News Analysis: Oracle Waives Fees On Extended Support Offerings

Oracle President Charles Phillips pleasantly surprised Oracle Applications User Group (OAUG) Collaborate 09 attendees this morning during his keynote with the decision to waive Extended Support fees for a number of product lines through 2010 and 2011. As customers and prospects face one of the worst global economic crises, proactive relief on support and maintenance fees could not come at a better time.  Summary details of the program can be found in Figure 1.

Figure 1. Oracle's Revised Support Policies

(Source: Oracle Corporation)

Proactive change in support offering creates a win-win

Oracle's move to address the support issue may stem from a variety of reasons but the main focus centers around improving the vendor-client relationship for a few reasons:

• Responding to the global economic crisis.  Oracle has taken the initiative in listening to customers, partners, and industry watchers about customer reactions to the escalating costs of software maintenance.  Oracle's Applications Unlimited and Lifetime Support Programs have been successful in retaining acquired customers and have shown customers that acquisitions need not be slash and burn with minimal reinvestment.
• Providing more time for customers to adopt Fusion Apps. With the slow down, Oracle may be anticipating slower upgrade rates.  While no clear date and product road map has been communicated to customers, removing the price pressure on extended support fees provides customers with some breathing room on upgrade timing.
• Mitigating attention on high profit margins and its M&A strategy. After touting record profit margins near 50% and continuing its M&A strategy with the announcement to acquire Sun, customers have become concerned about the impact of less choice in the market.   This move may appease regulators and industry watchers and show that Oracle has some self regulating policies.

The bottom line - user groups should now determine the minimum R&D percentage of investment from revenues

Oracle continues to gain economies of scale with each acquisition.  The good news - Oracle has the capacity to reinvest $2.6B per year into R&D and the real dollar amount has increased from 1.9B in 2006.  While this is a large figure, the bigger and more important issue - what percentage of the maintenance revenues have been reinvested?  Here's where we find a slight drop from 12.6% to about 11.6% in 2008.  Consequently, like SAP's users and user groups, OAUG and the other Oracle users and user groups should begin to track the ratio of R&D dollars that tie back to the amount of maintenance revenue.   In fact, they may want to take a look at the SUGEN KPI's and see if they are applicable to Oracle's environment.  R&D spend from maintenance and the need for Third Party Support options will be the key ownership issues for the next 5 to 10 years.  In any case, the need for preserving and strengthening independent user groups will be one effective check and balance in the consolidating world of enterprise software.

Your POV

Do you feel Oracle made the right move?  What have your experiences been like with Applications Unlimited and Lifetime Support?  Send me a private email to rwang@forrester.com.  Posts are preferred!   Thanks and looking forward to your POV!

Copyright © 2009 R Wang. All rights reserved.

Reposted from http://blog.softwareinsider.org

News Analysis: SAP and SUGEN Make Progress on Enterprise Support

Since SAP's announcement of its single tier Enterprise Support plan last July, customers have continued to express dissatisfaction.   In response to such complaints, the SAP User Group Executive Network (SUGEN) of 12 SAP user groups and SAP have been engaging in discussions around the value derived from this new offering.  This morning SAP and SUGEN announced an agreement on three key areas of the Enterprise Support offering:

• Defined list of key performance indicators to measure the results of SAP Enterprise Support (ES) services. As part of the agreement, the value of ES will be measured by through the jointly agreed SUGEN Key Performance Indicator Index (SUGEN KPI Index).
  Based on the press release and informal conversations, the four areas covered include business continuity, business process improvement, protection of investment, and total cost of operations.  No public details have yet been provided on the specific metrics but there is an expectation for customers to realize value within a four year time frame of the benchmarking program

  POV: The four areas measure how choice, value, and predictability of investment come together in the overall maintenance offering.  If successful, this represents a unique and transparent approach to demonstrating value in maintenance.  In the coming weeks, SAP users will want to seek details of the specific KPI's and determine how those KPI's will be measured on a consistent basis across different types of organizations.

• Joint benchmarking program to define and measure how SAP customers may derive value from ES. With agreement on the KPI's in place, a formal benchmarking program will be instituted to provide baselines to quantify value.   SAP and SUGEN have agreed on the parameters of the representative customer sample.  SUGEN will choose the customers.   Importantly, an independent party will validate results will conduct quality assurance and independent validation of the results.

