Will Oracle Or SAP Blink First On 22% Maintenance Fees?

October 2, 2009 from InformationWeek – “Oracle and SAP seem to be nearing a point of having to make some hard choices about whether to consider modifying their one-size-fits-all 22% annual fees for upgrades and support…

Here's part of what Goldmacher said in that report:

We believe ERP upgrades, the primary motivation to pay maintenance fees, are on the wane because it's a mature market. Vendor investments in R&D are on the decline, innovation is lagging and redeployment costs are multiples of the license fee. As a result, customers are increasingly questioning the value of paying annual maintenance fees of 20% of the cost of the original license for the occasional use of technical support. We believe that as the value proposition around maintenance fees diminishes, there is significant opportunity for third party service providers to offer low cost tech support…”

180 View – The ERP vendors have their customers between a rock and a hard place. They know that the costs to convert to a new system are huge and customers don’t want to bite that bullet unless they really need to. Assuming an original license cost of $500,000 and an interest rate of 5%, the NPV of maintenance fees amounts to about $475,000 over 5 years. Let’s assume that a new system will cost ½ as much as the old one and that maintenance fees will be 18% rather than 22%. Let’s also assume that the cost to implement the new system including both internal and external resources is twice that of the license fees. That amounts to $250,000 (license fees) + $500,000 (internal and external implementation costs) + $200,000 (approximate NPV of new maintenance costs) - $475,000 (NPV of existing maintenance costs) = $475,000 of additional costs to convert to a new system. They got you if price is the only factor.