Global CIO: Why SAP Won't Match Oracle's 22% Maintenance Fees

Last week, SAP said it would postpone until January a decision on whether to boost its annual support/maintenance fees from 17% to 22%. At the time, I said I thought the 30-day delay was a commendable effort by SAP in coping with a change of monumental significance to it and its customers, and noted that expert analyst Ray Wang called it "a good faith gesture and a step in the right direction."

But the more I've thought about it, the more I find it incomprehensible that SAP would attempt to enforce in this environment an across-the-board increase in annual support fees from 17% to 22%. I'm betting that the issue will be decided by SAP's stark and rational realization that such a move would push its customers past the point of no return.

I can support that assertion with five concrete reasons, and I'll get to those in just a moment.

But first, since Oracle's maintenance fees are already 22% versus SAP's 17%, why would it be so bad for SAP to make the jump to 22%? The core reasons goes to what each company fundamentally is right now, and to what each is becoming.

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Oracle is on the verge of becoming a systems company, and as soon as it liberates Sun Micrososystems from the dungeon of Castle EU it will begin selling what it calls software-optimized hardware packaged with its databases, middleware, and applications. Oracle is diversifying into multiple lines of business and will become less dependent on its 22% annual maintenance fees, which have grown to make up more than half of Oracle's revenue (see "Global CIO: Where Do Oracle's Profits Come From?" in the Recommended Reading section at the end of this column).

That doesn't make Oracle's 22% fees any more palatable for customers, but Oracle's evolution might allow it to avoid being so dangerously dependent on the maintenance-fee cash cow for its very viability. And that diversified future might even give Oracle enough financial flexibility to reduce its annual fees, or at least allow some tiered options.

SAP, on the other hand, is to the very core an enterprise applications company: that is who is, what it is, and what it will be. If SAP alienates its enterprise-applications customers, it will be cutting off its own food and water supply—and we've all gotta eat to survive. So let me offer five reasons why I think it will be suicidal for SAP to raise its enterprise-support fees next month.

1) Heightened Competition, Part 1 The real exposure SAP faces is from below: the fleet of small but nimble cloud and SaaS software providers that right now might seem puny and inconsequential to a global powerhouse like SAP, but surely won't seem so in a couple of years if SAP's sale of new enterprise licenses and revenue continues to stagnate or decline. And at the head of that pack is Salesforce.com, and Salesforce has decided to take the battle right into SAP's territory by launching a major expansion into Germany with its full suite of cloud CRM apps and services:

"We're looking to invest heavily in Germany," [Salesforce.com president of sales Jim] Steele told Reuters in an interview at the company's Cloudforce European user and developer conference in London. "Until now we've only invested opportunistically. . . ."

He added: "We believe SAP is vulnerable right now," citing delays to a mass rollout of SAP's own SaaS offering, Business ByDesign, as a factor. Steele said German customers had slowly been persuaded of the safety of Salesforce's cloud-computing model. "In Germany everything has to be quality," he said. "My feeling is, Germany has done its due diligence over the last five to seven years."

With the world's most powerful cloud computing applications company unleashing a major offensive in your own backyard, is this the right time to jack up annual maintenance fees and thereby assure that customers will give the new kid on the block a very long, hard, and eager look? I think not.

2) Heightened Competion, Part 2 Another cloud-based provider of enterprise-level apps is NetSuite, and that while it's much smaller than Salesforce.com, it's growing, it's financially solid, it's hungry, and it's got a lot of current or former SAP customers who are vigorous evangelists for NetSuite's products as much cheaper and simpler alternatives to SAP's powerful but complex products. Here are two of them:

The New Release, which owns and operates thousands of DVD rental kiosks throughout the U.S. under the Moviecube and Blockbuster Express brands, recently embarked on an aggressive expansion campaign to expand their share of the DVD rental market. . . . Replacing SAP R/3 with NetSuite OneWorld will save TNR approximately $325,000 per year in annual recurring ERP spend. "NetSuite has greatly reduced our stress level, helped us streamline our basic processes, and organize around our aggressive growth strategy," said Tracy Terrell, CTO of The New Release. "We can make better, faster decisions about capital allocation, new kiosk deployment, perform monthly close more quickly, and customize the system ourselves in a matter of minutes."

Second, here's an extremely compelling rationale for switching from SAP to NetSuite from the CFO of netSuite customer Asahi Kasei Spandex Inc.: "We were spending 3% of our revenue on SAP. By switching to NetSuite, we reduced that cost to 0.1% of revenue."

With customers like these already looking for cheaper and simpler alternatives, will SAP customers perceive a hefty increase in support fees as a boost in the business value they're getting from SAP? I think not.

3) Cloud Computing's Inevitability SAP has one of the world's most technologically advanced and knowledgeable workforces and it has a staggering wealth of software expertise in every possible combination. And yet, it has no real cloud-computing solutions to offer its customers because the accompanying business model was less appealing to SAP than its current on-premises business with the wildly profitable margins on annual maintenance fees. There's nothing wrong with that—companies exist to maximize their profits and their opportunities. But they also exist to serve and delight customers, and SAP now realizes its timetable for getting Business ByDesign to market was dangerously off. So now it will be playing catch-up, and early adopters of Business ByDesign will be asked to deploy brand-new, never-used applications to run key parts of their businesses. In that context, does it sound like the right time to spring a 30% increase in annual maintenance fees (from 17% to 22%) on customers? Again, I think not.

4) The Bluff Gets Called If SAP were going to jack up annual fees, why wouldn't it have just done so last week? What's the big magic about a one-month reprieve? One astute software-industry guy I know says SAP was concerned that an increase at this time would create enormous blowback that could tarnish its quarterly numbers. Indeed—but I hope SAP's not expecting the reception in January to to be any better! If customers would have blown a gasket with a December announcement, then they will surely blow a gasket with a January surprise. In fact, it might be worse because they might perceive SAP had played them with talk of a customer-oriented delay to gather more input, etc., etc., etc. No, I think if SAP had the cards it needed, it would've played them.

5) A Lack Of Internal Discipline? Finally, a move of this magnitude would require incredibly buttoned-down internal organization, coordination, and message discipline: every executive and every division in every country telling the exact same story, with no variation chalked up to language or local custom or hard-to-control personalities or the new moon or anything else. And over the past several months, SAP has shown an astonishing lack of such internal discipline: one executive board member says one thing, one geography tries a new approach, new pricing schemes are rolled out here but not discussed there, alternative licensing models are alluded to vaguely but never explained, and more. SAP needs, above all else, to get its own internal strategies and messaging in order before it can reasonably expect to be able to spread the word to tens of thousands of customers around the world.

Your turn: if anybody's got five or one or 10 reasons why SAP should crank up its maintenance fees from 17% to 22%, send them my way and we'll post them right here in Global CIO.