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Five negotiation tips for cutting SAP maintenance contract costs

In this podcast, get negotiation tips for cutting your SAP maintenance contract costs and learn negotiation mistakes customers make and what savings they're getting.

After nearly two years of friction with customers, SAP now plans to reinstate a tiered Standard Support offering alongside SAP Enterprise Support.

Customers who purchased software after early 2008 and paid the higher maintenance and support fees can move to Standard Support when their current maintenance and support contracts end. Standard Support will cost 18% of net licensing fees, while Enterprise Support will eventually cost 22% by 2016.

In that light, customers will be negotiating new SAP maintenance contracts. In this podcast, Ray Wang, a partner with Altimeter Group and former vice president and principal analyst at Forrester Research, shares his five tips for negotiating better maintenance contracts. Wang also talks about the types of deals SAP customers are getting and why some are opting for third-party maintenance.




  Negotiating maintenance contracts  
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  Program highlights  
  • What's the mood amongst SAP customers right now when it comes to maintenance?

  • Explain the first of your five tips for negotiating maintenance contracts -- assembling all the relevant contract information.

  • Why is it important to break down the total cost of shelfware?

  • What should a customer take into consideration when crafting an overall software strategy?

  • Why is it important to determine what your alternatives are?

  • Why is it important to engage account representatives at least one quarter before the contract expires?

  • What's the biggest mistake customers make when negotiating contracts?

  • What are some of the deals SAP customers are getting these days?

      Podcast transcript  

    Editor's note: The following Q/A is a partial transcript based on the podcast with Ray Wang. Please contact with any questions. What's the mood amongst SAP customers right now when it comes to maintenance?

    Wang: Like all customers, they're looking for ways to save money. And in IT costs, maintenance is probably one of the biggest areas out there. With the announcement of Enterprise Support, I would say that when we talked to about 800 clients, maybe 750 are really trying to find ways to reduce their maintenance, spend, and trying to reduce shelfware. Customers are out there in general just looking at ways [in which] they can reduce overall costs not only with maintenance but also with operating in SAP in the long term. Explain the first of your five tips for negotiating maintenance contracts -- assembling all the relevant contract information.

    Wang: When you get into a contract negotiation, you want to make sure you're armed with the right level of information. Some of it is: What do you have? How many licenses do you have? How many are being used? What's being deployed? What's shelfware, and what's going to be deployed two months from now or two years from now? Or it may never be deployed because you got it for free and you might not get around to it.

    There's another aspect of walking into a conversation about maintenance, which is really, "What have you used this maintenance for? How often do you call for support? How often do you set up support packages? What are you doing about your upgrade plan? Do you call much for technical assistance?"

    What you really want to do is figure out how much you're spending, and what you're getting in terms of value. Most customers are going to find that if you call, and you're spending about $500,000 or $1 million a year and you call five or 10 times a year, then these support calls are going to be really expensive, because they're anywhere from $100,000 to $200,000 a pop. So you'll want to figure out and be able to say, "Hey, we're not using this support very much, so why are we paying this much for maintenance?"

    It might be the other case, where you did an implementation, you are calling SAP all the time, you're seeking a lot of technical support and knowledge, and you're getting a lot of value. But this is the important question, and getting all that information together. Why is it important to break down the total cost of shelfware?

    Wang: This is important because when you're thinking about shelfware -- software licenses that are purchased and haven't been deployed -- you're really taking away any discount structure you've got. So if you've bought, for example, 1,000 user licenses, and you're using only 800, basically you're paying maintenance on 200 licenses, which is about 22% in today's support fees, every year on those licenses, and really at the end of five years you've paid for those licenses once in maintenance. Hopefully you've deployed that. So, it's important to figure out where you are on shelfware. Because there are some concessions you might get for software that you bought but that you haven't deployed, and shelfware is a good part of assembling that information. What should a customer take into consideration when crafting an overall software strategy?

    Wang: This comes in when you're thinking about how you're going to tie your adoption strategy -- which is really your product strategy for SAP -- with your contract negotiation strategy. And this is where you're thinking about business drivers, such as the push towards efficiency, your movement towards regulatory compliance, what you're doing in terms of increasing, improving revenues, or doing something more strategic. How does this come back into how you're going to use the licenses, and when you're going to use the licenses? Typically, you think about this across the software ownership lifecycle.

