A few days ago, I argued that a company that wants to replace its old, limping systems with a brand, spanking new Oracle or SAP application should probably wait for the next generation of apps.

The post got a lot of approving comments, which surprised me. I think there are pretty good arguments for just hauling off and buying. Consider what one of these hypothetical companies might say in defense of a decision to buy now rather than later.

1. We’ve got the money now and we should spend it.

2. The product we’ll get will be much more reliable.

3. The cost of services surrounding the product will be lower.

4. We don’t know when the new products will be out (with the possible exception of Workday 10).

5. We don’t know what will be in the new product.

Imagine what idiots we’d look like, the buyer might say, if we waited for five years for a product that was no better than what we could buy today and far more incomplete and buggy.

I see the force of this, which is why I thought it was a close call. Ultimately, I did decide it’s better to wait for markedly better products that are coming, despite the risks and delays. But I saw why people would disagree.

So are my commenters intemperate or am I dithering? One test for this is to look at the case of somebody who is not considering a replacement, but is considering a fairly big investment in the existing platform. Maybe they’re considering an upgrade, or maybe they’re considering some extension products, or maybe they want to push their existing installation out to other geographies.

This is a very realistic case. Several companies I know fairly well are considering one or more of these options. One is upgrading to Oracle 11i; another wants to upgrade to Infor LN. Still another wants to extend its QAD implementation to another geography. Still another wants to buy a CRM system from its existing vendor.

For each of these companies, the details matter a lot, but on reflection, I think the same argument applies. It will be hard to get the return on this big new investment in the old platform, because the useful life of what is to you a new product is not long enough to justify the expense.

This raises two questions. First, how does one calculate “useful life.” Most of the companies I’m thinking of believe that the useful life is defined only by how long they’re willing to use it, and for some companies, that’s pretty long. (There are, after all, big SAP clients who are still using R/2.) I think this is wrong, but I’m going to have to hold off explaining why till a later blog.

The second question is, “Assuming that the commenters and I are right, what kinds of investments should companies who have decided to wait actually make?” I have no determinate answers to this, but I think there are some guidelines.

Start with Gavin’s comment on the previous post. Gavin points out that some investments in the Oracle infrastructure and in new Fusion-based products will actually take you toward the next Oracle generation. He is quite right; Oracle designed things this way, and partly because of the problem that I’m describing, they quite deliberately created some ways of investing in products from Oracle without locking yourself into an older technology.

There are many, many caveats, of course. Among other things, if you have an Oracle system now, you might not want Oracle in the future. The three main products I mentioned in the earlier post (Workday, Business by Design, and Fusion Applications) are all highly differentiated, each with its own flaws and virtues. A rational person would do well to look at all of them before deciding to stick with the vendor they have now. (This applies to SAP customers, too.)

Even if you are bent on Oracle, you still may want to take some time thinking through your infrastructure stack before investing in pieces of it. Even the examples Gavin gives like OpenID, which are likely to be pretty good, may not be right in the long run, and if they aren’t, that will be a lot of trouble and expense gone to waste.

You should note that Gavin’s argument almost certainly will apply to SAP, as well. SAP is also workng on “hybrid” intermediate solutions, and I’ll bet you dollars to donuts that they’re trying to figure out every way they can to ease the migration to the new system by asking you to make steady, rational investments in products that extend your current capabilities.

But what about customers for whom an infrastructure or extension investment isn’t right? Here, I think there are some interesting arguments, akin to Gavin’s, for small, light cloud-based apps, point solutions designed to solve highly specific problems. I’m not just talking about a CRM app or a call-center app or a recruiting app; I’m talking about things that are very, very specific to your industry, but really powerful, things like Tradestone in the apparel industry.

Another possibility is to spend some time and effort cleaning up your existing installation. This will improve its current effectiveness, extend its useful life, and very possibly lower the cost of the new system significantly. (A lot of the cost of any implementation is cleaning up after the mess left by a system that everybody has given up on.)

There’s a very smart analyst in Europe, Helmuth Gümbel, who has spent a lot of time thinking about this problem. He has a blog, and he also has a conference, Sapience, which goes into these questions at length. If you’re thinking about extending your current ERP to other geographies, a reasonable alternative might be to find lower-cost ERP systems to serve those geographies.

