms deliver more support bang for the buck than the vendors. Major vendors might want to consider outsourcing or reselling service from such vendors to hang on to at least some of the revenue.
Bottom line: Maintenance used to be a “black box” where vendors could recoup some costs and build in some profit. In a networked world of smarter (and poorer) customers and lower-cost offshore service providers, this model is under attack.
Filed under: IT Marketing
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