  POV: Benchmarking remains the critical factor in this program.  SAP customers should pay close attention for balance in the representative customer sample.  Key variables include level of internal SAP competency, size of organization, complexity of environment, number of instances, industry, and geographic focus.   One can not overemphasize the importance of this program.  The results not only impact future maintenance fee increases, but also provide important benchmark data on SAP operations.

• Changes to the 2008 pricing program for current contracts that may will be migrated to ES. Based on the KPI program, SAP agrees to postpone subsequent price increases pending the realization of targeted improvements measured by the SUGEN KPI's.  These changes have been made to the 2008 pricing program for ES.  Instead of ongoing increases until 2012, the new program ends in 2015.  As stated in the press release "Starting in 2010, the price of SAP Enterprise Support for existing customers will continue to increase based on individual contract terms but will not be higher than a yearly fixed upper cap. This translates to an increase average of no more than 3.1 percent per year from 2010 onwards. The price of SAP Enterprise Support will be capped at 22 percent through 2015. "

  POV:  Two scenarios emerge.  Should the value of ES not be realized, then the price increase will not pass.  However, customers will more likely face a more gradual price increase to the 22%.   This may prove to provide some relief for recession strapped customers.

The bottom line - progress on Enterprise Support issue may result in a win - win for  SAP customers

Expect customers to take the news with cautious optimism.   Should the benchmarks succeed, customers may gain value.  Failure to meet targets meet a freeze on maintenance.  In any case, this is welcomed news and provides a hard fought win-win for the customer and the vendor-client relationship. Congratulations go out to SUGEN and SAP for coming to a common ground!  This shows the importance of preserving independent user groups and the role active users play in shaping the overall agenda.  The one thing left in the choice, value, predictability equation is choice - meaning a tiered maintenance program or access to third party maintenance.  With the less than positive Q1 earnings report announced today, let's wait to see how other chips will fall into place.

Your POV

Do you think SAP met its promise to SUGEN?  Will this help you with your commitment to SAP?  Do you feel SAP has now done the right thing?  Send me a private email to rwang0 at gmail dot com.  Posts are preferred!   Thanks and looking forward to your POV!

For more POV's:

Dennis Howlett - April 28, 2009 "SAP software revenues plummet, announces new deal on maintenance"

Copyright © 2009 R Wang. All rights reserved.

Reposted from http://blog.softwareinsider.org

News Analysis: Oracle Acquires Sun, Enters Open Source and High End Computing Markets

Oracle announces a $7.4B deal for SUN just a few weeks after the IBM deal fell through.  Oracle now controls a significant major open source alternative and a nice piece of the high end computing business.  These open source components have been viewed as the alternative to the dominance of the Big 4 or MISO (Microsoft, IBM, SAP, and Oracle).   Oracle also gains an innovation engine with the assets of Sun's Labs groups which pioneers a series of innovations that include potential enterprise solutions for the virtual world.  The deal puts Oracle on a continued path to acquiring deeper components of the enterprise computing stack.  Here's how the stack looks:

• Middleware - While Java and Solaris may appear to be the crown jewels in the deal, Oracle has managed to slowly buy out other stack competitors (i.e. BEA and now Sun) and integrate them into the Fusion Middleware suite of tools for custom development and its own Fusion Applications product lines.   Sun complements BEA.
• Database - Oracle takes out the low cost competitor to SQL server on the low end and gets a shot at converting them to Oracle DB instead of IBM.
• Hardware - Oracle gains another great recurring revenue (maintenance) base with Solaris.  This complements Oracle's large and profitable database installations on Solaris that would have fallen prey to the IBM DB2 team.

