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Software maintenance pricing - Fair or out of control?

Like it or not, software and hardware maintenance is a way of life in IT. Although IT organizations make every attempt to free up enough dollars to continue moving the business forward, sometimes entrenched vendors demand an increasing part of the budget pie. My department is currently facing two large maintenance increases of 10% and 15%, respectively. With a 0% increase in my budget this year, these increases mean that something else has to go. Read on.

Like it or not, software and hardware maintenance is a way of life in IT.  Although IT organizations make Maintenance.  Keeping the old running.  Any way you put it, maintenance contracts are money spent maintaining existing systems.  Maintenance contracts and costs also make up a huge percentage of many IT budgets and the costs continue to increase year after year after year.  Double-digit percentage increases are, unfortunately, far from uncommon.  In fact, for the coming fiscal year, I'm facing double-digit increases in two large maintenance contracts.  One contract goes up 10% per year like clockwork while the other is going up 15% this year.  On the second contract, we we've apparently been under special promotional pricing for the past three years, which has now expired.  If we had still been under the promotion, the increase would have been only 5.75%.  5.75% I can stomach.

What am I getting at?

Software vendors are particularly proud of their wares.  The fact that we see 10% and 15% increases in maintenance pricing indicates that these vendors feel that major additional value is being added year after year.  Either that, or they're simply sticking it to us... attempting to be optimistic, I'll assume the former and do some analysis to determine if it's the latter.

What are my options?

On these software titles, I can't really rip and replace in the short-term.  The first title is our learning management system which is heavily used by our faculty.  Over the next year, however, we will start having discussions about the future of this product on campus to decide whether or not it is still serving our needs.  Although the product used to be very, very good, upgrades for the past two years have been pretty horrible; as such, we're two versions behind simply because there is a fear about what will happen with the next version.  While stability is always important, foisting what is sometimes considered unnecessary change (i.e. upgrading) on the faculty can be a losing battle, particularly when such as upgrade creates more problems than it fixes.

The second title is our ERP system.  Obviously, a rip and replace of an embedded ERP system is a massive undertaking.  To make the cost matter worse, we also have an added burden; next year, we'll slightly surpass 1,000 students for the first time.  Once we do so, we move into the next pricing tier for maintenance.  That impact: A whopping 50% increase in software maintenance cost for this title.  I am in the process now of negotiating with the vendor to see if we can lessen the impact.

We have a lot of other hardware and software for which there is maintenance attached.  In general, when maintenance cost increases get into the double-digits, I start looking for alternative solutions.  For example, up until about two years ago, we were very much a Cisco school.  We were, however seeing maintenance costs increase at 12% to 15% per year.  Cisco SmartNet isn't cheap to begin with, so there maintenance increases were relatively onerous.  We're now an HP Procurve school; the entire project was funded by replacing Cisco maintenance with a five year lease.  We now have a fully funded replacement cycle for our network paid for with what was maintenance money.  I keep a relatively detailed budget spreadsheet; any vendor that imposes double-digit maintenance increases on their product is reviewed to determine real need and value and to discover whether there is a viable alternative.

For the coming year, I don't have a choice; I need to keep supporting these products.  With a 0% budget increase, it simpy means that we'll have to skimp somewhere else or request additional budget funds.

In summary, when maintenance costs rise at crazy rates, you have a few options:

  • Negotiate with the vendor. While this won't work for every title, if you have real options for moving to a different solution, the vendor might back off the massive increase. In this economy, vendors can't afford to lose customers.
  • Start a search for a replacement. If a vendor won't negotiate, you can always start looking for alternatives, assuming they're out there and are affordable.
  • Rip and replace. Replacing our Cisco gear with HP was the easiest no brainer ever from a financial and technical perspective. Better equipment for less acquisition money and no accompanying maintenance cost? Sign me up!
  • Suck it up. Sometimes, the increase is simply an added cost of doing business.

What do you do?  Are you seeing double-digit increases every year in the services you use?

About

Since 1994, Scott Lowe has been providing technology solutions to a variety of organizations. After spending 10 years in multiple CIO roles, Scott is now an independent consultant, blogger, author, owner of The 1610 Group, and a Senior IT Executive w...

