Unintended Consequences and the Future of Maintenance Revenue: SAP Jettisons TomorrowNow

When Shai Agassi called me in early 2005, he asked me a loaded question: How would I respond if SAP decided to take the fight to Oracle by providing third party maintenance for Oracle’s recently acquired PeopleSoft customers? I told him it would be an incredibly aggressive move, but that SAP would have a lot of trouble proving it had a credible offering for PeopleSoft customers.

“What would it take for us to be credible?” Agassi asked me. If we had been talking face to face I might have seen him grinning ear-to-ear.

“Right now, the only company I know doing third party maintenance for PeopleSoft is TomorrowNow,” I replied. I had recently met with the company and written a column about them. At the time they had about 65 customers, including 24 of the Fortune 500.

At which point Agassi spilled the beans, under NDA, about his blockbuster announcement. The move was clearly meant to help PeopleSoft customers who might be sitting on the fence take a hard look at SAP, and to that end SAP announced a “safe passage” program whereby interested PeopleSoft customers who shifted to TomorrowNow would get a credit towards the purchase of SAP software to replace the PeopleSoft system maintained by TomorrowNow.

For the record, I saw nothing illegal or otherwise had any inkling of the issue that would embroil SAP in a lawsuit with Oracle and ultimately lead to this week’s announcement that SAP was shutting down a subsidiary that had become unsellable and unworkable as the lawsuit dragged on. TomorrowNow hadn’t invented third party maintenance – big SIs have been doing it since the dawn of time – and it seemed that SAP had an interesting, and admittedly very controversial, new way to grow its business.

The irony of Agassi’s enthusiasm for TomorrowNow is that the controversy opened up by this acquisition will hardly die with the shutting down of the SAP unit or the eventual resolution of the lawsuit by Oracle against SAP. Because the real issue at play, the proverbial Pandora’s Box that SAP opened up by buying TomorrowNow, isn’t about a little spat between lawyers about who did what to whom. The suit, which Oracle will continue to pursue until it’s wrung every drop of PR value out of it (and so far I calculate the total value to date in the 100s of millions), is really immaterial, and largely, as I just said, mostly about PR.

The real legacy of the acquisition of TomorrowNow is that a slumbering giant of a problem for SAP, Oracle, and the entire on-premise enterprise software market, was awakened: The prospect of third party maintenance undermining a very profitable, and increasingly controversial part of the entire industry’s business model.

The problem is this: With SaaS and open source offering the illusion that software can be maintenance free – bear in mind that it can’t, though both models offer a way to maintain software at a much lower cost model than traditional on-premise software – SAP, Oracle, and the rest of the traditional on-premise industry is running into a bear market when it comes to customers’ willingness to pay 22 percent per year for services that seem to return much more to the vendors’ bottom line than they do to the customers’.

This simmering controversy was joined once again last week when SAP announced it was effectively standardizing its maintenance costs to an across-the-board 22 percent, with existing customers able to pay the lower fees they contracted until they upgrade to the latest version of SAP, whereupon they join the rest of the customer base at the industry-average 22 percent rate. The announcement once again put in play the question of the value of maintenance to customers, a question that vendors have been loathe to really define.

Catalyzing this controversy is TomorrowNow’s lasting legacy, and the fact that TomorrowNow founder Seth Ravin’s new company, Rimini Street, seems to be going gangbusters is proof that customers are looking for an alternative to being jacked for 22 maintenance without necessarily knowing why. I would also venture that a lot of the early interest in SaaS is predicated on the assumption that this model helps do away with the maintenance burden, though those who believe that fantasy can rest assured that most SaaS vendors are busily making sure their fees are also turning maintenance into a healthy margin business, just not as overtly as their on-premise rivals are doing.

The problem with maintenance in general, and SAP’s announcement that it’s raising its prices, is that the value of paying 22 percent maintenance has never been well-explained by SAP or anyone else, leaving it wide open to some justified criticism. And some that’s not justified.

In the unjustified category, SAP has been working hard to vastly simplify the upgrade process, and in doing so has come up with what it calls Enhancement Packages. These are mini-upgrades that are extremely simple and easy to undertake, using a fraction of the resources that a major upgrade requires, and the customers I’ve spoken to who’ve done EPs universally speak of them as non-events. As opposed to the typical upgrade event, which is a resource hog of monumental proportions, making the fact that the software itself is free as part of maintenance a trivial cost savings.

SAP’s EPs represent an increased value for SAP’s 22 percent maintenance fee, insofar as the total cost of an upgrade goes down significantly using EPs. This might help SAP explain why it’s asking all its customers to pay the 22 percent fee, and it would definitely help SAP justify its fees vis-à-vis the competition, none of whom have anything like EPs.

Sort of. Because these fees exist in a larger context of vendor-centric, instead of customer-centric, pricing and contracting that belie the perception that vendors are mostly interested in “partnerships” with their customers. They’re interested – as the law demands – in maximizing shareholder value. Working on long-term customer satisfaction can definitely do that, but raising maintenance rates is a lot faster and cheaper.

With Pandora’s Box now open, and SaaS and to a lesser extent open source providing an unflattering perspective on 22 percent maintenance fees, it’s safe to say that the acquisition of TomorrowNow was a rare strategic blunder for Shai Agassi. Getting rid of TomorrowNow won’t make the problem go away, nor will resolving the Oracle lawsuit. The real problem is that the maintenance issue in on-premise software is broken, irretrievably, and it will be up to SAP and its competitors to fix it, or face the consequences. The time to change it is now.