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Why Oracle and SAP are so reliant on their support fees

While many organisations scratch their heads over the budget for their IT estates, wondering how they’ll find the capital to make business critical improvements and advancements, Oracle and SAP are pretty comfortable.

The mega-vendors have monopolised the ERP market for a great many decades and instilled a sense of dependency in their customers, meaning they are able to dictate the pricing of their support and maintenance services. 

In essence, their pricing structure has been carefully constructed, and the vendors have devised more than one way to ensure customers keep paying up. 

But are the vendors too reliant on their support fees? And, if so, how can they have such a hands-off approach to maintaining customer relationships?

Raking in support fees

Support fees are the biggest source of recurring revenue for the mega-vendors, as they typically rake in a 90% profit margin. Yes, 90%.

Despite the lofty price tag for vendor support services, it is well documented that customers feel these services leave a lot to be desired. So how are the vendors able to generate such a high profit margin on their support services?

We can think of three key reasons why:

  1. It comes as a default service when purchasing products (not too dissimilar to the insurance policies provided by manufacturers, such as Apple Care for Apple products).
  2. They benefit from economies of scale because they do not offer tailored patching, support for customisations, or a customer-centric service.
  3. Matching service levels policies and Unlimited License Agreements (ULAs) keep organisations locked in and generate substantial recurring revenue.

The trouble is many organisations are overpaying for poor support and have the expectation that they are investing in the future of their IT estate, as well as the current upkeep.

However, rather than investing the profits they make on support services in bettering existing products, the vendors instead fund their own innovation and the development of new products, such as their Cloud-based applications.

Oracle has such an extensive product portfolio, meaning each customer only uses a nominal percentage of those on offer. As a result, there is a strong likelihood that a lot of Oracle customers – that pay out for support for on-premise technologies – will fund the product advancements that other companies want/need for their chosen products, while not benefiting themselves from the vendor’s investment picks.

It seems sort of amiss that these organisations must forego their own innovation projects in favour of supporting their vendor’s, right? So, maybe it’s time that Oracle’s customers instead consider cost-saving initiatives that could enable them to invest in the vendor product releases and upgrades that are relevant, needed, and of great value to the future of their organisations.

Leaning on the upgrade cycle

But support fees aren’t the only way the vendors can squeeze their customers for revenue.

In fact, support fees are just the beginning because while the vendors invest that capital into developing and launching new products, they’re also starting the desupport countdown for an organisation’s current product.

For example, Oracle has a wide range of products, all varying in age and version and, for this reason, the vendor states that it cannot manage that volume of products simultaneously. As a result, Oracle only offers support and maintenance for its most recent releases which is where the vendor’s tiered system for Oracle Support comes in:

  • Premier Support – offered for the first five years following a new product release, and is considered Oracle’s top tier of support.
  • Extended Support – follows on from the initial Premier Support period and is offered for three years. Support fees can increase by as much as 24%, while support levels decline.
  • Sustaining Support – offered indefinitely once the Extended Support period expires; however, customers are no longer eligible to receive new critical patches and fixes, only those that the vendor has already developed.

This tiered support model is all part of a much larger plan, of course. A plan we’ve summarised in one infographic:

The endless Oracle upgrade cycle

By charging organisations more for less (support services, that is), it encourages them to upgrade to Oracle’s latest product release and renew their Premier Support experience; trapping them in the never-ending cycle.

In addition, organisations are sometimes told they cannot upgrade a particular application without first upgrading their database. This can become even more costly should the organisation have to adhere to the vendor’s sneaky matching policy which effectively means that, if you have licences for both Oracle Database and a related product, both products must have the same level of support from Oracle. For example, you could support both products with Premier Support, Extended Support… or no support at all. 

All the costs slowly start adding up, and before long upgrading your software can cost your organisation considerably more than was initially anticipated. 

And for the vendors? Well, not only are organisations locked back into Premier Support, but they have also begun the cycle all over again.

And this is something Oracle is very much playing on with its plan to release new databases each year. This puts massive pressure on its customers to complete more frequent upgrades in order to continue receiving the highest level of support from the vendor, and prevents customers from having the time, resources, or funds to consider exploring database options with other vendors.

Embracing third-party support

While the vendors might be dependent on their customers’ fees, these customers don’t have to be dependent on the vendors. 

Organisations that have their ERP estate on-premise or in a Private Cloud have the option of switching to a third-party support provider. 

Until third-party support, organisations had to endure the costs and pay Oracle/SAP’s fees to remain supported. Now, organisations have the option to step back from their vendor’s regular price rises and instead focus on their own IT roadmap. 

So, what do you need to know about third-party support for the Oracle software?

  • We can support any Oracle product version, improving the ROI of your existing systems and enabling you to stick with the current versions for as long as you need.
  • You will benefit from a customer-centric approach to support and will receive BAU and security patches.
  • You will save at least 50% on your current support bill by moving to us, generating significant savings that can be reinvested into new technology, digital transformations, or Cloud solutions.

Support services are at the very core of what third-party support providers do, which means we aren’t developing a full product line or Cloud platform that we need to raise significant investment for.

Not only do we pass these cost-savings onto our customers, but you also won’t catch us pushing any sort of upgrade cycle.

If you’re ready to stop supporting the vendor’s best interests and want to start building towards your own future with third-party support, then let us help you construct a business case with our free, downloadable template:

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