The career paths of IT professionals—whether they start out as administrators, creatives, or executives—are as varied as snowflakes in a blizzard. Along the way, many of us are fortunate enough to meet mentors who guide us and help us grow into better professionals.
Reflecting on the lessons we’ve learned, it’s interesting to imagine what advice we might give to our younger selves if, say, Elon Musk invents a time machine through X.
One of the key lessons for any aspiring IT leader is understanding how to manage resources effectively. In many cases, managing these resources is more important than focusing on yourself. Among these resources, an organization’s software is often its most significant investment—sometimes even more costly than its hardware. Companies such as Oracle and Microsoft have long recognized the lucrative nature of software licensing, and it’s up to IT leaders to carefully navigate this landscape.
Effective management of software spending is critical. Savings here can be redirected to other vital areas within the organization, and it may even play a role in sustaining your own position.
As IT leaders, striking a balance between operational efficiency and cost control can make all the difference.
Maintenance/Support Fees—The Dirty Little Secret
Enterprise software maintenance fees typically range from 15% to 25% of the initial license cost. Decades ago, those software giants were remarkably insightful, even before the term “trillionaire” appeared in comic books. As mentors from the future, we would emphasize to our younger selves the significance of this revenue stream to enterprise software companies—the same ones enticing you with free lunches and baseball tickets. Let’s put it more bluntly: These maintenance fees are critical to major vendors, giving you substantial leverage when negotiating deals.
For software giants, these fees represent a stable, predictable revenue stream, which plays a key role in boosting their stock valuations. The not-so-hidden secret is that these support and maintenance fees have massive profit margins, as the cost of delivering updates and support is minimal compared to the revenue they generate. While it might not have been evident in the early days, the future mentors in us would highlight the growing alternatives to relying solely on vendor-provided support and maintenance.
We’d urge our younger selves: “Listen up, ambitious younger selves—explore the leverage offered by third-party support vendors like Spinnaker Support for Oracle or Origina for IBM.”
These alternatives can offer substantial savings and often provide more flexible, customer-focused service. And for vendors who become completely unreasonable, consider taking a break from them. A year or two of walking away can often lead to a more attractive offer to win you back—one that’s hard to refuse.
The Lock-In Effect
Maintenance and support fees often create a “lock-in” effect on customer relationships, making it financially and technically challenging to switch vendors. Beyond the cost of purchasing a new solution, there are significant expenses and disruptions associated with migrating to new software. As a result, it’s often far more convenient for customers to stick with their existing vendors, even if the costs keep rising. predictably by 3%–4% annually. However, in recent times, several vendors—such as SAP, Microsoft, IBM, and Oracle—have raised these fees more aggressively in response to rising inflation. For instance, in August 2022, Oracle announced an 8% increase in annual support fees.
It’s crucial to recognize that, across time, you effectively end up repurchasing your software every 3–5 years due to these ongoing support fee increases. The higher the rate of these increases, the sooner you’ll find yourself paying the equivalent of your original purchase price again.
Leverage During Initial Purchase
As we continue offering unsolicited advice, let’s focus on the initial purchase. When negotiating, aim to secure a cap on the annual increase that the vendor can charge you for maintenance and support costs. Trust us—you’ll thank us later for this one.
For existing vendors, consider proposing a 3-plus year license commitment in exchange for a reduction in the annual support fee increase. Vendors often agree to longer-term commitments in return for this concession, which can significantly reduce costs across time.
Co-Terminus Contracts—Not Your Friend
It’s common for companies to make multiple software purchases from the same vendor across time, leading to staggered renewal dates. Purchasing agents, or managers, often push to make these contracts co-terminus for simplicity. However, with the wisdom gained through the years, as your mentors, we strongly advise you to reconsider this approach.
A good rule of thumb is to remember that the sales professionals you’re dealing with have a deep understanding of the nuances and pitfalls of the offers on the table. They likely know more than you, so be cautious when making decisions.
While your goal is to reduce costs, major vendors have strict policies to protect their revenue streams. IBM enforces the “All or Nothing Subscription & Support Requirement,” Oracle has its “Repricing Policy,” and SAP follows an “All or Nothing Support Policy.” Our older, more seasoned selves may feel confident, but we must not underestimate these vendor strategies.
Oracle’s repricing policy, for example, dictates that when you drop support for some, but not all, licenses, the remaining ones are repriced at list price—unless that results in a cost exceeding what you were previously paying.
When you merge multiple contracts into a single co-terminus agreement, you limit your flexibility to downsize in the future. Separate contracts give you the option to selectively drop certain agreements when needed. Trust us, you’ll be grateful in the years to come if you maintain that flexibility.