The bottom line- Oracle succeeds at post merger integration where others often fail

Despite skepticism, Oracle has made these acquisitions work from a financial perspective, with year-over-year quarterly profit growth that has generally been well above 20%. Some key success factors include:

• Acquiring companies for the recurring revenue. Oracle's first set of deals (i.e., PeopleSoft and Siebel) focused on installed base acquisitions that provided a strong foundation of support and maintenance customers. This base of recurring revenues provided Oracle with the room to continue strong R&D investment while reducing overall costs.  Oracle takes out another highly profitable maintenance base adding pressure to competitors.  In this acquisition it gains the profitable Solaris revenue stream while moving into a maintenance business for open source software.
• Eating its own dog food. In the late 1990s, Oracle made a major commitment to re-engineering its back-office processes using its own applications. As a result, Oracle has become highly efficient, with a ratio of general and administrative expenses to revenues of 3% to 4% - in most calendar quarters, one percentage point lower than SAP's and even lower than other large software vendors like Microsoft and Symantec.  Expect Oracle to put the Sun assets into its arsenal of tools for delivering software innovation.
• Mastering post-merger integration. With two former investment bankers at the helm, Oracle has one of the best post-merger integration teams in the business. Oracle's profit performance signals that it has been able to add new companies and their stream of revenues while keeping costs down.   Sun will provide considerable synergies in the short and long run.

Your POV

What do you think abou the acquisition of SUN?  Did you count on SUN as your open source stack alternative to the Big 4? Send me a private email to rwang0 at gmail dot com.  Posts are preferred!   Thanks and looking forward to your POV!

Copyright © 2009 R Wang. All rights reserved.

Reposted from http://blog.softwareinsider.org

Tuesday's Tips: Five Simple Steps To Reduce Your Software Maintenance Costs

Maintenance costs represent a major part of the software budget and the largest growing source of revenue for software vendors.   In fact, an aggregation of the past four quarters of software vendor financial results definitively demonstrates double digit declines in new license revenue, even more exacerbated by the evils of currency flux from the strong dollar for US based vendors. Not surprisingly, vendors are hard at work vigorously protecting their 70 to 80% margin in maintenance revenues just as clients and readers of this blog now zero in on this line item as the major concession target during contract negotiations.  Here are five steps (i.e. A,B,C's to software maintenance) you need to do now*:

1. Assemble all the relevant contract information. Aggregate all your contract information and vendor interaction history so that its centrally accessible.  Determine the value of your maintenance agreement. Examine how often you call for support, apply patches, conduct upgrades, and require technical assistance.  Then calculate the total support and maintenance spend.  Most customers will find that for $1M a year, 5 support calls can be pretty pricey at $200k a pop, especially when upgrades aren't in the picture for the next 24 months.   The vendor better show up the next day with white gloves and be there in person.
2. Breakdown the total cost of shelfware. Simply put, shelfware is the software licenses purchased, not deployed that is incurring support and maintenance fees.  That great deal 3 years ago you got on 1000 user licenses, when you only ended up using 800, now comes to bite you in the butt.  Calculate the maintenance fee you have for 200 user licenses at $1000/user which is $200,000 X 20% annual support and maintenance X 3 years.  At $120,000, you had better make up the "big" discount you got for buying 1000 user licenses by at least 12% this year and 15% the next year.
3. Craft your overall software adoption strategy. Consider the business drivers that impact software adoption.  Assemble the domain experts, vendor management and sourcing professionals, legal experts, business owners, and IT team.   Apply a long term apps/ recession proof apps strategy and determine when and how licenses will be used in the software ownership lifecycle.  What processes will be supported? What roles will use the software?  When will you upgrade?  Can you consider an alternative?
4. Determine all the alternatives. Depending on your adoption strategy, multiple paths exist.  If there are no intentions to upgrade or enhance the software, self support and third party maintenance (3PM) options from vendors such as Rimini Street and Spinnaker should be considered.  In some cases, an upgrade should be completed before switching over to 3PM or self support.  If the system can be replaced, begin vendor selection efforts so that you will have leverage during the negotiation.  If the system cannot be replaced, consider swapping out unused licenses for credit towards newer or more desirable modules.  Reduce your CPI for new maintenance.  Focus on reducing new license costs.
5. Engage account representative at least one quarter before the contract expires. Put preparation on your side and begin to let your sales rep know 3 to 6 months in advance that you are unhappy with the current agreement.  Based on steps 1 to 4, you now have the ammunition you need to negotiate from a position of strength.

The bottom line - align your contract negotiations strategy with your product adoption strategy.

