Perpetual ERP software - a broken model?

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I received a note a while ago from a former colleague. He had met with an executive at a large high tech manufacturer in the North East. The discussion turned to the high cost of ERP support and maintenance. He noted that this company and several others chose not to upgrade their Oracle installation;

“Oracle’s annual maintenance fee combined with the cost of upgrading to Release 12 has become so expensive that we and others opted not to renew support this past year.”

Another indication that ERP support and maintenance costs are a significant issue. A quick search on Google brings a wealth of articles talking about the cost of ERP ownership: "Is this Highway Robbery or Indentured Servitude? Oracle Is "The Teflon Don" of ERP Software Maintenance ERP Software Maintenance: An Offer You Can't Refuse?" and "Oracle: Don't Hate the Player, Hate the Game ERP Support Drama: How Far Will Oracle Go to Protect Its Golden Egg? Operations Hangover".

There are more, but these give you a good idea as to the state of affairs with ERP support and maintenance. An article by Thomas Wailgum at brought this issue into focus. In this article Wailgum discusses a concept from a Gartner report called ‘Global IT Debt’.

As Gartner defines it, global IT Debt is “the cost of clearing the backlog of maintenance that would be required to bring the corporate applications portfolio to a fully supported current release state”. According to Gartner, the Global IT Debt will total 500 billion in 2010 and has the potential to jump to 1 Trillion by 2015.

The Gartner announcement points out that the most worrisome issue is that many IT organizations don’t have an application inventory or a structured application review process which means that IT management isn’t aware of the extent of the problem. On the one hand, working for a software company, I understand the importance of support and maintenance payments.

This money goes to staffing support call centers, tracking down and fixing bugs and to funding research and development into new capabilities that will ultimately provide additional value to customers. In our case, however, we provide an on-demand service that includes support and maintenance in the monthly payment. Of course as a subscription service you incur little upfront costs so the monthly payment seems far more reasonable.

The old ERP model of perpetual, on-premises licensing adds insult to injury by demanding a staggering up-front price and ‘extortion like’ annual support and maintenance costs. At some point (and it’s starting to happen…) companies are going to say enough is enough and start to look for alternatives. So what alternative is there? The software as a service (SaaS, or on-demand) model is certainly gathering momentum.

When we first introduced our on-demand offering in early 2006, customers would often express great concern over data security and system availability. Today, after years of proven performance and security both with our software and with other SaaS companies like Taleo and Salesforce, most prospects don’t even ask about on-premise models. Will Big ERP go on-demand?

They say they are, but a quick look at what they are offering, it appears to be more of an outsourced model than on-demand. Some companies like NetSuite are delivering ERP for small / medium businesses via SaaS. My thinking is that companies like this will expand upwards and will start taking some of the large accounts away from SAP and Oracle. Time will tell.

What are your thoughts on the ERP maintenance agreements? Are you considering going off support? When is the last time you upgraded? Comment back and let us know.

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