The basic theme running through these latter approaches is that while you’re waiting, you can focus on saving some money and preparing your current installation, thereby making the later transition to a newer technology faster and more affordable.

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The SUGEN Numbers

January 20, 2010

I argued in the previous post that SAP’s new, “two-tier” pricing system for maintenance offers customers less choice than meets the eye, and commentators like Dennis Howlett agree.

So why did they bother? If one offering is “good support for a fair and reliable price” and the other offering is “less good support for roughly the same price (only no one will really know for six years)” why would anyone pick the latter? And why would SAP risk a public relations nightmare when the people who pick the apparently lower-cost alternative find that they’ve been snookered?

Is it just that SAP needs to offer the enterprise application version of “small coffee,” the coffee size that nobody ever orders, but you need on the menu, so people will order medium?

The question is particularly salient because SAP has data that, one could at least argue, shows that Enterprise Support really is better.

This data comes out of a program embarked on last summer, sponsored by SUGEN (SAP User Group Executive Network) and SAP. In this program, companies were put on Enteprise Support, and the benefits thereof were measured in 11 benchmarks and the sum of those benefits added into something called the SUGEN KPI Benchmark Index. SAP had vowed not to raise the cost of Enterprise Support until this program showed that a gain in the Index that gained justified the increased cost of Enterprise Suppory.

SAP reported the results at the Influencer Summit last December, which I attended. According to the numbers they showed me, the SUGEN KPI benchmarks had indeed been achieved.

These numbers were disclosed to me on the condition that I not repeat them until the full results were published, and while I’ve been given informal permission to speak about them, I will try to respect this request.

I think, though, that I can convey a fairly accurate idea of what is going on without actually citing the numbers.

Before I can get to this, though, I need to explain something about the program and the expectations that people had for it. When SAP first announced a new, improved class of support at an increased price, which all customers were required to use, many customers thought that this was just price-gouging. They didn’t believe that SAP’s across-the-board price increase for maintenance would be accompanied by any benefits. When SAP started hearing from these customers, they were clearly taken aback, since the executives in charge of this new support program clearly did (and do) believe in its benefits.

So SAP (and SUGEN, the customers’ self-appointed representatives) agreed to put the question to an empirical test.

Now anybody reading the press release about this program or anybody attending the journalist session at last May’s Sapphire (as I did) would believe that this test would be done along traditional social science lines. A representative sample of the SAP customer base would be given the opportunity to take advantage of Enterprise Support, and the benefits would be measured.

After attending that session, I told my client base (people who are professionally interested in tracking what SAP does) that it was impossible for this program to show so much benefit that it would justify the across-the-board increase. The reason was simple. To get the available benefit from Enterprise Support, a customer must get and install a software product called the Solution Manager and must then do a lot of process documentation and process modification. A representative sample of SAP customers simply wouldn’t include very many customers who had done all this installation, documentation, and change, because the total amount of work was considerable, and most customers weren’t going to do it, at least not any time soon.

Isn’t it sort of squirrelly, expecting Enterprise Support customers to get software, install it, and then do a fair amount of work before they get the benefit that SAP promised them? Well, yes, but it isn’t quite as squirrelly as it sounds.

At the Influencer Summit, Uwe Hommel, the person behind this idea, expressed it roughly this way. A lot of customers don’t really run support as well as they could. The Solution Manager provides them with a framework for the practices that they should be using, plus it enables SAP support personnel to give better, more accurate, and faster help, because the Solution Manager gives them better information about what was going on at a customer site. It would be nice if SAP could wave a magic wand and improve support without any effort from the customers. But that just can’t happen. All we can do is provide a framework.

As far as Hommel is concerned, what SAP is saying is roughly what the trainer at the gym offers. “We’ll make you better, bigger, stronger, and leaner, but of course you have to do your share.”

Fair enough, of course. But that’s not actually what SAP said. SAP actually said something more like, “You need to do support better, and to do it better, you’ll need a trainer and you’ll have to put in some effort, but oh, by the way, you have to pay for the trainer whether or not you actually get around to going to the gym.”

Perhaps the oddest thing about the test that SUGEN and SAP ran is that both parties pretended that SAP had said the first thing and not the second.