Successful negotiations will require these 5 steps.  However, more importantly, organizations should keep a current apps strategy and product adoption strategy.  Without these two key documents, lack of visibility into the business case will lead to shortsighted negotiations that fail to meet the true requirements of the business.  Sourcing, procurement, and vendor management professionals should partner with domain experts who can provide third party, independent and objective advice that will complement contract negotiations strategy.  Click here for more contract negotiation strategy tips.

Got more enterprise software contract negotiations questions?  Set up a call with the inquiry team and ask for R "Ray" Wang.

Your Turn

What's your best practice in reducing maintenance costs?  Post your comments here or send me a private email to rwang@forrester.com

Contribute to the 2009 Enterprise Software Licensee's Bill of Rights

Take the new poll on what rights should be included in the 2009 Enterprise Software Licensee Bill of Rights   Posts are preferred!  For every good idea or comment, whether or not we use your idea, we'll send you a copy of the final report.  Let's put the collective wisdom of the web to work and help our end user clients create a fair win-win playing field with the vendors.  We'll be publishing the official update in Q2 2009.  Thanks and look forward to your input!

*Caveats are as follows:  1) This does not constitute legal advice.  Please consult your legal counsel for an official opinion and wording.  2) This does not consider any procurement or vendor management rules that must be applied to your enterprise.  Please work with your vendor management teams for compliance.  3)  Contract negotiation support provides insight into overall trends and price points.  Benchmarks are not provided as each user scenario is unique.

Copyright © 2009 R Wang. All rights reserved.

Reposted from http://blog.softwareinsider.org

It's Time To Update The Enterprise Software Licensee Bill of Rights!

Now's The Time To Assert Your Rights

With the market now in favor of the enterprise software licensee, its now time to update the Enterprise Software Licensee's Bill of Rights to include newer topics such as virtualization, SaaS and subscription pricing, newer usage based pricing models, open source, and vendor lock-in avoidance.  As mentioned in a call to action in a December 2008 Monday's Musings, this groundbreaking report, originally published in December 2006, will be updated to reflect current market conditions.  The goal - improve this reusable contract negotiation model that cuts across the 5 key phases of the software ownership life cycle:

News Analysis: SAP Launches Business Suite 7 - Transformational Change Or Expensive Repackaging?

From SAP's Morton Street New York City marketing HQ, SAP publicly launched Business Suite 7 on February 4th, 2008.  At first, the suite offering of SAP PLM, SAP SRM, SAP SCM, SAP CRM, SAP ERP, and industry applications may seem like a repackaging exercise.  But on deeper analysis, there is a bit more than "harmonized" UI updates and a bundling of previous products with 3 letter acronyms.  In fact, the movement to a synchronized release structure for 5 of the key flagship products onto the common "switch framework" in SAP NetWeaver is no small technical feat.  Key highlights from this morning's announcement include:

Monday’s Musings: Master Data Management - Do Styles of MDM Matter Anymore?

Three Architectural Styles Represent Different Technologies To Build MDM

In 2003, customer data hub (CDI), product information management, and master data management (MDM) vendors strived to differentiate themselves by architectural style.  Each approach had its advantages and disadvantages.  A religion about styles emerged overnight along with a hard core following.  Here's a quick recap (see Figure 1):

Monday’s Musings: A Year of Extremes Brings Us Back Full Circle to the Beginning of the Dot.Com Bust

With a few days left in the year, it’s hard to believe that 2008 is almost over.  Just like our paltry .401K’s and lowered gas prices, it’s like we reverted to the Dot Com bust.  Extreme contrasts in positions and tremendous change made 2008 both exciting. suspenseful, and frankly sobering like 2002.  In fact, it wasn’t just the pace of change, it was an intensity of change like no other.  For example in the topical areas I cover:

Monday’s Musings: 2009 Enterprise Packaged Apps Predictions

So it’s that time of year for holiday cheer and pundits to tempt fate and pontificate.  I'm going to throw out some ideas that may make it in the next Forrester report.  So here are some very very draft predictions for 2009 in order of most likely to least likely to pan out:

