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CIOs taking risk of cutting vendor maintenance contracts to save money

As CIOs continue to face budget pressures, they are increasingly dropping vendor maintenance. Here's how to weigh the risk vs. rewards of that move.

As many midmarket CIOs continue to face budget pressures, some are now slashing a mainstay of the IT budget: vendor maintenance contracts for software and hardware systems.

Hard-pressed to find more places to cut, interviews with CIOs suggest they're increasingly inclined to take the risks of going off vendor maintenance, or moving to a cheaper third-party provider, even for mission-critical systems and even though that means forfeiting their rights to upgrade.

The surprising punchline? For CIOs who do not plan to upgrade a system soon, or carry more licenses than they now need because of layoffs, the gamble might be just the right thing to do.

"Everybody is questioning every maintenance spend, and some of the contracts they're finding they can do without," said Duncan Jones, an analyst at Cambridge, Mass.-based Forrester Research Inc.

 The attitude marks a big change from pre-recession thinking.

"Two years ago when I spoke to clients about maintenance, they had a completely different story. Maintenance was a 'good value for the money,' they thought they would keep on paying it for the foreseeable future and, besides, 'It's in the budget. The business is used to it,'" Jones said. "That isn't the case anymore."

The shift in attitude applies to hardware, too, said analyst Jim Browning, in an email. "I have talked to many midsize businesses that are lowering costs by reducing the level of support on some systems to reflect actual use, after evaluating the history of problems and supports calls," said Browning, research director for small and midsize business at Stamford, Conn.-based Gartner Inc.

Post-evaluation, Browning said, many companies find the maintenance is rarely used on equipment such as routers, switches, scanners, printers and so on, and decide it is more cost-effective to do maintenance on a time-and-materials basis. "The other popular action I have seen is to reduce the maintenance window for some of their less critical systems from 24/7 to 9 to 5," he said.

A recent phone background meeting with CIOs from a broad swath of medium-sized industries attested to a willingness to forego vendor maintenance. The trend was especially strong at companies that have experienced across-the-board cuts.

Everybody is questioning every maintenance spend, and some of the contracts they're finding they can do without.

Duncan Jones, analyst, Forrester Research Inc.

One CIO said he was analyzing all his maintenance contracts in anticipation of negotiating vendors down on numbers of users and levels of service. He said he was also going without support on some hardware and software systems that had proved highly stable. "If we haven't gotten our money back on the maintenance and the thing hasn't broken in a couple of years, we are willing to take that risk," said the CIO, who like others shared IT strategies on the condition of anonymity.

Another CIO said he has dropped a lot of maintenance contracts, even on mission-critical systems. "It is not something we want to do, but it gives us the needed cost savings we need to come up with."

The story was much the same at a construction firm, which dropped several maintenance contracts on hardware and software this year. "Most of those were ones who were actually notifying us of major increases, not just your normal half or 1% or 2%," the CIO said, including some hardware vendors asking for 10% to 15% raises, or in one case pay before the old contract expired. He found cheaper third-party providers for some of the technology.

Some third-party vendors are seeing the trend as well. Las Vegas-based Rimini Street Inc. quadrupled sales bookings in the first half of 2009 compared with the first half of 2008, according to spokesperson David Rowe. That came on top of a quadrupling in sales in 2008 over 2007.

Weighing the risks and benefits of dropping vendor maintenance

For those who are thinking of forgoing maintenance or moving it to a third party, Forrester's Jones said the following risks and benefits should be weighed:

Benefit: Saving money. Jones said companies can save at least half by going to a third-party provider for maintenance. For example, a company that spent $1million on a software package and pays the traditional 22% annual maintenance fee, or $220,000, can cut that to $110,000 by using a third-party provider, he said.

In fact, the savings can be more than half at companies that have downsized and now carry more licenses than they need. Large vendors typically don't allow you to cut your maintenance fee by essentially giving back licenses.

Risk: Forfeiting upgrade rights. The risk is that by going off maintenance you forfeit the upgrade rights, which can be very valuable later when the new version comes out. "They may find that in four or five years' time, they have to re-buy their licenses and they wish they had stayed on maintenance. Maintenance is of great value if you upgrade regularly," Jones said.

For companies that don't plan to upgrade, or, have applications like ERP that are so customized that they really can't upgrade, the vendor maintenance "is of little value," he said.

Risk: Being caught short-handed on licenses. If you decide to go off support and find you need more licenses because the business -- hooray -- is growing and you want to buy more licenses for the same old product, you might have a problem, Jones said. "The software vendors will say, 'Sure you can buy more licenses, but you can't buy licenses without support, and you can't buy support for just some of your licenses; you need it for all of them.' So they will get it there," he said.

So if you're going off support, make sure you have license capacity to be sufficient "forever," Jones said -- otherwise you're going to pay.

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

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