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As two software giants prepare to increase their fees, are IT organisations about to be hit by a steep rise in the cost of buying and maintaining business software?

The jury is still out on whether IT departments are going to see their budgets reduced in the coming months; some analysts believe it is inevitable, others think companies will spend more on IT as part of business cost-cutting efforts.

But recent news from two of the world’s leading software vendors suggests that those budgets may be stretched no matter what.

Firstly, German applications giant SAP announced that it is to phase out its current standard support package – priced at 17% of software licence fees – in favour of ‘Enterprise Support’, which will cost 22% of the licence fees.

The new package, which all new customers must adopt and existing customers will be moved on to by 2012, includes improved support for the service-oriented architecture infrastructure that many – although by no means all – organisations are now building.

SAP users have reacted angrily to the news. “In real terms this is a 29.4% increase in costs over the next four years for existing SAP customers, and is proving to be a particularly difficult area to accept,” says Alan Bowling, chairman of the UK & Ireland SAP Users Group.

“We are sceptical that the Enterprise Support offering is sized appropriately and we remain concerned on its suitability for many small and medium-sized enterprises,” he adds.

Meanwhile, rival software vendor Oracle quietly raised the list price for many of its database and middleware products by between 15% and 20%. And although users rarely end up paying the list price, the direction in which prices are heading is obvious.

Both vendors observe that these are the first significant price increases for years, and argue that their products are increasingly sophisticated and generate increased business value. But for businesses feeling the pinch, these price increases could not come at a worse time, especially since pent-up demand is pushing up IT staff salaries in all but entry-level positions.

That might be a little difficult to swallow when Oracle and SAP are clearly still raking it in: in their latest quarters Oracle banked $2bn in net profits (a 28% margin) and SAP took 408 million (a 14% margin). But they have set high expectations among investors they must continue live up to. Is it fair – or wise – for them to be asking even more of their customers?

The experts' response...

Bill Wohl, SAP public relations director, says its move to a more expensive support service reflects the expanding requirements of its customers

We are seeing dramatically different support requirements, triggered by increasing use of service-oriented architecture. In the Standard Support offering, it wouldn’t be our responsibility to find out if something outside the SAP system is at fault. But customers are telling us they need a support contract that provides problem identification from soup to nuts. Enterprise Support provides end-to-end support. We have made this our base service offering because if you have too many packages, it becomes more expensive for everybody.

Ray Wang, vice president of analyst company Forrester Research, says that vendors already make a killing on support fees

Up to 80% of an enterprise IT budget is spent on maintaining existing investments. Customers are paying anywhere from £200,000 to £250,000 a year for maintenance. Are they getting that much value from their vendor? Most customers would say “no”.

If you call for support five times a year and pay £250,000 a year, well, that’s really £50,000 a call. Is that worth the cost? Unfortunately, in most cases, the vendor is making up to an 85% profit margin on maintenance after the third year a product is introduced.

Further reading

Overseas success for US IT giants

SAP closes the gaps around ERP
Application maker expands product range to plug the gaps between analysis and execution, and between organisations

Find more stories in the Business Applications Briefing Room