Article

Oracle/SAP lawsuit fuels third-party maintenance argument

Linda Tucci, Executive Editor

Try to get a CIO to discuss vendor maintenance versus third-party maintenance for that oh-so-critical software that runs the company, and invariably the response is a polite "no thanks."

Why should they? Expounding publicly on the vicissitudes of software maintenance is not likely to improve upcoming contract negotiations.

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For sure, few CIOs are willing to publicly take sides in the ongoing legal battle that makes the topic timely: to wit, the Oracle Corp. lawsuit accusing SAP AG of "corporate theft on a grand scale" for the illicit downloading of Oracle software by SAP subsidiary TomorrowNow Inc. Bryan, Texas-based TomorrowNow provides third-party software maintenance to Oracle customers.

"You never know who you're going to be doing business with," explained a loyal Oracle customer who did not want to be named.

At the heart of the Oracle case is the economic value of the maintenance contract in a mature software industry and the viability of third-party support, said Gartner Inc. analyst Dan Sholler. Walldorf, Germany-based SAP and Redwood City, Calif.-based Oracle are going head to head because SAP's TomorrowNow provides maintenance support for Oracle's PeopleSoft.

Analyst Ray Wang doesn't pull punches. He said the current situation stinks, likening it to IBM's lock on mainframe hardware in the 1970s. Major software vendors are not giving third-party maintenance providers the access necessary for providing a high level of support, in Wang's view. As a result, CIOs are held hostage to annual maintenance fees that can run to 25% of the contract.

"Think of it, a million-dollar contract -- every year they're spending $250,000 of support," said Wang, who covers business software trends at Forrester Research Inc. in Cambridge, Mass.

Is it worth a quarter of a million? Not by year five or six, Wang said.

"The major bugs are fixed. You're getting some functionality, but most companies would say they are not getting that value. If someone comes along and can cut those maintenance costs in half, that is a great deal," Wang said.

Choosing a maintenance provider should be the software buyer's prerogative. But because of the way most software licenses are negotiated, software owners are often owners in name only, in Wang's view.

"If I could stop paying maintenance costs and sell those licenses, that would be very interesting. If I could use another provider to give maintenance at half the cost, that would be very compelling, but we don't have either," Wang said. "We don't actually have a perpetual license."

Not every expert agrees. AMR Research Inc. analyst Jim Shepherd said the premise of third-party maintenance is that the contractor, hired to act on the company's behalf, has exactly the same right to access as the company's employees.

An asset like no other

Shepherd isn't exactly a shrinking violet when it comes to taking on big software vendors like SAP and Oracle. At an industry conference last fall, Shepherd warned a roomful of CIOs that consolidation in the enterprise software industry is threatening innovation.

But software maintenance?

"I don't feel up in arms about it at all," Shepherd said. "Software is different from other kinds of assets. It's constantly changing, and it has to."

While 22% or 15% maintenance tax on the software sounds like a lot of money, Shepherd said it's the cost of doing business in a volatile environment subject to changes in both business practices (new regulations, privacy issues, etc.) and in the technology itself.

"On the one hand, you have this need for the software functionality itself to be continually updated, and on the other hand it sits on top of a highly volatile technology platform, where hardware operating systems, databases, middleware, user interfaces and so on are constantly improving and being developed," Shepherd said.

"It is not realistic to think I am going to buy an enterprise application and keep it for 15 or 20 years and be perfectly happy with it if it doesn't change. I wouldn't be. And my users would never stand for it," Shepherd said.

Vendor-specific

Application support is "context-dependent," said Eric P. Meyer, a co-founder of NetFlix Inc. Meyer has worked with a number of startups since leaving the online movie rental company in 2001. He said a broad-brush policy doesn't work for software maintenance.

"If the vendor comes up with one version every four years and you pay 22% a year or 25% a year, you've paid for the software over again by the time you get the next version. That might feel quite expensive," Meyer said. "If they come up with a new significant improvement every year, and they take good care of you, then it might not feel expensive."

Companies should determine the quality of support they can get, and how much they need. "If you are using open source, you don't really need support because everything is out there. But if you use a very complex software like Oracle applications, it is obvious you want their support," Meyer said.

I don't feel up in arms about it at all. Software is different from other kinds of assets. It's constantly changing, and it has to.

Jim Shepherd, analyst, AMR Research Inc.

Do the major software vendors have you over a barrel? Yes and no, said a veteran CIO, who did not want to be quoted. If the software is strategic -- that is, the system is expected to change and grow with the business -- you have little choice but to go with the vendor, the CIO said. When it comes to "static" software IT has a number of options, including negotiating for source code and maintaining the software in-house or contracting it out.

CIOs are not without blame for the high cost of maintenance, Wang said. Given short tenures, the CIO who made the decision to buy the software is on to the next job long before that software has served its useful purpose.

"They're gone! The people who stay behind are stuck with making it work, and then the next guy buys new software and makes the same mistake again," Wang said. The result is that many CIOs are thinking in three-year time frames, not the 10 years that's appropriate for a lot of software, Wang said.

Meyer, a self-described serial entrepreneur, has done his share of job-hopping since co-founding Netflix. His latest company is Zurock Inc. He said he doesn't buy the CIO-at-fault argument. Major software decisions in large companies are not made solely by the CIO, but by a team that includes the business user, he said. "Usually it is a very long and well-studied decision. You don't buy a new piece of software just because you have a new CIO, you buy it because your business needs it."

June Drewry, global CIO at Chubb & Son Inc. in Warren, N.J., agreed. "The cost of bringing in systems is so expensive, the new guy ain't throwing it out. They're trying to find a way to make hay out of what exists."

Let us know what you think about the story; email: Linda Tucci, Senior News Writer.


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