No More Maintenance
Because Kennametal's ERP system has been unable to keep up with changing technologies, Hanna says the company never benefitted from the millions in maintenance fees it paid to cover upgrades. "We paid maintenance for nothing."
Not all CIOs feel that way; nevertheless, IT leaders have been frustrated with ERP maintenance costs for years. Recent budget cuts and hiring freezes have brought the issue to a head, making relationships with ERP vendors more tense than ever. The tension has risen in part because, with so many IT projects still on hold, big ERP vendors have been "forced to live off maintenance contracts," says Paul Hamerman, an analyst at Forrester Research. In one well-publicized example, the $113 billion Siemens reportedly challenged the fees of its longtime ERP vendor, SAP, then worked out an undisclosed deal.
The major vendors have made some gestures to quell such uprisings. For example, SAP is addressing customer complaints about maintenance by delaying the start of planned price increases and stretching them out over seven years, according to Janet Wood, the executive vice president of Maintenance Go To Market. SAP has also worked with large user groups to devise ways to measure the value of enterprise support, Wood says. Oracle maintenance is a flat 22 percent of licensing fees and the vendor rarely negotiates.
Still, some CIOs say that for ERP to have a viable future inside their companies, stretching out price increases isn't enough; they have to change drastically how much it costs to maintain it. Some are enticed by discount third-party maintenance providers.
Choice Hotels, for example, is considering Rimini Street to replace maintenance from Oracle, says Carol Galonis, vice president of corporate information systems at the $642 million hotel chain.
"Right off the bat, they start with a model of 50 percent off" what Choice Hotels pays Oracle, Galonis says, "and the service levels seem to be richer." She expects to raise the prospect of switching maintenance vendors in negotiations with Oracle and make a decision by June.
Doug Tracy, CIO at Dana Holding, researched analyst firm estimates about where maintenance money actually goes and found that 90 percent of those fees are pure profit for the vendor. For Tracy, there is no more time or tolerance for vendor games.
The $8.1 billion auto parts supplier has in recent years fought a hostile takeover attempt as well as been in, then emerged from, Chapter 11 bankruptcy protection. Then the auto market tanked, and Dana's sales reflected the 30 percent to 70 percent decline. The company had to scale back some ERP projects and Dana wanted its vendors to work with them to reduce fees. He declines to name Dana's main ERP vendor, but says he wasn't getting the deal he was looking for.
Dana's vendor didn't lie down. To try to persuade Tracy that maintenance fees are valuable, the vendor analyzed Dana's use of its support, he says. The findings: Dana made 21,000 requests to the vendor between January and September last year. About 98 percent of them didn't involve human intervention; they were automated look-ups on the vendor's knowledgebase. "We're not getting much," Tracy concluded.
So he stopped making maintenance payments to his main ERP vendor as of December 31. "That's a risky strategy, though not as risky as vendors would have you believe," he says.
Risks to any CIO who decides to stop paying maintenance include being hit with penalties assessed by the vendor for breaking a contract and being left without technical support in an emergency. With Dana's lawyers, Tracy studied the company's contracts and felt comfortable that it would not be violating any terms by stopping maintenance payments. Then Tracy and his IT team explored ways to get support for the ERP system in question through other avenues. They found many, including online user forums, books and consultants.
One result of the move away from provider support is that Dana's internal IT people have to be more savvy about the ERP systems the company relies on--able to fix what may go wrong. But, he says, there have been no technological show-stoppers in years because ERP, like other legacy systems, is mature and reliable. Plus, there's plenty of ERP talent.
Eliminating maintenance saves money, because Dana is no longer paying for a service of questionable value, and it sets a precedent with the company's other ERP vendors. "You have to show value every step of the way," Tracy tells his suppliers. "If you try to hold us hostage, I will call what I see as a bluff and just stop payment."
Join the CIO Australia group on LinkedIn. The group is open to CIOs, IT Directors, COOs, CTOs and senior IT managers.