Maintenance model faces triple threat

Cloud computing, third-party maintenance and customers fretting about IT debt may turn into a toxic view for on-premise enterprise software vendors.

Enterprise software's maintenance model is facing a trio of threats: cloud computing, third-party maintenance and a customer base that is increasingly wary of being locked in.

It's unclear when the software maintenance model will blow, but when it does the likes of SAP and Oracle may have problems a few years from now. The acquisitions in recent weeks of software-as-a-service vendors tell the tale. SAP paid up big time for SuccessFactors in a US$3.4 billion deal and Oracle bought RightNow just a few weeks earlier.

While these deals are designed to hedge the software business model and keep companies like Workday and Salesforce at bay they also indicate a tipping point of sorts. Oracle and SAP would have laughed off the importance of cloud computing just a few years ago. Now they're talking the cloud game as much as they can.

SAP co-CEO Bill McDermott said:

With the addition of SuccessFactors to our portfolio, we will gain immediate strength and leadership presence in the fast-growing segment of cloud-based applications for people and talent management. This is a top priority for CEOs globally.

The combination of SuccessFactors and SAP will in fact create a cloud powerhouse. According to Gartner, human capital management products are expected to reach US$10 billion by 2015. Talent management alone is expected to reach US$4.5 billion, with 75 per cent of the available solutions expected to be cloud-based. In other words, this market is in the early days. SuccessFactors gives us the number one human capital management solution in the cloud.

It remains to be seen whether SAP is a cloud juggernaut going forward, but the strategic value of SuccessFactors makes some sense. SAP has to defend itself and it's better to keep customers as subscribers than to lose them completely. It's worth noting that SAP gets Siemens back as a HR customer via the SuccessFactors purchase.

Cowen analyst Peter Goldmacher said:

SaaS HR start-up Workday is on fire with the best sales pitch in all of software: buy our brand new HR products for 50 per cent of the cost of your 15-plus-year-old Oracle HR/SAP HR/PeopleSoft maintenance bill and we'll even run it for you to keep your costs down. Every deal Workday does leads to the cancellation of an Oracle or SAP maintenance contract, which is a 95 per cent net margin business for the legacy software providers. Workday will book over US$200 million in revenues this year which we estimate is worth over US$400 million in SAP/Oracle maintenance contract renewals.

In a vacuum, the SaaS merger wave makes sense. However, there is another issue to ponder for the software maintenance model — third-party support. It's no secret that Rimini Street has been growing nicely by offering support for Oracle and SAP software.

Rimini, which is being sued by Oracle, has landed the largest deals in the company's history in the past three quarters. Today, Rimini has 450 customers, up from six in 2006. David Rowe, chief marketing officer at Rimini, said the company's SAP bookings are larger than any other product line now. Rimini is brought in to support legacy applications and the custom code that comes with it.

Simply put, more customers — especially those with custom code — are wondering why they should pay vendor support, which typically doesn't cover specialised programming. According to Rowe, "several customers come to us for three to five years as they plan to move to SaaS". The typical use case would be leaving a Siebel System that's depreciating and then move to Salesforce.com.

Now it's unclear what happens to Rimini if everyone ultimately moves to SaaS. What exactly will Rimini support in the future? Fortunately, for Rimini, there are enough custom legacy applications to keep the company growing for years.

If you combine SaaS with third-party maintenance it's obvious that software companies may have some business model problems.

And there's more.

Customers are looking to shed their "IT debt", old infrastructure that weighs down operations. At the Gartner Symposium in October, it was obvious that nearly every CIO wanted to shed old applications, become more nimble and blow up their existing infrastructure. Cloud vendors such as NetSuite obviously smelled blood. Toss in the realisation that line of business executives will increasingly own more of the technology budget and it will be difficult to justify maintenance outlays.

In the end, companies appear to want out of the maintenance game, but realise they have little to no leverage over Oracle or SAP. The only way out is through the cloud with potentially third-party support as a stop gap.

With that backdrop, you can't blame Oracle and SAP for being acquisitive. They either get cloud religion to minimise a threat or join the party and adapt. It remains to be seen if IT buyers transition from maintenance arrangements to the cloud with the same vendor or go for the clean break.

Via ZDNet US