End user predictions

1. Heavy discounting continues for new license. Discounts include non-monetary concessions such as training, implementation, integration, and other professional services.
2. SaaS contract terms move from annual terms back to month to month contracts.
3. Single source ERP strategies lose appeal as customers move to contain exposure to vendor lock-in with large ERP vendors.
4. SaaS integration becomes a requirement as customers seek hybrid deployment options.
5. Consortium and shared service buying move beyond the public sector.
6. Customers with more than 3 ERP systems move to reduce to 3 or less.
7. Custom dev shops extend functionality on PaaS offerings.
8. Software appliance adoption exceeds that of open source.
9. Lack of third party maintenance seen as anti-competitive.  Customers demand options.
10. Industry groups ban together to define web services and business process standards.
11. Open source SaaS software improves open source adoption rates.

Vendor predictions

1. SaaS vendors continue to take market share away from pure on-premise vendors.
2. Intense software discounting in Q4 2008 and Q1/Q2 2009 drives less capitalized vendors to go broke or be acquired.
3. ISV’s battle for ecosystem partners as capital for innovation becomes scarce.
4. Apps vendors torn between building on .NET, delivering their own SaaS offering,  or hosting with another vendor like SFDC.
5. M&A activity abounds in Gov Con (i.e. Public sector, Education, Utilities, and Defense verticals) as vendors seek to consolidate around public infrastructure spending.
6. Specialized apps vendors emerge to meet micro-industry niches and many arise from system integrators with software development expertise.
7. System integrators forgo vendor “warnings” and deliver on third party maintenance.
8. A few system integrators will acquire software vendors and drive towards solutions convergence.
9. Software vendors improve support and maintenance offerings.
10. Large ERP vendors cede the SMB market or acquire for market share presence.
11. Cloud computing remains a 2009 buzzword and every vendor will dilute the meaning till it becomes meaningless.

Your POV.

Send me your view of 2009 and what you think will be hot or not.  What’s the one trend you think will pan out?   Feel free to share with me your experience.  You can post here or send me a private email to rwang@forrester.com

Copyright © 2008 R Wang. All rights reserved.
Reposted from http://blog.softwareinsider.org

The Three Pillars of Software Maintenance And Support Policies

After more than 350 conservations with customers about the maintenance and support issue in the past 4 months, it’s becoming quite clear users expect from their software vendors.   While those issues can be broken into tens of categories, three themes have emerged that include:

• Choice. Customers want to choose between tiered plans.  The best plans allow customers to select the option best for them.  Choice means the availaiblity of a basic plan or the full range of services expected in a comprehensive “insurance policy”.
• Value. Users expect plans to show ROI or meet service level agreements (SLA’s).  These SLA’s should reflect outcomes not just process.  If a user contacts a help desk 5 times a year and pays $500,000 in maintenance, at $100,000 a call, they better be getting platinum response levels of 1 hour or less and a resolution in 24 to 48 hours.
• Predictability. Maintenance and support remain one of the biggest budget items in the ownership of packaged apps.  Changes in price, policies, or service levels should be communicated with at least 4 quarters notice.  The best vendors provide guidelines that give customers predictability 2 to 3 years in advance.

The bottom line- can vendors deliver on such promises?

Let’s see which vendors can deliver on all 3 pillars.  Recent financial analyst reports from investment houses (i.e. Merrill Lynch’s Kash Rangan w.r.t. Oracle and Merrill Lynch’s Raimo Lenschow w.r.t SAP) indicate a sharpening downward trend in revenue estimates, not only for Q4 2008, but also for FY 2009 and FY 2010.  Software vendors under pressure to make margins will be forced to choose whether they are willing to take short term pain in stock valuations for long term gain in improving the vendor-client commitment or make their numbers by disenfranchising customers during a time of crisis by violating any one of the three tenants of maintenance pricing.   Because many software vendors have blown through their Q1 2009 pipe in Q4 2008, new deals are scarce and maintenance revenues are the easiest targets for “guaranteed” revenue and price increases.

Your POV.

Are you being hammered in your existing maintenance arrangements? Do you feel locked in or do you feel your vendor is willing to work with you on deals?  Feel free to share with me your experience.  You can post here or send me a private email to rwang@forrester.com.

Copyright © 2008 R Wang. All rights reserved. Reposted from http://blog.softwareinsider.org