26 comments
jamjube
jamjube

Ok - I am one of those evil software developers. Here is the story from the other side of the fence. In sum, stop your whining. The reason you are paying on the back side is because you are generally too cheap to pay on the front side. Here is how it happens ... I see an opportunity in your industry that I think needs a software solution. I fund all the R&D up front out of my own pocket. Maybe the product will "make', maybe it will not. After 5 years of hell at my end, and 5 years of expense, and 5 years of risk, I have a package that with 5 people can do in 3 minutes what it used to take 300 people all day to do. So, essentially you are wasting a day-expense for 295 people. Let's say that your average cost is about $200/day/person and then add the hassle factor for all their whining and complaining and wanting of Christmas turkeys, etc etc --- you get the idea. At that point you are easily at over (200x300) $60,000 in expense (per year) to do this task. So the question is what is it worth to you to not have to pay this expense? At my top end, with perfect software you should be willing to pay a little bit less that $60,000/ year for my solution, but of course my solution has cost too. Every once in a while your users will need training, every once in a while it will not be able to do something that you want it to do. And of course maybe it would be ok to split the savings.... You get the idea. Now, are you willing to agree in your hearts that as an economic question that $60k/year should be the top end of yearly fee you could spend and still make money? NO - and the responses to this post will prove it. What happens is that you look at the software and you look at YOUR salary which is $150,000. Then, instead of keeping you eyes on YOUR dinner plate you look start looking at my side of the table to see how much money you think I am going to "make" out of the deal. So, instead of looking at things and assessing that in 3 years YOU will have saved your company $180,000, your will make a quick assessment that in 3 years you will have paid ME $180,000 and you will then fester and concentrate on this, whereupon, you will get jealous and begin to engage in populist thinking about how it is unfair that I get to make what YOU see as a "windfall". At that point the deal is essentially dead because now it is about YOU teaching ME a lesson. Remember now, it was MY brain that saw the solution in the first place, It was MY risk, not yours, that is all tied up in the offering - which is gong to save YOU $60,000/YEAR. So then, this is where the beatdown occurs and instead of negotiating with me as a value added ecosystem partner - a partner that can help you make money - you treat ME as a VENDOR. In that case then, I treat YOU as a customer and I will give you your deal, but then, in response to your cheap attitude, I simply will do not production test the main platform as much as I would like, and willl I give you the software at your desired "serfs wages" cost, but, I will execute a maintenance contract with you. Now YOU think that this maintenance contract is to fix crap that is in the software, but THAT is NOT what it is for . What it is really for is to compensate me for my brain and to get me the payment I want to get for releasing MY intellectual property for you to use to save yourself $60,000/year with. It is sad to me the impediment is in large part your jealousy that I am making money out of the deal as opposed to your happiness at looking at how much money YOU are making out of the deal. In closing, every once in a while I come across a ecosystem partner that "gets it" and makes a payment based on his benefit, not mine, and for these people I work MY ass off because they reflect my line of thinking of trading value for value, instead ot thinking that they can trade me (my brain) like I was a commodity.

ari.vainio
ari.vainio

Open Source based systems typically has lower maintenance fees and especially lower intial costs. Openess in source code level enables multiple vendors to provide support. Ari Vainio, Priorite.fi

prhodes
prhodes

From Eric S. Raymond, _The Magic Cauldron_ (1999): "The brutal truth is this: when your key business processes are executed by opaque blocks of bits that you can't even see inside (let alone modify) you have lost control of your business. You need your supplier more than your supplier needs you - and you will pay, and pay, and pay again for that power imbalance. You'll pay in higher prices, you'll pay in lost opportunities, and you'll pay in lock-in that grows worse over time as the supplier (who has refined its game on a lot of previous victims) tightens its hold. Contrast this with the open-source choice. If you go that route, you have the source code, and no one can take it away from you. Instead of a supplier monopoly with a chokehold on your business, you now have multiple service companies bidding for your business - and you not only get to play them against each other, you have the option of building your own captive support organization if that looks less expensive than contracting out. The market works for you." Ten years later, and in this economy, this statement is more true than ever. -Phil

