“Overshooting” – paying too much for software support
In his seminal Harvard Business Review article (and, later, his book) “Does IT Matter?”[i], Pulitzer Prize finalist Nicholas Carr refers to the concept of “overshooting”. In essence, this sets out the idea that, over time, hardware and software manufacturers develop and enhance products that provide way more functionality than the majority of its customers actually need. Referring to this growth in product functions and features, Carr states “while computers may be governed by Moore’s Law, buyers are not. Sooner or later, most of them become satisfied with what they have – they just don’t need another dose of power or another scoop of features”.
For example, in a February 2020 blog post by technology researchers at UpperEdge[ii] in relation to SAP extending support on some products to 2027, UpperEdge state that, on average, 30% of the on-premises software footprint is underutilised by customers.
This is a key factor underpinning the value related to the use of large on-premises ERP and related software applications and their ongoing support charges. Many organisations using ERP, CRM, financial applications and the like are largely using features and functions that have been in the software for years. Very little of the incremental functionality that is delivered in each new software release is actually of additional interest or value to customers. And, unfortunately, many customer organisations find themselves incurring the cost and disruption associated with installing new software releases simply to comply with supplier support policies as the versions they are (happily) using are going out of support.
For on-premises software, software support is generally purchased with the initial software licenses. On an annual basis thereafter, it is usual for the customer to pay software support charges that range from 20% to 25% of the licence fee. This is a lot of revenue to hit corporate opex budgets year after year, particularly when the value delivered through the support services wanes significantly over time. For example, it is very common for organisations to use old versions of software applications (Finance, ERP, CRM etc.) that meet all their functional needs but then find that they are no longer supported by the software vendors. Some versions may be so old that, not only is the customer paying for entitlements that they may never use (such as latest functional updates etc.) but may, in fact, be paying for extended support (in addition to the “normal” support fees) simply because of the age of the software version that is in use. An initial 23% annual support charge with an annual indexation factor of 3% will end up costing 30% at year 10 – very often for no tangible value at all due to the version in use being no longer supported.
With the arrival of third party maintenance suppliers such as Spinnaker Support, Rimini Street and Origina to provide alternative software support options, customers now have a real opportunity to reduce costs while availing of high quality software support services.
In brief ….
- Large organisations can spend 20% to 25% of initial software licence costs on annual support, providing the right to technical support and new versions/releases of the software over time.
- This is generally uplifted by an indexation factor, thereby compounding the aggregate support cost year on year.
- As an opex charge, this directly affects the company bottom line. Until now there have been few, if any, alternatives to direct support charges levied by software manufacturers such as IBM, SAP and Oracle.
- Third party software support providers such as Spinnaker Support, Origina and Rimini Street and now provide real alternatives for applications and technology software support. The savings are significant – savings in excess of 50% of existing support charges are quite achievable.
- This area of software spend has been largely ignored up to now. Third party software maintenance is now being viewed by many organisations as a real, risk-free opportunity to significantly reduce annual software support charges and bring immediate value to the bottom line.
- A real savings prize is there to be won – what is there not to like about the prospect of taking large sums from your budgeted software maintenance costs?
- Every Procurement Software Category Manager should be considering this as a means of delivering yet another cost savings success from tightly constrained budgets.
For further information on how my clients have gone about unlocking the real savings opportunities related to third party software maintenance, email me at email@example.com