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.

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In general, however, "the way enterprise software is licensed today is just not meeting the needs of many organizations," says Patricia Adams, an analyst at Gartner. Organizations are fed up with the perpetual-license-plus-maintenance approach to enterprise software purchases, and they're tired of running on the upgrade treadmill simply for the sake of keeping their software maintenance status current. Organizations "struggle with the currency of the software," Adams says, "and, when negotiating, they still struggle with finding out how the vendor performed against the contract."

IT shops have been pushing back. When GWU's contract comes up for renewal, Steinour says he plans to look at more cost-effective approaches to enterprise software licensing and maintenance, including a gradual migration to a subscription-based software-as-a-service offering from Oracle or another vendor.

If the university commits to a change, it would consider moving to third-party maintenance as an interim step, he says. That would allow the IT department to continue supporting the software and receive bug fixes as well as tax and regulatory updates for payroll, but no software upgrades. Essentially, the university would freeze its two ERP implementations until it was ready to move off the old ERP system -- and that process could take a long time. "[Users] would be involved in the decision process of the future direction, [and] I am sure they would be supportive of our mission," Steinour says.

For his part, Robinson says he couldn't justify spending hundreds of thousands of dollars to upgrade to SAP Enterprise Core Component (ECC) 6.0 just to keep maintenance costs down. "I looked at ECC 6, and I found nothing that made sense for us," he says. So Color Spot went with Rimini Street, a third-party maintenance provider that offered maintenance and support services for less than half of what SAP was charging -- and it included support for Color Spot's customizations, something SAP didn't offer. "Our maintenance is now 9% of the IT budget; initially it was 20%," Robinson says. And while he no longer receives software upgrades, he says he can still buy additional modules and add users. The software vendors are "still happy to take your money," he says.

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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