SAP Plugs Profit Hole With Support Price Hike - InformationWeek

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Cloud // Software as a Service
08:41 AM
Doug Henschen
Doug Henschen
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SAP Plugs Profit Hole With Support Price Hike

SAP increases Standard Support maintenance contracts by 5.5% to 19% of the software's original cost each year. That could reopen old support price-hike wounds.

A controversy around the price for SAP software support dogged the brief tenure of former company CEO Leo Apotheker, and now the topic has reared its head again. SAP resurrected the topic by telling customers Monday that it will increase the annual cost of new Standard Support contracts from 18% to 19% of the original software licensing, effective July 15.

The first to shed light on SAP's announcement was independent analyst and blogger Frank Scalvo, who in a stinging post pointed out that the seemingly small single-point change amounts to a 5.5% increase. Scalvo encouraged customers to pepper SAP with questions around a central theme of "What are we getting for our money?"

An SAP spokesperson on Tuesday told InformationWeek that the planned increase will be "relevant for a relatively small group of SAP customers" because the "new customer adoption rate for Enterprise Support is 95%." Enterprise support is 22% per year. The increase on Standard Support will not apply to the (small-business-oriented) BusinessOne app or to contracts already in force.

However, that 95% only refers to new customers making this choice since this option was available. Don't confuse this adoption-rate stat with the current ratio of all customers on Enterprise versus Standard contracts. That's a figure the spokesperson said SAP does not divulge. If the total on Standard Support isn't much higher than 5%, it's hard to believe the company would bother revisiting this PR nightmare of a topic.

[ Want details on the 2010 compromise on software maintenance? Read SAP Introduces Two-Tiered Support. ]

Until 2008, all SAP maintenance support contracts were 17% of the original software licensing annually, but in July 2008 the company announced it would step up the fees to match rival Oracle and many other enterprise software companies that charge 22% per year. A customer outcry ensued -- understandable given that largest customers faced cost increases of millions of dollars per year, just as the recession was getting underway.

SAP relented in 2010, coming up with a two-tier plan offering Standard Support and Enterprise Support options with gradual, year-by-year increases offered to companies stepping up to 22% by 2016. The support issue quickly died down after these changes, and SAP started sharing the high adoption-rate figure with each and every quarterly financial report.

Standard Support helps customers keep systems up and running with bug fixes, support and software upgrades. SAP describes it as a reactive, break-fix approach. Enterprise Support promises to be proactive. It includes everything in Standard Support plus best practices guidance for IT operations along with Solution Manager software that monitors systems, identifies baseline performance and helps customers institute best practices for system optimization.

So what more are Standard customers getting now that would justify a 5.5% increase? SAP told analyst Dennis Howlett that "there is ongoing expansion of value, for example a continuous flow of innovation through enhancement Packs while SAP Standard Support is covering a broadening solution portfolio." Enhancement packs are SAP's vehicle for adding new features, functions and upgrades to its Business Suite applications.

What's really at stake here is profits. SAP has a standing promise to shareholders that it will reach 20 billion Euros ($27.1 billion) in revenue and a 35% operating margin by 2015. But last year's SuccessFactors and Ariba acquisitions -- not to mention aggressive hiring to drive Hana and cloud-services sales -- have made it harder to reach that margin goal. SAP's operating margin declined to 25.1% in 2012, down from 34.3% the previous year. Where to make up the difference? Well, support accounted for 8.2 billion Euros ($11.1 billion) -- about half -- of SAP's 16.2 billion Euros ($22.0 billion) in total revenue for 2012.

Support services are highly profitable. Just ask third-party support providers such as Rimini Street and Spinnaker. These are small companies (Rimini had $43 million in revenue in 2012) that pick off a tiny share of customers that typically want to support stable versions of aging software. Rimini's standard pricing approach is to charge half of what Oracle and SAP charge for supporting enterprise applications. A Rimini executive told Howlett that margins for the big OEMs are as high as 90%.

It's hard to introduce price increases without raising objections, but SAP could have been more forthright in handling this one. First, it didn't offer much of an explanation for the price increase in its initial announcement beyond the statement, "In order to ensure the same high level of quality support in the future." That throw-away line just made subsequent statements about "expansion of value" seem like trumped-up afterthoughts. Second, SAP tried to convince me and others that "a relatively small group" will be impacted by this change by pointing to a misleading 95% adoption-rate figure. When pressed, SAP wouldn't say what percentage of all customers are now on Enterprise versus Standard support.

SAP warned customers, back in 2010 when it set up two-tier support, that Standard Support would be subject to increases based on inflation. The company also deserves credit for putting the word out five months in advance and making it clear that customers should renew before July 15 to get 18% deals while they can. But even long-term contracts eventually come to an end. And when that happens, that little 1 percentage point -- the 5.5% hike -- will hit customers, and help fulfill that 2015 promise to the financial markets.

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User Rank: Apprentice
2/7/2013 | 2:23:25 AM
re: SAP Plugs Profit Hole With Support Price Hike
I can hear Seth Ravin (Rimini Street CEO) chuckling to himself right about now . . .
D. Henschen
D. Henschen,
User Rank: Author
2/6/2013 | 11:20:37 PM
re: SAP Plugs Profit Hole With Support Price Hike
Digging down on SAP finances, last year's margin was impacted by a $750 million set-asside tied to the TomorrowNow lawsuit, as well as the acquisitions and increased hiring. Bottom line: SAP profits aren't as low as that 25% figure suggests, but they were still below 2011 levels. They need to go the other direction to meet 2015 goals. I'm not convinced this 5.5% increase won't be significant once we get to 2015 -- even if it's as a further inducement to step up to Enterprise Support.
User Rank: Strategist
2/6/2013 | 9:16:20 PM
re: SAP Plugs Profit Hole With Support Price Hike
The larger the customer base, the more margin that 22% figure means. Very large customer bases for a single application mean problem areas get well defined, the solution database gets more data and it becomes easier for the support provider to deal with issues. Customers get volume discounts for big license orders but the inverse isn't true. They don't get volume discounts when the vendor enjoys a large support fee customer base. More competition is needed. Charlie Babcock, InformationWeek
Cindi Howson, BIScorecard
Cindi Howson, BIScorecard,
User Rank: Apprentice
2/6/2013 | 7:56:32 PM
re: SAP Plugs Profit Hole With Support Price Hike
In general, 22% per year for support is not unreasonable and is still below the industry average. While Oracle and SAP may charge 22% of net, Microsoft and IBM charge 24 to 25%. In the side by side analysis we do for BI platform vendors, some are higher and are based on list. BUT the big problem here is that SAP support ranks in the bottom tier according to our survey results, so it's hard to justify an increase without also providing a good level of support. Support for ECC may be different. Innovation, both in ECC and BI, are funded by maintenance dollars and that too is a mixed bag. In BI, the newest products like Hana and Visual Intelligence cost customers extra.
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