You see this, for instance, in the way they [SUGEN according to Myers, below] chose the subjects for the test. Rather than choosing the representative sample of the customer base that I was told they would choose, they asked for volunteers to apply for the program. 140 customers did apply; of those, only 56 were chosen for testing. This, of course, simply guaranteed that the test would not prove what SAP wanted it to prove, that the price increase was justified. At best, it would prove that those customers who decided to go to this metaphorical trainer would get some benefit from it.

So, did they get some benefit?

Well, um, uh, sort of.

As I said above, SAP and SUGEN agreed before the test that there were 11 areas where benefit might be provided. The areas ranged from the obvious things–fewer outages, faster problem resolution, and fewer problems–to the less obvious, but still important things, like more efficient CPU utilization and better use of disk storage.

In the actual test, the benefits of Enterprise Support was measured in only 6 of these 11 areas. The areas chosen had to do with total cost of operations (use of CPU and storage), the cost/effectiveness of managing patches, and the extent to which customers used SAP’s current software effectively. Clearly, this made things harder for SAP, since they were trying to prove benefit, but the benefit was actually measured in less than half the areas where benefit might be available.

Nevertheless, SAP thinks that it succeeded, and technically they did. They measured benefit by giving the SUGEN Index an arbitrary value of 100. The way I understood it at the session, the aim was to show that the increased benefits at least offset the roughly 7.6% price increase in 2009. [According to Myers, below, the actual aim was 4%].

Both aims (what I thought was the aim and what Myers said was the aim) were actually achieved. The benchmark index dropped by 6.89 percentage points. Even though only 6 benchmark areas were measured, the benefit achieved did offset the 7.6% increase (at least within 1 percentage point).

There is, however, a little, tiny, “but.”

All the benefit was achieved by massive improvements in only two out of the six areas: storage utilization and number of failed changes. (A “failed change,” is an attempt to install a patch which fails.) In all the other areas that were measured, the average improvement was very small.

Both of these measure appear to me to be one-time-only improvements. Take, for instance, storage utilization. If you have one of those awful Windows machines, and your disk is sluggish, you can run a utility that compacts your disk and frees up disk space. You’ll show massive improvement in storage utilization. But running this utility once is not the sort of thing that justifies a permanent yearly increase in maintenance costs. Yes, you can do it next year, but it won’t show the same level of improvement, because you gained most of the benefit the first time you did it. The same thing goes for reducing failed changes. Changes in process (and use of the Solution Manager, or Sol Man) can reduce this number a lot. But once you’ve made the changes, further reductions aren’t really available.

I certainly hope that somebody from SAP is reading this; if you are, you’re probably upset, because you’re saying to yourself, “Well, the benefit is permanent; for the rest of time, people will have fewer failed changes and use less disk space.” [Myers does in fact argue this. See below.] You are, of course, right. But you’ll have overlooked the larger question: does helping people to a one-time improvement justify a permanent, yearly price increase. That is hard for me to see. If Enterprise Support promised to bring these kinds of improvements in regularly, then it would be OK to pay more for it regularly. But this test doesn’t show that these regular improvements will be forthcoming.

In any case, it’s all moot now. SAP has scrapped the SUGEN benchmark process. In a way, it’s a shame. This is one of the few times that any enterprise application company has ever tried to run a systematic test of whether its software and services work as advertised. And the results of this test are very interesting. In some areas, the software and services don’t seem to work; the benefits are minimal. In other areas, though, they work very well indeed; the benefits are startling. Who woulda thunk it?

At the very least, shouldn’t SAP keep going with this, so it can go back and fine-tune its software, figure out why some benefits aren’t forthcoming and do something about it?

Apparently not.

If you were one of SAP’s biggest customers and you found out that SAP was giving big discounts to another big customer, pretty much because they asked for it, what would you do?

Assuming you have at least a room-temperature IQ, that is.

Wait a minute. Let’s be democratic. If you were one of Oracle’s biggest customers and you found out that SAP was discounting maintenance for the asking, what would you do? I mean, you’re an Oracle customer, you definitely have a room temperature IQ.

Still not sure what to do? Here’s a hint. The phone number at SAP headquarters is 49/6227/7-47474. At Oracle, it’s +1.650.506.7000.

“Wait a minute, wait a minute, wait a minute,” I hear you saying. “SAP didn’t start handing out discounts, did they? They raised maintenance prices; they didn’t lower them?”

