Are most enterprise software buyers receiving an adequate return on their investments when they buy maintenance contracts from their software vendors? How do manufacturers know that the rising prices they’re paying for maintenance are delivering the value they would expect from any investment? In other words, are manufacturers really getting their money’s worth when they buy maintenance from their enterprise software vendors?
These questions occurred to me recently after I heard Oracle CEO Larry Ellison speaking on a conference call with a bunch of financial analysts. Ellison was explaining to the analysts how, with the global economy lurching into recession, Oracle was able to increase its first quarter 2009 revenue by 18% and its profits for the same period (ended August 31) by 28%.
A big reason for Oracle’s seeming immunity from economic stagnation, Ellison said, was all the maintenance revenue the company pulls in. Maintenance, he crowed, is an “extremely high-margin business,” generating Oracle’s highest profit margins.
And, as Oracle has grown, maintenance revenue generated from its various acquisitions has grown as a percentage of Oracle’s overall revenues. In fact, Ellison noted, maintenance now generates the majority of Oracle’s revenue.
Maintenance, Ellison said, helps Oracle invest more in product engineering and new product development, which, in turn, allows the company to gain share in the various markets in which it competes. In other words, maintenance revenue subsidizes new product development.
One way to look at what Ellison was saying is that the company’s cost of providing maintenance services is significantly lower than the revenue that maintenance generates. At least in Oracle’s case, what it costs Oracle to provide maintenance and what customers pay for maintenance is out of whack.
This, of course, doesn’t necessarily mean that customers aren’t getting good value from their software maintenance deals. Some manufacturers — particularly larger ones who can cut advantageous deals — probably do. And you could argue that all customers benefit from the development of the innovative new products that maintenance revenue subsidizes.
But we often speak to others who feel that what they pay large vendors like Oracle and SAP for maintenance — up to 22% of the original license price per year — is in excess of the value they receive. Many tell us they selectively or rarely take advantage of software upgrade rights that come with maintenance because the perceived benefit is unclear. Many buy maintenance from their software vendor because they see it as a security blanket. A very expensive security blanket.
That turns out to be a very good deal for Oracle. But you have to wonder how long enterprise software customers will be satisfied to be the source of vendors’ very high profit margins.
—Jeff Moad, MA Executive Editor
Is Software Maintenance Worth It?
Are most enterprise software buyers receiving an adequate return on their investments when they buy maintenance contracts from their software vendors? How do manufacturers know that the rising prices they’re paying for maintenance are delivering the value they would expect from any investment? In other words, are manufacturers really getting their money’s worth when they buy maintenance from their enterprise software vendors?
These questions occurred to me recently after I heard Oracle CEO Larry Ellison speaking on a conference call with a bunch of financial analysts. Ellison was explaining to the analysts how, with the global economy lurching into recession, Oracle was able to increase its first quarter 2009 revenue by 18% and its profits for the same period (ended August 31) by 28%.
A big reason for Oracle’s seeming immunity from economic stagnation, Ellison said, was all the maintenance revenue the company pulls in. Maintenance, he crowed, is an “extremely high-margin business,” generating Oracle’s highest profit margins.
And, as Oracle has grown, maintenance revenue generated from its various acquisitions has grown as a percentage of Oracle’s overall revenues. In fact, Ellison noted, maintenance now generates the majority of Oracle’s revenue.
Maintenance, Ellison said, helps Oracle invest more in product engineering and new product development, which, in turn, allows the company to gain share in the various markets in which it competes. In other words, maintenance revenue subsidizes new product development.
One way to look at what Ellison was saying is that the company’s cost of providing maintenance services is significantly lower than the revenue that maintenance generates. At least in Oracle’s case, what it costs Oracle to provide maintenance and what customers pay for maintenance is out of whack.
This, of course, doesn’t necessarily mean that customers aren’t getting good value from their software maintenance deals. Some manufacturers — particularly larger ones who can cut advantageous deals — probably do. And you could argue that all customers benefit from the development of the innovative new products that maintenance revenue subsidizes.
But we often speak to others who feel that what they pay large vendors like Oracle and SAP for maintenance — up to 22% of the original license price per year — is in excess of the value they receive. Many tell us they selectively or rarely take advantage of software upgrade rights that come with maintenance because the perceived benefit is unclear. Many buy maintenance from their software vendor because they see it as a security blanket. A very expensive security blanket.
That turns out to be a very good deal for Oracle. But you have to wonder how long enterprise software customers will be satisfied to be the source of vendors’ very high profit margins.
—Jeff Moad, MA Executive Editor