Forum Surfer
Forum Surfer

Their maintenance is ridiculous. Sure, there actual help requests are on the level of Cisco, answered promptly and professionally. The sad thing is, google searches through their user support forums usually fixes my problems. I have elected to purchase the product and NOT pay maintenance for a few years. I don't get the upgrades when they roll around, but they often don't roll around quick enough. It's cheaper for me to repurchase the software from scratch when a necessary update rolls around. I had a few licenses in the development/research department that needed support for some custom in-house apps, so I was allowed to simply pay "back payments" on those select licenses to catch me up. Saved money in the long run. I don't necessarily agree with the switch from Cisco to HP, but I'm looking at it from my perspective. I have 15+ sites spread all over a city with fiber connections to all. Some are large buildings with WLC's and WCS's with clients talking on wireless voip all through the building without interruption. From a central management standpoint, I simply don't have the manpower to start dealing with other vendors and the problems that will certainly arise from gradual change-over. On a scale this large, I can't afford the time spent troubleshooting from an HP management tool here and a Cisco management tool there. And quite honestly, I have never seen any whitepapers on HP network equipment in a large deployment, particularly at the core and the backbone...then again I admittedly haven't looked either. My current Cisco setup allows me to manage a fairly large network with a network staff of 4. Honestly most of our time is spent pre-paring rollouts for new phases of construction/moves or adding levels of security. With around the clock service a must I can't switch vendors even if I wanted too. My constant purchase/trade-up of new equipment gets me alot of free cisco training that allows my staff to stay sharp. On a smaller scale...yeah I'd dump Cisco and the absurd smartnet pricing in favor of other solutions. I have several colleagues that are quite fond of linksys business class equipment performance.

mandrake64
mandrake64

Large database vendors seem to be worst when it comes to increasing price of maintenance and support for no net gain in features or quality of support offered. We are currently stuck with a much older unsupported database version which the big O does not support but still expects ever increasing annual payments for problems they refuse to fix. Migrating would be far too big an exercise in the current economic climate. The only option is further consolidation of servers to reduce total number of licenses required.

LocoLobo
LocoLobo

No maintenance contract at all. Smaller places can't always afford to pay 10-15% of the total cost of an expensive system each year. In the mean time fix it yourself as much as possible. They figure paying on a per incidence basis is cheaper in the long run. Sometimes it is, sometimes it isn't.

richardp
richardp

Something's gotta give. Scott took action towards negotiation and seeking alternatives. Cisco lost and HP won. We're caught in the middle sometimes in our IT realm, having to justify our services. Thanks Scott for relating your experience; the positive outcome is encouraging.

medfordmel
medfordmel

Has anyone sought Citrix support recently? One of my clients' IT staffers claims that he contacted Citrix for support of a small Citrix installation, and was told that there was a $10,000 software maintenance fee, after which he would have the opportunity to pay $700 per support incident. Without the $10,000, there's supposedly no access to the $700 per-incident support. I didn't verify this myself, as it wasn't really my business, but it seemed pretty extreme to me.

ggbyrne
ggbyrne

So much software is customized and tightly integrated within operations that software companies know it is difficult to extricate ones-self and switch. Scott Lowe was being very kind about the motivation for the uplifted pricing. Vendors of both software and hardware will continue automatic increases until users make them stop with actions, not begging. Attacking hardware maintenance price increases is far easier than wholesale replacements every time there is an expired contract. The example of replacing CISCO with HP was one very effective approach. Also very effective is dropping SmartNet on stable devices and buying a few parts for the hardware break-fix needs. CISCO is a bit unusual in that SmartNet is a combination of both software and hardware maintenance - so dropping software maintenance requires another hardware maintenance strategy. For other products (servers, client devices, printers, storage) the opportunities for cost control, if not outright savings, abound throughout the product life-cycle. In many cases (all?), the hardware service contracts being proposed(including pre-paid warranty uplift) have no price relationship to the service needs of the equipment. This is a formula for a rip-off. Users typically negotiate from the basis of a totally artificial and arbitrary price. Whatever the final discount - the result is always too much money being spent for too little service. IT Managers can turn the tables and gain control of hardware maintenance pricing. Start the evaluation by focusing on the service actions needed to support the equipment (Reliability). This approach allows managers to compare the total cost-of-ownership for new devices, as well as providing a road-map for alternative service approaches. Alternative service options include refining service level agreements to appropriate levels, self-maintenance, 3rd party maintenance, and all permutations in between. All managers need is to know the reliability of the equipment. Some of this information is readily available (or should be) internally. The ideal next step is to collaborate with others to expand the knowledge base. If anyone wants further information on how to collaborate, we can discuss further.

bill
bill

I can only add one observation ...... Why does McAfee charge more for the annual renewal of its PC protection software suite than it charges for a new licence ?

