Third Party’s A Charm For JDE Maintenance Contracts

April 23, 2012 Dan Burger

Like a fur coat on a hot summer day, the cost of software maintenance is making a lot of companies sweat. Maintenance has always been a factor whether it relates to purchased or home-grown software, but in recent times its shadow grew while budgets were pinched. Nowhere in the IBM i community has this issue been more apparent than among JD Edwards users. JDE apps have a large installed base, and ever since Oracle took over JDE, it has become the lightning rod example.

On average, the annual software maintenance fees come in at around 20 percent of the total software licensing fee, which means after five years the initial software expenditure has doubled. As you are well aware, ERP software is not purchased with petty cash, so there’s some serious money changing hands. More so than in the past, this has turned up the burner on the pot labeled scrutiny. When companies believe they aren’t getting their money’s worth, discussion between buyer and seller heat up.

Oracle is not the only company to feel the heat, but it is most often in the spotlight. Its maintenance fees are higher than average, but Oracle is not out on that limb by itself. Oracle’s JDE customers, particularly those with a great deal of history with IBM midrange systems, have not been silent about it. Many are feeling squeezed and enough of them have jumped to third-party maintenance providers to ignite a healthy business for several firms that specialize in saving them money, providing better service and bringing attention to Oracle’s maintenance contracts, which have a 92 percent gross margin, according to the company that writes them.

Earlier this month, the Wall Street Journal took note of Oracle’s practice of collecting higher than average maintenance charges and the customer complaints of less than satisfactory product development. The article–titled Oracle Customers Rankled by Product Roadmap–was, no doubt, a public relations nightmare for Oracle.

Although IT Jungle has been writing about this for years, the WSJ has us beat when it comes to readers outside the IBM i community. Admittedly we are not the big fish in the big pond. And it’s just a guess on my part, but I’d bet the Jungle beats the Journal when it comes to subscribers inside the IBM i community. Kudos to the Journal for its attention to this. Reporter Clint Boulton pointed out that a two-year-old survey showed 58 percent of Oracle customers were dissatisfied with the maintenance costs and 42 percent were unhappy with the level of support. In bringing it up to current times, Boulton says “there appears to be a deepening resentment fueled by the sense that the company is leveraging its market strength and forcing customers to upgrade to products Oracle wants them to buy.”

Duncan Jones, vice president and principal analyst for sourcing and vendor management at Forrester Research, keeps an eye on Oracle as part of his vendor management gig. He was quoted in the WSJ article, so I contacted him for more on his point of view. Jones told me Oracle’s quarterly revenues indicate flat revenues for application maintenance. Consequently, he says, Oracle is losing application revenue because customers are migrating to other products or dropping maintenance at the same rate that Oracle is raising prices and selling new licenses to new or existing customers.

“Without getting too mathematical,” Jones says, “that means its apps maintenance renewal rate (across all products) is roughly 95 percent.” Not exactly a failing grade, but it looks like smoke rolling out of the windows of the JD Edwards business.

The JD Edwards portion of Oracle’s customer base have a unique situation because many of them are heavily invested in the IBM i platform. Most of them technically run on older versions of the operating system that are referred to as i5/OS and OS/400 and their hardware is either iSeries or AS/400. (Because the majority of them have not yet made the jump to IBM i 6.1 or 7.1, those who want all references to IBM i all the time will have to cringe.) Jones describes them as facing “a quasi-religious conversion away from that platform in addition to migrating ERP.”

This “AS/400 effect,” as Jones calls it, is of greater significance at another major ERP software vendor, Infor, which has many IBM midrange-based products. “The two companies have similar strategies,” he says. They keep enhancing the legacy product lines to maximize maintenance renewal, develop new products that integrate with the legacy ones, while providing a migration option for when customers are eventually ready to do a new ERP implementation.”

When that day comes, it will be a disruptive project that involves correcting problems that originated with the original implementation services providers (pre-Oracle). Jones says there was mis-selling of customization work that inflated the profits of the system integrators and “set in stone the customers’ sub-optimal legacy practices” and “left them locked into releases that soon became obsolete.”

That’s a worst case scenario. It’s not uncommon, but plenty of companies are going through periodic software upgrades without reaching obsolescence. For the most part, they stay on maintenance. Sometimes it’s because they figure there is no choice. That’s been changing though, and no place has seen more of this change than JD Edwards users.

One of the companies that’s done well in this emerging market is Spinnaker Support. Its CEO, Matt Stava, says not every company is a great fit for third-party maintenance. That said, Stava’s company is taking care of more than 100 companies that trust Spinnaker will give them better JD Edwards support than Oracle. They know Spinnaker will charge them less and that moves the contract negotiations in the right direction.

It is both the size of the maintenance contract and the lack of product development being done by Oracle that influences the decision to move to third party maintenance, Stava says. Companies are getting around to looking at the value proposition and are not happy with what they are getting compared to the amount they are paying.

“There’s a realization that it’s not a forgone conclusion that maintenance is embedded in operating costs and it has to be that way,” he says.

“From my foxhole, I’m looking at JD Edwards customers and I see that Oracle is sunsetting support of some of their large applications–World A7.3, for example. I would say that nothing short of 40 percent of all JD Edwards customers run that application. It is massively widely adopted, and support will end in 2013.”

A lot of customers are planning upgrades to A9.3, the latest World release, which occurred less than two weeks ago. They will get to that release over the next three to 18 months, but when maintenance comes up for renewal they will bail on the maintenance contract with Oracle and come to third party vendors like us for maintenance. They will ride that version of JDE for five years while deciding what to do.

“We have dozens of companies with that MO,” Stava says.

Third-party maintenance vendors provide a variety of options. It begins with basic break/fix and bug fix contracts, but can include such things as performance optimization, tax and regulatory updates, and customization support. What these vendors cannot provide is access to upgrades and future versions of the software.

When companies find the cost of a maintenance contract cut by as much as 50 percent and they are unhappy with the company they’ve been dealing with, there should be no surprise that events unfold the way we’ve been seeing them unfold.