Perhaps. But let’s try to apply that IQ of yours.

As I’m sure you know, it’s been an bruited about in the media that Siemens was seriously considering the possibility of dropping its maintenance contract with SAP, starting January 1 of this year. Their plan was to have a third party provide maintenance, possibly either IBM or Rimini Street. (For a representative summary of the situation, as reported in the press, see this Market Watch report.)

So what happened? As all of you big SAP customers realize, Siemens had to make a decision September 30. Well, here’s what we know. About a week ago, SAP issued a press release, saying that Siemens had in fact re-upped its maintenance contract for three years.

Case closed, right? SAP doesn’t ordinarily announce maintenance renewals, but the underlying tone was, “Well, we’ve read the stuff in the press, too, so let’s deal with those scurrilous rumors, and issue a press release. After all, Siemens didn’t just come back. They bought more.” End of story?

Maybe. But you’ll notice that the press release doesn’t actually say anything about how much they paid for the maintenance. Indeed, there’s a funny little line about, “based on SAP’s maintenance standards for large customers,” which seems to demand some explanation.

So, let’s pursue it a little further. Is there any further information anywhere about what Siemens actually paid? About the same time as the press release, a post appeared on the Sapience blog. The post said that Siemens had been paying 30 million euros, pre-deal and was now paying 18 million euros, plus some other concessions. If you value the concessions at zero, this is a roughly 40% discount.

Sapience is written by Helmuth Gümbel, an industry analyst who has been following SAP for longer than I’ve been in the business. Helmuth is not an uninterested party here; he offers consulting on how to pay less in maintenance. But he’s also a well-respected figure, a person who doesn’t just say whatever he feels like saying, true or not.

[Full disclosure: Helmut is also a person I regard as my friend, someone whom I see socially on the rare occasions when he’s in town.]

So what is one supposed to believe? On the one hand, you can say, “Why believe an isolated blogger, especially when he has an axe to grind?” Then, you assume that the press release is giving you basically the right idea about what happened. On the other hand, you can say, “Where there’s smoke, there’s fire,” and assume that Helmuth (and the Enterprise Advocates, a group that discussed the Siemens situation in its recent webcast, have to have roughly the right version of the truth.

Helmuth isn’t the only source of smoke, here. Kash Rangan, an investment analyst at Bank of America/Merrill, estimated, recently, that 20-25% of customers get discounts on their maintenance payments. (The relevant figures are reproduced in the dealarchitectt blog.

No full disclosure required here. I have only a nodding acquaintance with Kash.

Of course, all this can be pretty muddy. American accounting rules tend to make it difficult for companies to give direct discounts on maintenance; basically, if a maintenance agreement is part of the initial license contract and the stated price of maintenance isn’t supported by objective evidence, companies are supposed to recognize the license revenue ratably, not all at once. If you give discounts, then your ability to demonstrate that the stated price is supported by objective evidence, is called into question. So, contra Kash and Helmuth, you could argue that SAP can’t be giving out discounts, because it would screw up their reporting.

But of course there are ways of discounting maintenance without actually charging less than the stated price. There is, for instance, a long, long history in the software business of handing out free seats, instead of cash, when customers are unhappy. (Both Helmuth and a cynical reading of the press release suggest that something of the sort may be going on here.) If pressed, vendors have also been known to reduce the basis for the maintenance charge and also to fiddle around with start and stop dates. I’m not saying that’s going on here–I don’t know–but I’ve been told by reliable sources that it has been done, at least by some companies.

If that were the case here, then Helmuth’s way of characterizing it is really the only sensible way to figure out what’s going on. You look at your outflow before. Then you look at your outflow afterward. The difference gives you a gauge of what the discount is.

So did Siemens get a discount? The plain fact is that we don’t know for sure, even with all that IQ, and won’t know unless SAP and Siemens agree to tell us, and even then we won’t know, because the one thing we can be sure of is that SAP will present the case in a way most favorable to them.

So, if we don’t know for sure, and yet it seems possible that in fact SAP is giving discounts, what should you do? Well, I have a suggestion. It’s 49/6227/7-47474. See what they say.

But don’t hide it. Post what they say right here. If SAP really is holding the line on disounts, well and good. But if they’re giving them out, don’t you think it’s time for you to get in line?