Procurement Category: Information Technology. How software maintenance fees are siphoning away your IT budget and How to Stop It

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1 Procurement Category: Information Technology How software maintenance fees are siphoning away your IT budget and How to Stop It

2 How software maintenance fees are siphoning away your IT budget and how to stop it According to our benchmark data, software is either the first or second largest category of IT dollar spend. Of that amount, 50 to 60 percent of software spend goes to maintenance and support. The problem is that many of these dollars are wasted. Studies indicate that each year businesses spend approximately $12 billion on maintenance fees for un used software a staggering statistic. This amounts to an invisible tax on corporate IT budgets, choking off dollars that could otherwise be spent on new IT-enabled innovation. Given how much money companies spend (and often waste) on software maintenance, coupled with the need to find more dollars to invest in innovation, CIOs are increasingly focused on attacking software maintenance spend. In fact, software maintenance optimization projects are the top area of focus (measured by active 2013 projects) among our IT Procurement BPO clients Figure 1 The bottom line: Our project data show that clients can reduce software maintenance costs by 20 to 25 percent. For a company with $2 billion in revenue, this equates to $600,000 to $2.3 million in bottom line operating expense savings, or 3 to12 basis points of margin impact from this single area of IT costs (see figure 1). When companies are struggling to maintain or expand operating margins despite tepid top-line growth, optimizing software maintenance presents a meaningful opportunity to impact overall margins. Savings stem from two main strategies: eliminating wasted/unneeded spending, and better managing ongoing maintenance agreements. Where s the waste? Software maintenance fees are usually calculated as a percentage of initial software license fees. Based on a typical maintenance fee range of 15 to 23 percent of license fees (not including annual inflation or cost of living adjustments), cumulative maintenance fees equal or exceed the initial software investment by year four or five. During a 10- to 15-year lifecycle, which is fairly common for many enterprise applications, cumulative maintenance payments far outweigh initial software purchases. Paradoxically, the value of maintenance depreciates rapidly in the first few years, much like a new car. This is natural as users become more familiar with software systems, and initial implementation and business process kinks are resolved. Yet, maintenance payments stay the same or increase over time, while support calls and other benefits decline. This results in IT departments paying more for less value over time, as most companies do not actively lower maintenance fees over time when user requirements change. The result: wasted maintenance spend for IT organizations and high-margin revenue for software providers. Industry Revenue USD $M IT Spend Software Spend% SW Spend USD $M SW Maint (50-60% of SW spend ) SW Maint USD $M Savings $M (@23%) Margin Impact CPG $ % 38% $ % $10.12 $ % Manufacturing $ % 26% $8.1 55% $4.43 $ % Tech $ % 13% $ % $5.79 $ % Life Sciences $ % 23% $4.6 55% $2.50 $ % Bus Services $ % 26% $ % $5.55 $ % Savings Range *IT spend as a % of revenue based on benchmark data. $0.6M $2.3M 0.03% 0.12% 2

3 Figure 2 USD $M $3000 $2500 Cumulative maintenance spend exceeds license spend by year 5 $2000 $1500 Maintenance spend dwarfs license spend over time $1000 $500 $0 License 1 year 2 year 3 year Maintenance 4 year 5 year 1-5 year 6 year 7 year 8 year 9 year 10 year 1-10 year Why the waste? A number of significant barriers get in the way of effectively managing or containing maintenance costs: Contract restrictions: Many companies knowingly or unknowingly commit to contractual terms that restrict flexibility to adjust maintenance fees over time, or lock the companies into unnecessarily long-term commitments. These commitments may be concessions made in exchange for discounted licenses, but almost always the stream of maintenance fees paid over time dwarfs these discounts. User resistance: Most software end-users will instinctively rebel against proposals to reduce support even when it is hardly used, cancel unused licenses, or cancel maintenance/support agreements altogether. Poor governance: Governance processes for software purchases vary widely. The lack of unified governance procedures cause more problems in today s SaaSbased world as individual departments increasingly purchase software on their own to support specialized functions like marketing, CRM, and design/engineering. The result: siloed purchase decisions combined with onerous contractual commitments, redundant software and underutilization of existing software assets. If this sounds like your company, you re not alone most companies do not have full visibility as to what software is actually being used in their organization, by whom and how, without performing an expensive software audit. The problem requires effort to solve, but returns are substantial for organizations that proactively tackle it. 3

