June 7, 2019 | Michelle Wilkinson | Sr. Director, Marketing
Annual Oracle and SAP support revenues measure in the billions, with profit margins ranging from 75-90%. That’s a tremendous return for what has become largely self-service support models. To retain these revenues and their massive customer bases, both software companies have been known to create roadblocks to keep customers from canceling support agreements – and switching to a third-party alternative.
Over the next few weeks, we’re going to take a look at the most common barriers they erect and provide tips to help you navigate around them. First, let’s discuss where your support fees are going and how that influences the tactics you may encounter when speaking with your sales account manager.
Understand How Your Support Fees Are Being Spent
Current Oracle and SAP customers contribute over $30 billion every year in support fees, earning the software providers more than $25 billion in gross profit margin. Both companies have recently ceased breaking out support revenues in their financials, a red flag to many interested stakeholders and bystanders.
From CEO and CTO interviews, we know that both companies are reinvesting a significant portion of their profits into research, acquisitions, development, and launch of new IoT technologies, analytics tools, and cloud offerings. These products are often designed to replace the existing on-premise systems that are generating the profit in the first place.
This is not to say that SAP and Oracle have completely abandoned their on-premise product portfolio – at least not yet. But they do not hide the fact that they are betting heavily on their next generation cloud products and would prefer that all customers migrate to SaaS, the cloud, and subscription pricing sooner rather than later. Those moving later are heavily “encouraged” through sales tactics and other roadblocks to stay put and keep funding replacement products.
Be Prepared When They Push to the Cloud
In their own minds, Oracle and SAP are now cloud product companies, with all new customers coming onboard as cloud customers by default. And they want you to join their party.
That’s why Oracle and SAP account managers are incentivizing existing customers to migrate to the new SaaS products, databases, and digital platforms sooner rather than later. They will tout convenience, performance, and flexibility, as well as a way to capitalize on the existing vendor relationship. This is their way of locking you in for the foreseeable future into their support, which is included in the new licensing.
This deceptively simple strategy poses challenges and underplays potential risks, including increased (unplanned?) spending on new licensing and implementation consultants, a dearth of expert resources for these new solutions, and an immature, standardized solution that lacks required or industry-specific features. The Internet is flush with mostly negative commentary from the digiterati regarding the preparedness of Oracle and SAP cloud solutions, and several high-profile misfires with large companies like Haribo and Lidl.
The Sales Tactics that Will Come into Play
You may be fundamentally dissatisfied with vendor support for any of these reasons: the high cost, the lack of personalized service, the slow pace of responses, the lack of real technical experts, the refusal to investigate custom code-related issues, the quality of and speed of publication for security patches, or the diminished number of product patches or enhancements. When the contract renewal date approaches, and you decide to reevaluate your needs, you can expect several predictable tactics.
First, our customers tell us that when the vendors learn that you are considering leaving support, they are offered incentives – not for better support of what you currently own but for the new products. Enticements can include attractive discounts and flexible payment options for cloud licenses – along with the warning that such incentives will only shrink as time passes.
Next, account managers will resist any requested changes to the existing contract. They generally will not provide a discount for unused on-premise licenses (shelfware), though in some cases, they will allow a trade-in of shelfware for cloud futures. Such a trade is often not prudent for the customer because they can retain the shelfware (a valuable commodity) instead of trading it in for cloud futures they may or may not use.
Next, they will explain that if you ever want to return, you will owe back fees for support that will increase drastically the longer you wait. We’ll address this point – and the impact leaving support may have on your overall customer relationship – in more depth later in this roadblock series.
Finally, if you continue to resist these overtures, the software vendors may reduce your support fees. We recommend that you press them for an even deeper discount, citing your knowledge of the cost benefits of third-party support. Note that, in addition to the 60+% cost reduction offered by a third-party support provider, certain third-party vendors will give pricing concessions for shelfware, allowing you to align support fees with licenses
The Message You Still Won’t Hear
Note what’s missing from any of the above tactics: an offer to provide higher-quality, more responsive support for the on-premise enterprise products you now run. Should you decide to stay with Oracle or SAP support, your IT team is still saddled with delays for solving important issues, a lack of engineers that truly know your technical stack and business imperatives, and a significant hit to your annual budget.
That’s why third-party support has become a popular alternative to those who want off Oracle and SAP Support until they are ready to consider the next generation of applications and technical products. They avoid having sales tactics override the pace and direction of their strategic product roadmap.
To understand how much better your support can be, we recommend reading our white paper on the customer experience of Spinnaker Support.