MidwestSteve
MidwestSteve

I'll be interested to see other comments on this topic, as it is relevant to many of us. Let the vendor know the proposed cost exceeds the value. Most things are negotiable. Ask them about other options for maintenance, such as a per incident fee, third party support, etc. These may not be viable, especially if you're also interested in upgrades and fixes. Can you structure a payment plan that costs less this year and more in future years? Ask if they have different types of maintenance agreements. If you can legitimately identify alternative options that will likely provide some leverage. You may also want to engage a consultant to help you with the renewal. They can usually provide an idea of what other customers have paid that is hard to identify on your own. With your new agreement contractually require a cap on annual increases to the CPI, 3%, or some other amount you can budget. If it makes sense have a renewal clause that brings this provision forward to future terms. I'm not a fan of automatic renewals, but that's another subject.

Scott Lowe
Scott Lowe

Making money is far from evil... and if I continue to see value in the product or service, I'm happy to keep paying the maintenance cost. I have no problem with a valued vendor making a profit from my purchases. That's how they stay a vendor and avoid the unemployment line. However the deal is structured at the front end, though, is your problem - if you didn't get the price you wanted, either charge more, build a product that people will pay what you're asking, or walk away from the deal. Or, simply tell me up front that annual maintenance is, in reality, part of the overall lease/purchase option you described rather than simply being annual maintenance. As far as training and new features go: With the title I have in mind, some training is included with annual maintenance, but much is fee-based. New features are built into new versions - sometimes - but it's also a whole lot of bug fixes. What I don't like are INCREASES in those costs that are far and above the norm, particularly as organizations everywhere tighten belts. If that title brings me 10% to 15% additional productivity year after year, great! I'll pay it. When an organization starts to look at maintenance and wonder where the value is, the vendor should be worried. Either the product isn't performing as it should (which could be the fault of either side), but it's in the vendor's interest to continually demonstrate their value.

Forum Surfer
Forum Surfer

Lots of open source alternatives are out there. Some you have to pay for documentation. Others do offer paid support if you so choose. What happens when you have a small staff due to budget constraints? All of our positions aren't dedicated to one task. We don't have programmers who have time to focus strictly on open source apps to replace what we currently have. I don't care to work around the clock constantly or 60-70 hours a week developing and deploying new solutions utilizing open source alternatives. I have a life outside of IT that is far more meaningful and important so while I love my job and my 40-50 hours a week there, I don't care to overwork my staff just to save a buck on software. We adopt when we can and we use several open source apps when possible (such as moodle as mentioned before and some open office ventures, some successful some not so much). It is certainly not a driving force and sometime the time spent learning and adapting is just as expensive as purchasing some vendor supplied product. Other times, as with ESRI and MapInfo there is no professional grade open source alternative. I think that in the near future there will be much more of a balance between open source apps and closed source vendor apps in mainstream IT. IMHO it would be foolish of me to rule out either open source or vendor specific solutions without looking at each solution with extensive ROI's.

Scott Lowe
Scott Lowe

We've looked at Moodle and other alternatives. It's not as easy as it sounds to make a change like that when faculty are involved.

ggbyrne
ggbyrne

You have hit upon the key issue preventing competitive displacement generally, and not just for CISCO vs HP. Lack of confidence that the solution is solid is# 1. No one wants to switch vendors and put their butts on the line. I am trying to remedy that information gap by tracking hardware failure rates in an independent and disciplined fashion. I'm not trying to use this forum as an infomercial - but in all seriousness we need people like you to share their experience so that we can build the knowledge base. Same with your friend that loves his Linksys equipment. Once users can compare products on the basis of reliability, they can then make much better decisions on which products to deploy, which to retain, and how much is reasonable to pay for a service solution. There is a lot of fear of the unknown which is bloating budgets everywhere.

MikeGall
MikeGall

Try to negotiate in a refund if the expected value added doesn't occur. For example: I used to work at a hospital. We had a software program that we had paid 1M for and 500k for service over three years. We got absolutely no service or updates during that time. A new version had come out but they conveniently forgot about our site, or they didn't have time (new customers got first crack at the installers schedule). We had even purchased a component prior to release later "that year". It didn't appear on the market for 2 years all along we were paying for service on it. The vendor had a lot of trouble in our area, their sales guy left, then a new guy came in and got promoted a couple months later to replace the north american sales guy, followed shortly by the regional tech support guy leaving etc, I feel their pain, but still they got 500k for absolutely nothing. Life would have been so much easier if we could have got our money back because we had it negotiated into the contract ahead of time. It should be no service no payment. That simple.

a.barry
a.barry

Sometimes you're paying for upgrades, sometimes for support, sometimes you're paying to prevent everything from suddenly going dead as soon as your contract ends. Sometimes I wonder why they still call it "buying" software?

