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According to Gartner, software spend is the second-highest IT spend category as of today. Much of this spend is comprised of ongoing software maintenance and support costs. For large software publishers such as SAP, Microsoft, Oracle, and IBM, software maintenance and support revenue represents nearly 50% of their total annual revenues. Gross margins on this support average 90%. With so much IT budget being devoted to the maintenance of software, many enterprises are looking to third-party software maintenance providers to preserve and sustain their software titles. The reason? Third-party providers are able to provide high-quality support at typically one-half to one-third of the cost of the OEMs (Original Equipment Manufacturer).
The market for third-party software maintainers continues to grow at a rate of 30% per year. Key suppliers include the following:
We anticipate that there will be more entrants to the market and that companies already providing service will continue to evolve and diversify their offerings.
Enterprises should understand whether engaging with a third-party software maintainer is right for them. Below are situations where an enterprise may want to consider a third-party maintainer:
Stable software: Software that is stable (defined by frequency of support calls, type of support, severity level of the incidents) could be a candidate for third-party support. In a scenario such as this, third-party software maintainers tend to drive high savings and better support in most instances than the OEM.
End of Support (EOS) by software OEMs: Instances where the OEM has announced an end to software support and maintenance of software are prime scenarios in which a third-party software maintenance provider can be leveraged. Third-party maintainers are in a good position to preserve and sustain on-premises software.
Older software: As a corollary to the EOS indications, if software is older but still under support, third-party providers are an attractive and viable alternative to support from the OEM. Third-party maintainers can support titles as old as 15 years and older and nearly half the cost of OEM support.
Absent or expiring caps on maintenance and support: If there is no price protection language in your contract, or if the yearly price increases are higher than a recognized index such as CPI All Urban Consumers, then third-party software maintenance services should be evaluated.
While there are numerous situations and scenarios in which third-party software maintenance makes sense, enterprises should not blindly enter into an agreement with a third-party maintainer. Instead, it’s wise for IT procurement professionals and their stakeholders to use the scenarios above as a guide to determine if it makes sense to further investigate third-party services. If the enterprise concludes it’s feasible then we recommend the following next steps:
An analysis of “total cost of ownership, including any fees or expenses to OEM maintenance: This would include an understanding of what the fees and charges would be to reinstate OEM maintenance, if required.
A full “Request for Proposal” process: This practice will serve to thoroughly vet and analyze what the third-party provider can do and at what cost.
Legal consultation: Partnering with Legal will be important for two reasons. First, a thorough review of contracts and support policy documentation from a Legal lens will make sure that the enterprise understands what it will give up if it discontinues OEM support of its software (including security patches, firmware updates and other items provided by the OEM as part of its maintenance and support of the software). Second, OEMs are eager to protect their maintenance and support revenue streams; some have already attempted lawsuits and injunctions against third-party software maintenance providers. Linking up with your Legal partner early on can help identify and resolve potential issues before they start.
A pilot phase to “test drive” the third-party maintainer services: For example, the business may choose to carve out a small portion of its technology solution to the new maintainer for a few months in order to gauge their success, and later transition the rest of the business if that pilot proves successful.
Rising software maintenance costs are forcing enterprises to look at alternatives such as third-party maintainers. In the right circumstances, third-party maintainers hold the promise of cost savings and equal or higher quality support and maintenance. However, due diligence is required before committing to a partnership with a third-party maintainer to ensure that this solution is indeed the best one for the
Reach out to us today to discuss maintenance options for your organization!
We invite you to join in the discussion on LinkedIn to share your thoughts, and let’s keep the conversation going!
Global IT Category Manager
Jeffrey Gaguzis is a global IT category manager for WNS Denali. Jeff has over 20 years in Sourcing and Procurement with over 15 years focused on the IT category. Before joining WNS, Jeff worked for Fairmarkit, a pioneer in tail spend management technology. Prior to that, Jeff held similar senior positions at Accenture, TD Ameritrade, and FreeMarkets/Ariba. Jeff holds a BS in Microbiology from Penn State and an MBA in Marketing/General Business from Robert Morris University.