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Monday, July 21, 2008 4:47 PM/EST

TomorrowNow Comes Early

The timing could not be less serendipitous for SAP: Today is the day it picked to announce that it is closing TomorrowNow, its embattled subsidiary.

That company was acquired for the sole purpose of taking the enterprise software fight to Oracle, and is instead providing Oracle with a wonderful pretext for suing SAP and a soapbox for making the argument that only Oracle can provide adequate support for Oracle.

The timing is so much the worse because SAP is fighting an uphill public relations battle over its new support pricing, which has been roundly condemned by the trade press.

Last week, I spoke to analysts who couldn't understand why SAP would force all its customers into a single, premium support package--including those that had already picked smaller-bore, lower-cost packages.

It seemed the best way to drive them into the arms of third-party vendors like Rimini Street.

Not only that, analysts had a tough time understanding why IDC analyst Elaina Stergiades let herself be quoted, in the SAP press release announcing the move, praising it as something customers would want. In fact, Stergiades let herself in for some unwarranted attacks on her integrity by a sloppy journalist.

I spoke to Stergiades last week, and she stuck to her guns. She said customers aren't as interested in "break-fix"-type support, and are looking for more proactive and preventive tools.

"The game is changing in support services," she said.

"SAP understands that getting rid of standard support opens the door for other providers," she added. But "customers we talk to are looking for that single point of contact."

But she also intimated that several executives at SAP were unhappy with how the message was delivered to the market. "People at SAP are not thrilled with how this was rolled out," she said.

No kidding. I'm sure customers with lower-priced packages aren't thrilled either.

Software analyst Joshua Greenbaum notes that this is the kind of thing driving customers of traditional enterprise software into the arms of the SAAS (software as a service) vendors:

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'.

I disagree with his assertion that the promise of free maintenance with SAAS software is illusory--it's not only not illusory, it's the very premise of the business model, and the reason it's taking off.

And this is exactly the challenge that companies like SAP are facing: How do they continue to extort maintenance fees at the usurious rate of 22 percent of the cost of the software?

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Comments (1)

Joshua Greenbaum :

Michael, Thanks for the link to my post, let me comment on the perception of maintenance-free SaaS software. There is no such thing as a free lunch, and SaaS software has its own maintenance cost structure -- albeit a lower one due to the innate economies of scale to be obtained by hosting multiple customers in a single data center, and upgrading all customers simultaneously. So inside the monthly per user fee of every SaaS vendor is a maintenance cost, it's just not stated as such.

More importantly, look at the profitability of existing SaaS vendors: only Salesforce.com has some weak profits, and that's a recent turn of events. This whole sector will go through the same hunt for profits that the on-premise sector has been going through, and I'm convinced they'll end up trying to turn their maintenance model into a profit center one way or another. It's hard to resist a profitability model that's worked so well for on-premise vendors.

Josh

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