MikeGall
MikeGall

Haven't heard of it,though never used citrix products. However, Sun charges in the 300/hr 4 hour minimum for service out of support contract so it is pretty comparible. That said paying for a support contract only to pay per incident seems strange. Depending on the level of contract you have a lot of vendors won't cover after hours/weekend work as part of the contract. So if you normally schedule your maintenance after hours chances are you aren't going to get your money's worth out of one of those contracts. I wonder if your friend was asking for after hours work?

NotSoChiGuy
NotSoChiGuy

...but I had a similar experience less than 2 years ago. One of our servers hadn't been renewed (it was going to get retired within a month of making the call), and as such, they weren't willing to support an issue that impacted the cluster. I eventually spoke with a manager, and got the help I needed, but not after some unnecessary stress. NOTE: The issue itself had nothing to do with either the server or the cluster setup; asides from the fact that one server's hiccups were causing problems.

mchinsky
mchinsky

Many of the major ERP vendors are hurting in this economy. In the past the nailed people off maintenance with all the back maintenance PLUS penalties as if they were the IRS. Now, they need cash bad and are offering off maintenance customers the ability to get on with NO penalties (you saved all that interest) and more importantly, 40% discounts. So they are basically screwing their loyal maintenance customers who paid full boat over all these years. Just let it drop, offer to pony up, but 60% and watch how quicky they are willing to take your cash these days. Not sure if this will last past the recession, but take advantage of it now.

medfordmel
medfordmel

They give you the first taste for free (or at reduced cost). Once you're hooked, all bets are off.

nick
nick

I like the suggestion above of determining value presumably a cost benefit analysis of the maintenance. A lot of hardware is easy, maintenance seems to be about 20% of the purchase price. If you have 100 items of hardware don't pay maintenance just keep a stock of spares and swap outs. You will probably end up ahead. Of course that breaks down if you have only one or 2 pieces of proprietary metal. Software rarely adds up. For example Cisco Smartnet, how often do you actually apply IOS updates, of those times did you really need to do it? Are you resolving bugs, enhancing security or just keeping up because you think that you need to. I had a situation with a previous employer. We built a new server environment. We sat down with the vendor of our Financial Software and had them validate our design. This package is updated every 6 weeks or so, most of the changes are for compliance to reflect changing tax rules or other rules of the business environment. Over the course of 18 months the Vendor made minor changes to their supported environment. One day they told us that they could no longer support us as our environment was not compliant. Yet they still insisted on maintenance payments to receive the updates. We were told to rebuild our environment to be compliant. They had us over a barrel, we needed the compliance updates otherwise we would have to stop trading and yet the vendor would not help if things broke. It was very messy as some of the issues we had dated back to before rebuilding the environment. I don't work there any more and I think that the issue is heading for the courts.

stephen.a.feller
stephen.a.feller

Great original article Scott and a number of good responding posts.

Forum Surfer
Forum Surfer

Let?s say I want to build a new building and cut cost by running an HP/Nortel/whatever based solution. I need to know that the equipment will play well together. I?ve worked in environments with mixed equipment such as Cisco and SMC. There were several caveats with that setup, particularly with STP that could bring the network to a crawl due to loops if things weren?t setup properly. If I?m going to switch I?ll need a vendor that will work with me closely and perhaps let me borrow some equipment for a month or two for evaluation/lab testing. I?m just not going to purchase $400,000 worth of HP or anything else to equip a new building and deploying it into my WAN without knowing %100 that it will work just as well with no interoperability issues and the same up-time/MTR that I currently have. I'd basically like to test it myself or see it successfully implemented elsewhere on a smaller scale with operational data/specs/results. With budget crunches and smaller staffs that most of us are facing, we can't afford to spend more time troubleshooting. All that money saved on equipment may just be going to pay myself and my staff's over time salary.

LocoLobo
LocoLobo

that happens to us too. We pay for support and it doesn't happen. Some kind of refund/rebate should be negotiated in. Or maybe a performance bonus/fine. Most of the time what my boss does though is simply pay for fixes on a per incident basis. It is usually cheaper than the support agreement in the long run. The trick is in figuring out which.