The article below is based on a recent post from Mark Smith, CEO of Support Revolution, who spoke to Enterprise Times about whether Oracle and SAP are too reliant on support fees.
Oracle and SAP’s money-makers
Did you know that Oracle and SAP make roughly 90% profit on their support services? It is this money that fuels each organisation’s drive to the Cloud and their innovation projects. Does this mean that loyal customers are overpaying for and contributing to solutions that they may never implement? Does this make it harder for them to transform to Cloud solutions? Are Oracle and SAP milking their cash cows dry?
Both vendors provide ERP applications, databases, software etc. and then charge organisations to support them. Income from support fees is supposed to fund support teams and innovations in existing products, but the reality is that the majority of profits fund new products instead. This drains the best engineers from traditional products leaving support services thinner despite regularly increasing pricing. Support for older products gets more expensive, and the demands to upgrade get louder.
Oracle and SAP’s Endless Upgrade Cycle
We call this business practice the Endless Upgrade Cycle:
Organisations pay support -> vendors use it to fund innovation -> new product gets released -> old product goes unsupported -> organisations need to upgrade to stay in support -> repeat.
The upgrade cycle is a relentless treadmill for Oracle and SAP customers: you either keep up or fall behind.
Keep up and you pay 17 – 22% of your licence costs in support fees each year (+4% annually of course, above the average rate of global inflation for at least eight of the last ten years). Or fall behind and pay the price – each year your systems are out of support results in a big jump in your support fees, regardless of how stable they are and how few support tickets you raise.
Customers who fall behind are, in effect, Oracle and SAP’s cash cows, to whom they give little and take a lot. They’re essentially the ones being “milked” as it were, to fund Oracle and SAP’s rising star products and competitive Cloud solutions like S/4HANA and Fusion.
The top-heavy business model
While this cycle is certainly profitable for the vendor, it doesn’t seem sustainable. It’s like Oracle/SAP are building a tower.
At the bottom are the cash cows; the reliable customers who’ve been with them for years (anyone not upgrading, but still paying support).
At the top is the ‘Next Big Thing’; whatever Oracle and SAP are developing at the time.
If the vendors keep taking resources from the bottom to build the top, then eventually the whole thing collapses.
That’s why vendors need to rethink their pricing strategies and support methods and how they’re treating longstanding customers. Otherwise, over time their cash cow customers are going to become fed up or be unable to justify the expense – or most likely both – and will look for an alternative.
That’s where third-party support providers like Support Revolution come in.
Breaking the upgrade cycle with third-party support
Organisations that have their ERP estate on-premise or in a Private Cloud have the option of switching to a third-party support provider.
Despite what the vendors may claim, third-party support can cover any and all versions of Oracle and SAP software, if you own the licences in perpetuity. By switching support partners, you won’t see a difference in service; all you’ve done is change who provides your support. You’ll still receive the security and legislative patches you need for half the price.
Organisations essentially hit the “pause” button on their software, because using third-party support means you don’t have to upgrade to receive the maintenance you need.
This means unlocking huge savings – which otherwise would’ve gone to Oracle and/or SAP – that can be reinvested into new technology, digital transformations or Cloud solutions. It also means added stability for organisations that get to stick to familiar functional systems.
The bonuses unlocked come at the cost of no longer receiving upgrades from Oracle or SAP.
We speak to Oracle and SAP customers every day who are sick of the demands to upgrade and the constant price increases to their support bills. They have their own timelines to move to the Cloud and their own reasons to stay on older products – and they’ve all decided that foregoing Oracle and SAP upgrades is a small price to pay to save 50% on their annual bills.Mark Smith, CEO of Support Revolution
Is giving up the latest releases a worthwhile trade? Well, you should consider how much value an upgrade brings you, if any at all – because many organisations are already deciding that it is a trade worth making.
A support revolution is brewing
Third-party support for ERP software isn’t a recent phenomenon. It’s been around for more than ten years, and the market has had a successful decade. At the end of 2019, Gartner estimated that the third-party software support market could increase by 200%, from $351 million in 2019, to $1.05 billion by 2023.
The demand for change is there. Third-party support has revolutionised the market for a straightforward reason: it provides the same (arguably, better) service, but for less money — an alternative that wasn’t there before.
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. And crucially, save a lot of money while they’re doing it.
Meanwhile, Oracle and SAP naturally want to avoid losing customers to third-party support. The vendors like to spread rumours that third-party support ‘isn’t safe’ or that it can’t provide the same level of support that they can.
None of these claims are true. Organisations can greatly benefit from switching to third-party support. If anything, the only ones in ‘danger’ of what third-party support can do are the vendors themselves.
Original article published by Enterprise Times on 03 September 2020.