    This is selection, implementation, utilization, maintenance and retirement of software, and then you want to think about which processes are going to be supported. Which roles will use this software? What are the alternatives to the software? When are you going to do the upgrades? Why is it important to determine what your alternatives are?

    Wang: This is where you pull all this together, your software adoption strategy with your contact negotiation strategy. And you come up with these areas where you say, "We don't plan to upgrade a certain module or upgrade a certain set of divisions, so maybe we should self support, or consider third-party maintenance. Or maybe we're not doing a good job of running our environment, and maybe we should consider AMS -- application management services -- from a system integrator or another provider."

    When you're thinking about these cases, you're really thinking about, well, what are the alternatives devoid of this specific software vendor? What are the things that you have to do from a technical strategy based on your software adoption strategies? Why is it important to engage account representatives at least one quarter before the contract expires?

    Wang: You have to set expectations with your account reps, and these contracts are taking more than a couple of quarters to be signed and get to agreement. There's a lot of back and forth going on, and I think you need at least three to six months in advance, especially if you're unhappy with the current agreement and want to make some changes. Hopefully, based on what we're doing with steps one through four, you've got what you need to be able to negotiate from a position of strength. What's the biggest mistake customers make when negotiating contracts?

    Wang: I think customers forget that the sales rep on the other side isn't working for them. And I say that in a way that's different because the sales reps have a total account value that they're looking at. And that's basically the number that they expect to grow the SAP account over the next three to five years. By confiding in them so much in terms of your product strategy, your roadmap, you're setting expectations in their mind as to where you're going to be and what your spend levels are.

    Now, you want to do that if you've got a strategic partnership in place. But you must keep in mind that the incentives are not aligned in your favor -- incentives are really designed for the sales reps to make their number. And sometimes you've got to keep some surprises out there to kind of grease the deal or to make sure you've got some leverage in the deal. So I think some of the biggest mistakes we've seen customers [make] is talk about their future roadmaps and plans and set false expectations of what their future spending [will be], which then leads to pressure on the sales rep who has forecast a number of what you're going to be spending. And that leads to a lot of misperception, and a lot of difficulty in terms of ratcheting down numbers, in terms of new licenses or maintenance fees. What are some of the deals SAP customers are getting these days?

    Wang: As everybody knows, each deal is customer-specific. But I can share with you some trends that we're seeing. Some customers are seeing some movement in terms of credit towards licenses, especially shelfware and products that they're never going to use, or towards another set of licenses that they might use or might have some potential. I see a lot of customers that are still holding off in terms of finding their maintenance agreements and waiting to see whether things are going to change, especially with what's happening with SUGEN and the KPIs as to what level of increases may occur and what they will need to do with their contact strategies going forward.

    I also see some customers that are consolidating some of their other software contracts with other vendors, and by doing that they're freeing up some money for new spend. And, of course, with any new spend, you're getting a lot more if you're able to spend money, whether it's bundles or in terms of more licenses for what you normally get or different sets of training credits or education credits that come out there. So if you've got money to spend, then you're definitely seeing some deals. If you don't have any money to spend, you are definitely seeing the sales reps take their time as they're prioritizing total account value over other things. Have customers become frustrated so as to start seriously looking at third-party maintenance, and if so, who are they going to?

    Wang: Since Rimini Street's announcement of third-party maintenance last year, I think people are waiting for Rimini Street to talk about what customers have been up live, or where they are in the process and what's going on.

    There is a lot of interest in third-party maintenance. I will say that through conversations with system integrators, it's very common for them to hear from their clients asking whether they're going to offer third-party maintenance. I can say that third-party maintenance comes up in almost every conversation we have with not only our SAP clients, but in general all of our ERP clients, because people are really looking at ways to halve their cost of maintenance.

    If you don't know what third-party maintenance is, it's basically when a third party comes in and provides tax and support and other regulatory requirements and enhancements on the software, and typically for half the cost of the original maintenance. You don't get access to upgrades -- you're typically making this move if you've [reached] a very stable point in your software, but it's definitely a way to save money if you're not going to move forward.


This was last published in April 2009

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