Global CIO: Will Oracle Or SAP Blink First On 22% Maintenance Fees?Global CIO: Will Oracle Or SAP Blink First On 22% Maintenance Fees?

"You and other customers have made your feelings clear to us about the need for more-flexible maintenance plans, and not only have we listened to you, we've acted upon your requests. Starting today, you have the freedom to choose the annual update-and-support that's best for you, and that offers the appropriate combination of services and expertise with the affordable fee structure.

"This overhaul presents us with some big challenges as we fundamentally are flipping our business models on the fly, but we're willing to do that for one reason: because we're worth it. In a rapidly changing world, you need first-level technology partners who are as committed to change and innovation and flexibility as you are, and that's exactly what we intend to be.

"Because we know we've created a truly superior approach, we're going to be reaching out to some of your peers who are running our competitor's enterprise software and making a series of special offers to them in hopes of having them join the New Wave of IT business value. We're going to invite them to reject the 20th-century fee structure that has become not only expensive and unwieldy but limiting and counterproductive here in the 21st century. And we're going to give all of you what you've asked for in no uncertain terms: the flexibility and power to choose that will let you pick the right combination of service and support that's right for you.

"From our end, our commitment remains unchanged: if you want platinum-level service, we stand ready to deliver it. If you want something in between, we're offering three additional tiered levels of service at proportionately scaled price-points. Here's our promise to you: you choose, and we'll deliver. Drop me a note when you're ready to discuss your options, and after we've had a chance to chat about this, I'll have your account leader set up a more-detailed meeting.

"Thank you for your business, thank you for you patience, and thank you for being a committed partner in helping us create the Next Wave of IT business value."

Maybe some CIOs would toss such a letter in the trash and say, "I like things just the way they are right now," but not very many—not very many at all. If the theory of "first-mover advantage" has even an ounce of truth to it, imagine the advantage that would accrue to the first to move on this issue.

SCENARIO 3 The folks at Barron's are not exactly known for being irrationally exuberant or irrationally rah-rah or irrationally anything. So when they write a headline saying, "An Emerging Threat to Oracle and SAP," there's some fire behind the smoke. Likewise at the analyst firm whose report triggered that headline and accompanying: the Cowen & Co. analysis came as part of the "Non-Consensus Idea Series" from Peter Goldmacher in which he strives to see things not as they appear but as they truly are. And you can be certain that he thought very carefully before putting this headline atop his report: "Maintenance Revenue: High Margin or High Risk?"

Here's part of what Goldmacher said in that report:

We believe ERP upgrades, the primary motivation to pay maintenance fees, are on the wane because it's a mature market. Vendor investments in R&D are on the decline, innovation is lagging and redeployment costs are multiples of the license fee. As a result, customers are increasingly questioning the value of paying annual maintenance fees of 20% of the cost of the original license for the occasional use of technical support. We believe that as the value proposition around maintenance fees diminishes, there is significant opportunity for third party service providers to offer low cost tech support.

And this is from the Barron's article that followed the Cowen report; the excerpt below comes just after some details about the very impressive operating margins Oracle and SAP have been able to generate because of their massively profitable maintenance businesses:

But that could start to change. Rimini Street, a privately held third-party maintenance provider, is going after this business, as are some smaller start-ups. "Automatic upgrades just aren't going to fly anymore," says Rimini Chief Executive and founder Seth Ravin. "We're going to change the way maintenance is [run]." The maintenance bill for individual companies can run into the millions each year. Cost is Rimini's biggest advantage. It charges roughly half what Oracle and SAP do. . . . The third-party approach is catching on with corporate software clients. In 2009 Rimini expects to have about $150 million in maintenance-contract bookings, up from $86 million a year ago. Oracle would charge about double, so that represents about $300 million in potential Oracle revenue, says Cowen analyst Peter Goldmacher. SAP's maintenance revenue hasn't been affected much yet because Rimini launched service for customers of the German software giant only three months ago.

In my view, this third scenario clearly presents the worst of all options for SAP and Oracle, because if it takes off, then both will have to go on defense and be forced to react to the initiative taken by the third-party providers, whom customers will venerate as liberators, while Oracle and SAP are seen as unfair, inflexible, and basically unwanted.

Getting boiled in Wall Street oil would surely be no fun, but having customers abandon your most profitable business en masse would be an even more excruciating experience. So here's my bet on which of those scenarios will play out:

I'm betting that either Oracle or SAP is going to steal the march on the other and write that letter to you. I'm betting that one of them is going to decide that it'll be worth taking the heat from Wall Street if it also means a strong likelihood of taking the customers from the left-behind competitor. I'm betting that the forces of enlightened self-interest, creative destruction, business-model innovation, and good ol' self-preservation will win the day.

Keep an eye on your mail—that letter can't be far off.

Recommended reading:

Global CIO: An Open Letter To Oracle CEO Larry Ellison

Global CIO: An Open Letter To SAP CEO Leo Apotheker

Global CIO: How 22% Annual Fees For You Equal 51% Operating Margins For Oracle

Global CIO: Where Do Oracle's Profits Come From?

Global CIO: An Open Letter To Oracle CEO Larry Ellison, Part 2