Buried in software licensing

The transition to cloud-based services is ratcheting up traditional enterprise software costs and adding layers of complexity. Here's how IT organizations are breaking free.

David Steinour is at his wit's end with enterprise software cost increases. In each of the past three years, the CIO at George Washington University (GWU) watched his annual maintenance and support costs for Oracle Financials and related enterprise software jump by at least 10%.

"Oracle works very well, but at the end of the day we pay a huge price for that service," Steinour says.

Today, 99% of the fixed-cost increases in the university's IT budget come from software maintenance price hikes. "That's just not sustainable," says Steinour, whose IT department supports 20,000 students and 1,600 faculty members.

Eric Robinson, CIO at Color Spot Nurseries, a $300 million, 4,000-employee wholesale grower that supplies plants to big-box stores, has been an SAP user since 2000. He says his biggest issue isn't the cost of the perpetual license for the outright purchase of on-premises SAP software, or the annual increases in SAP maintenance fees -- it's the fact that Fallbrook, Calif.-based Color Spot wasn't getting much in return for the money it spent on maintenance.

Robinson says SAP has been gradually raising support costs in annual increments from the initial 17% of the original software license price. In 2008, SAP had sent Robinson a letter announcing plans to gradually increase his rate to 22% plus an annual increase based on a cost-of-living index adjustment, and move him from Standard Support to a new Enterprise Support plan. In 2010, Color Spot was paying 18.1% and Robinson decided to drop SAP's maintenance plan and move to a third-party provider. At that time, SAP reintroduced Standard Support. In July, SAP raised the price on Standard Support from 18% of the original license cost to 19% for new contracts. Enterprise Support remains at 22%.

Rates started at 15% in the early 1980s, then gradually rose to 17% and stayed there until about 2005, says R "Ray" Wang, an analyst at Constellation Research specializing in enterprise software contract negotiations. They've since risen to 19% and now 22%, he adds.

Robinson acknowledges that Color Spot's SAP system is stable and that he didn't need to make many calls for support. But he points out that SAP doesn't support any of his company's customizations, and the support packs and major upgrades his IT organization was required to install to remain in compliance with the maintenance and support contract were expensive and delivered no value to the business.

SAP's top clients now spend $2 million to $5 million per year on maintenance and support contracts that average 20% to 25% of the original software cost, Wang says. "Every four years, they're paying the same amount they paid for the license," and most say that they're not getting the features they want for their money, he says. "They wonder whether they're better off not paying maintenance and just buying new software every four or five years."

For Robinson, the last straw came when he decided not to upgrade from Version 4.7 and SAP was about to require Color Spot to transition to its extended maintenance program, which is for users of older versions of SAP software. "At that time, SAP was 20% of the IT budget. It was ridiculous," he says. That's when he decided not to renew Color Spot's maintenance contract.

An SAP spokesman responds that, historically, standard support customers have paid an additional 2% to 6% for extended maintenance.

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