Maintenance Contracts are the big revenue stream

While researching the technology news for today's posting, I stumbled across this chart. It indicates the percentage of revenue major firms derive from maintenance contracts. It should be a real eye-opener for CIO's, CTO's and CFO's (Credit: Goldman Sachs).

I find it astounding that Computer Associates and BMC get about 60% of their top-line revenue from maintenance agreements. There are two takeaways as far I can see.

1. If it seems the sales reps are pushing maintenance contracts as if their careers depended on it, then it's probably because they believe their careers actually depend on it.
2. This is negotiating leverage point. A firm should absolutely be able to use this information to get better deals on licensing fees, as well as on professional services.

On a related topic, isn't time to rethink the whole maintenance agreement?
What are you actually buying? Upgrade assurance? Response Time?

• If all you need is to be able to get the next version for free, can't that be negotiated into the original agreement?
• And how many times has your staff called into their customer support requiring immediate attention? Aren't most emergency situations handled by your team? Do you really need to fork over tens of thousands of dollars every year for a service you hardly use, and probably don't need?

I believe that the maintenance fee gravy train is coming to an end. Competitive pressures will force firms like these to rein in their fee structure. It may not happen in 2009, but within five years, we'll see a major shift in this area.

Business Process Improvement tops 2009 CIO Priorities

A recent survey of 220 IT executives (by CIO Insight) showed that 42% of CIOs believe that Improving Business Processes is a top priority for 2009. Surprisingly, Cost Cutting was considered a top priority by only 38% of respondents, while only 25% named Generating more Business as a priority for this year.

The survey results do not provide any details as to when the survey was conducted. Since the survey was published in early December, it's quite probable that the full impact of the economy's 3rd and 4th quarter performance was not accounted for in their responses. At the same time, however, by October, I was already starting to see a pull-back on IT initiatives. Nearly everyone I communicated with was focused on cost reductions and hard savings. And virtually no one was looking at the soft savings promised by many IT initiatives. In fact, even projects with clear and hard-dollar ROI were being scrutinized and frequently delayed.

What explains the difference?
The only thing I can think of is that the respondents expect the economy to begin righting itself sometime during the course of 2009. I haven't seen any evidence to substantiate this belief, but I cannot come up with any other reasonable explanation for these responses.

Another fascinating detail in the responses is in the Cost-cutting results, which I've highlighted below. Notice the disparity between smaller (< $500 million) and larger (> $500 million). Apparently, the larger organizations were ahead of the curve on belt-tightening. The opposite disparity also shows up, to a lesser degree, in the customer service response. Taken together, this tells me that larger organizations are going to be in better position to take advantage of the eventual recovery than their smaller competitors. And we should adjust our strategy accordingly.

Summary of Responses - Top CIO Priorities for 2009:

• Improve Business Processes - 42% ... (Less then $500M - 43%, More than $500M - 40%)
• Deliver Better Customer Service - 41% ... (Less then $500M - 44%, More than $500M - 37%)
• Cutting Costs - 38% ... (Less then $500M - 34%, More than $500M - 45%)
• Generate More Business - 25% ... (Less then $500M - 28%, More than $500M - 21%)
• Innovate New Products and Services - 22% ... (Less then $500M - 23%, More than $500M - 19%)

Link to full survey results at CIO Insight: Top CIO Priorities for 2009

Getting more out of mobility

A few years ago, one of my most trusted clients told me that his firm's wireless spending was nearly as much as their land-line spending. At the time, the firm had more than 15 locations in 8 states across the US. How does this compare to your firm's telecomm costs?

According to a recent press release by Nemertes Research, "Companies that have not strategized the use of mobility are much more likely to indicate that their wireless budgets are out of control."

And the value of a mobility strategy does not just show up in reduced costs. The study found a significant direct correlation between the implementation of a strategic plan on mobility and increased ROI from mobile applications.

The relationship between strategy and cost might seem self-evident. But why, then, do so many organizations admit to not having one in place? The press release indicates that over 40% of responding companies did not claim to have ... or to be in the process of developing a ... mobility plan.

Does your firm have a strategic plan for mobility in place?
Do you see your wireless budgets as being "out of control"?

Developing a mobility plan does not have to be hard or excessively expensive. We can see that it is a sound investment and we know that mobility will be even more important to your firm's success a year from now. Now is a good time to contact us for an assessment of your current situation and to develop a roadmap to gaining more value from your mobility initiatives.

Nemertes Research Press Release:
Companies Adopting Mobility Strategies See 60% Increase in Productivity

Rethinking SLAs

When was the last time you examined your Service Level Agreements, especially for those for which you pay a premium for response time guarantees? It may be time to rethink all of those contracts, especially as you explore cost-cutting opportunities.

For instance, the most valuable part of any software maintenance agreement is upgrade assurance. Beyond that, is it really worth an extra 15-20% to pay for 2-hour response time when your own team will likely have the problem diagnosed and resolved well within that timeframe?

How often has your organization received actual benefits from a premium service level contract?

System reliability, clustering and virtualization have rendered most uptime promises largely irrelevant. Why pay extra for superior recovery services when your infrastructure has redundant built-in fault tolerance already implemented? And it seems that today's server components are (unlike automobile components) more durable than ever. As one executive put it...

"When we actually looked at the real world of performance of what we were getting even at the lowest level, the bronze service, because the equipment is so reliable and our processes are so disciplined we are exceeding the level contractually, and said, 'Gosh, can we bring everything down to that level?'"
-- Peter Whatnell, CIO, Sunoco Inc.

If you are searching for ways to reduce IT costs, looking at your service agreements is a great place to start. Call us today and we can help you rationalize and renegotiate.