4 Three pillars of managing software maintenance spend Given the amount of wasted maintenance spend and the opportunity to drive savings in software maintenance, how can your company get its share of the savings? We recommend focusing on three key areas: Initial buy: What happens in the initial buy phase has an outsized impact on cumulative software costs, so it is critical to get this right. Renewals and right-sizing: Contract renewal time poses another opportunity to drive value through renegotiating terms and right-sizing licenses and entitlements. Companies can also look for opportunities to actively re-scope and right-size their software environments outside of contract renewal timeframes. Third-party maintenance: Perhaps the most aggressive approach is to evaluate canceling maintenance/support altogether, or moving to a third-party maintenance solution. A switch from onpremise licensing to a SaaS or subscription model presents another option. Following is more detail on each of these areas: Initial buy Set yourself up for long-term success. Making the right choices during the initial buy phase has a significant impact on total cost of ownership for software assets, while mistakes can haunt software buyers for years. Here are some of the most important areas to focus on and get right during the initial buy phase: Manage demand: Buy only what you think you will need. Licensing is the number one driver of long-term total cost of ownership. Beware of incentives that encourage you to buy more licenses or modules than you need today in exchange for near-term discounts. Over-licensing leads to much higher costs and wasted spend. Instead, negotiate the flexibility to add licenses at prenegotiated prices as you grow, and retain the right to descale licenses as business conditions warrant. Maintenance pricing: Maintenance rates are always negotiable. Leverage benchmarks to ensure that you are paying appropriate rates. Renewals and right-sizing: Renewal time represents an obvious opportunity to renegotiate maintenance agreements, but the opportunity to initiate a re-scoping discussion can occur anytime: To renew or not to renew that Is the question! The first consideration should be whether to renew maintenance at all. Is the software still in active use? Is support still required? Is the software being phased out? Entitlements-Demand Management: Once again, start with demand. What are your user entitlements? How much and by whom is your software being used? Can you shift users from power user to lower cost casual user licenses? Is there an opportunity to remove named users and cancel their licenses and maintenance fees? Right-sizing support: Is there an opportunity (and a valid reason) to downgrade support? Do you really need 24/7 platinum-level support for a non-business critical application used only by employees during the 9 a.m. to 5 p.m. shift? Is support actually being used? Armed with data about how support is being utilized, you can have a very constructive conversation with end-users about downgrading support to appropriate levels. 4

5 Consider a hypothetical but realistic example: Annual support costs are $250,000 per year, and users have only made 10 support calls in the past 12 months. That equates to $25,000 per support call! With that perspective, users are typically much more willing to entertain revising support options, especially if their cost center is being cross-charged. Third-party maintenance and SaaS models: A third strategy to explore is to pursue more aggressive options like third-party support, or a whole new licensing model: Figure 3: Maintenance Cost vs Support Call Volume Over Time USD $ $ Cost of Maintenance $ $ $ $ $50000 $0 1 year 2 year 3 year 4 year 5 year 6 year 7 year 8 year 9 year 10 year Cost of Maintenance # of Support Calls Source: Accenture benchmark data Number of Support Calls Third-party maintenance: Use of thirdparty maintenance has increased as competitive offerings have matured, offering companies comparable levels of support at a fraction of the cost (40 to 60 percent lower than the vendor). This option is particularly relevant for mature software solutions, where a viable market of third-party providers has evolved. Subscription/SaaS models: When it comes to the discussion of controlling software maintenance, the appeal of software-as-a-service (SaaS) models is that total software costs (licenses, support and maintenance) are rolled into a single, per-user subscription price. It is worth evaluating whether subscription pricing is a beneficial solution, but the anlaysis will vary greatly company by company, and must consider factors such as security, integration, data ownership and ease of migration should a company need leave its SaaS vendor. Figure 4: Cost of Support Call USD $ $2500 $2000 $1500 $1000 $500 $0 1 year 2 year 3 year 4 year 5 year 6 year 7 year 8 year 9 year 10 year Cost per Support Call Source: Accenture benchmark data 5

6 Conclusion Software maintenance is an often overlooked area of IT spend that is sub-optimized at most companies. Yet maintenance fees represent a sizeable area of recurring IT spend that can almost always yield significant savings if addressed properly. These savings can be a boon to CIOs seeking to redeploy dollars away from run-maintain operations and toward strategic IT initiatives that support customer-facing growth initiatives and innovation objectives. Contact us to learn more about how to optimize software maintenance for your company and help fund new growth opportunities. Sources: Software Efficiency Report, Retrieved from: php?id= &key=key-1mx6lerc1eju75vlev 6

7 About Accenture Accenture is a global management consulting, technology services and outsourcing company, with more than 293,000 people serving clients in more than 120 countries. Combining unparalleled experience, comprehensive capabilities across all industries and business functions, and extensive research on the world s most successful companies, Accenture collaborates with clients to help them become highperformance businesses and governments. The company generated net revenues of US$28.6 billion for the fiscal year ended Aug. 31, Its home page is Authors Nick Huff Global Tower Lead Software [email protected] Curtis Glover Global Tower Lead Software [email protected] Mark Hillman Head, Market Insights & Analysis [email protected] Copyright 2014 Accenture All rights reserved. Accenture, its logo, and High Performance Delivered are trademarks of Accenture.