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Third-party maintenance: the good, the bad, and what it means for your business

Third Party Maintenance

Software maintenance costs are an important consideration for businesses that rely on software to support their operations. By understanding these costs and planning for them appropriately, companies of all sizes can ensure their software remains effective and reliable over time.

In this article, we’ll provide an overview of the nature and key components of software maintenance costs, and show where and how the third-party maintenance alternative fits in the big picture.

TLDR:

On an annual basis, maintenance expenses might account for more than half of the overall software expenditure.

Companies are searching for alternate solutions due to rising maintenance expenses, and third-party maintenance (TPM) is an increasingly popular alternative among local and global businesses.

As opposed to software vendor fees, TPM suppliers assert maintenance expenses may be reduced by 50% to 90%.

Utilizing third-party maintenance as an open option in the contract agreement might provide you with a significant negotiating edge with the software vendor.

The majority of TPM services focus on Oracle and SAP software solutions.

How long software licenses and support last

Every piece of software has a limited lifespan in terms of licenses, divided into three stages:

1. Initial purchase from the vendor

2. Usage (with the added option of upgrading)

3. DIscarding the software

The same principle goes for software support. In addition to the corporate software license, in most cases a company will buy software maintenance and support. This allows them to receive operational assistance, repairs, patches, and minor upgrades any time there is a need.

Let’s use SAP, one of the world's leading enterprise software developers, as an example. 

Between 18% to 22% of the license fee's original yearly value is spent on software support, not including annual inflation increases. The support is automatically renewed every year for the next five years (usually the case), after which the user has the option of renewing the maintenance agreement. This typically lasts one or two years at the original maintenance price and comes with an extra charge of about 5%.

The software provider will no longer provide further maintenance for the older version when the extended support term has finished. Instead, they will suggest an update or a purchase of a new piece of software, both of which will receive support.

So, as a buyer, you have three choices at the end of the software support lifecycle:

  • Continue using the software without vendor support;
  • Discard the software;
  • Restart the cycle by paying for an upgrade to a new version of the software.

Difference between TCO and TCM

One of the main characteristics of software maintenance costs is that they are typically ongoing. This means that once a software is deployed, the costs associated with operating and maintaining it will continue for as long as the software is in use. 

All costs during the software’s lifecycle are defined by the Total Cost of Ownership (TCO), which includes service expenses such as training, consulting, and all forms of daily operational costs.

TCM or Total Cost of Maintenance is a subset of TCO, making up to 60% of it. There are varying fees and charges that make up TCM, including the original vendor’s yearly annual maintenance fee, end-of-lifecycle upgrades for extended support, and special charges for custom coding.

The reality is that the price of the software license is significantly lower compared to the TCO. If a company buys the license for $1 million and spends 20% on the yearly maintenance rate, maintenance expenses equal the initial cost of license after five years during which the original support lasts. With extended support, fixed maintenance fee, and customized coding in the mix, the costs far surpass the starting license purchase price.

Hence, maintenance costs represent the important cost element of keeping software up-to-date and running smoothly, most notably due to their habit of incrementally increasing over time. They can add up anywhere from 50% to 80% of the annual software budget.

Naturally, someone is bound to profit from this - enterprise software vendors such as SAP, Oracle, Microsoft, Netsuite and others who, in their own rights, have monopolies on product support and maintenance. The maintenance business is quite profitable since new sales continue to be hard to come by. So, these corporations are turning more of their attention to increasing revenues from their maintenance business (arguably, their lifeblood) through fees and inflexible policies.

The role of third-party maintenance

To achieve a lower TCO, some companies choose to handle their own software maintenance in-house, although these cases are far and few between. The majority opts to purchase software support from a TPM provider as it offers a cost-effective and efficient alternative.

There are several reasons for the growing interest in third-party maintenance. One of the main ones is cost savings. TPM providers specialize in maintenance services, so they can often do the job more efficiently and at a lower cost compared to the software vendors or doing it in-house. This can be extremely beneficial for companies that do not have the resources or expertise to effectively handle maintenance on their own.

In fact, some estimates suggest TPM providers can halve the annual support fee.

Another reason for the popularity of TPM is increased flexibility and scalability. With it, businesses can easily adjust the level of service they receive based on their changing needs, meaning no unnecessary upgrades. This can be especially useful for companies that experience fluctuating demand for their products or services.

Third-party maintenance can also provide access to dedicated expertise and experience. For companies that are looking to improve their maintenance processes, TPM service is a much better fit as it allows for a personalized and prioritized service, instead of a randomly assigned help desk worker.

In addition, third-party maintenance can help companies to free up their own internal resources. By outsourcing maintenance to a third party, companies can redirect their own personnel towards other tasks and projects, increasing their overall efficiency and productivity.

Naturally, there are downsides to this approach too. For instance, custom-developed software often requires more expertise due to its more unique uses, bugs, or issues. This particularly goes for software with a large user base or complex functionality, where TPM may be an inferior choice.

Here is the full list of pros and cons:

Pros:

  • Reduced expenses
  • No unnecessary or forced upgrades
  • Priority support
  • Faster response time
  • Tailored solution for your unique needs
  • Custom code is included in the package
  • Flexibility to negotiate the optimal deal for your business

Cons:

  • In case of a required update, going through the vendor is the only viable option
  • Lack of various vendor optimization and configuration tools that come with paid maintenance support
  • Custom code requires customized support that may turn out costlier in the end as it often requires more care
  • You have to adapt to the new support communication flow
  • Your relationship with the software vendor may sour to the point of no return
  • TPM providers risk copyright issues as it’s not uncommon for software vendors to file intellectual property lawsuits

An alternative worth considering

As more and more companies recognize the benefits of third-party maintenance, it is likely that this trend will continue to grow in the coming years.

Simply put, TPM providers often have lower overhead costs and can offer competitive pricing for their services. This can help businesses keep their technology and equipment running smoothly and efficiently, which can be essential for maintaining their operations and competitiveness. In doing so, they can focus on their core business operations.

It’s important to mention that by having TPM as an alternative, you also gain more negotiating power with the software vendor. On the whole, industry insiders and experts concur that adding a special condition to the licensing and maintenance contract with the vendor is a wise approach if you want to maintain the flexibility to switch to TPM some time in the future.

So if you finally decide to explore the TPM waters, here are two key things you should do beforehand:

  1. Take your time to research your prospective TPM options and ask for details before deciding whether to use it for stable and less important software.This way, you can gain a better picture of the operational, contractual, and legal elements, along with the main risks.

  1. When the time comes for maintenance payments to be renewed with your software vendor, add a provision in your legal agreement regarding switching to a TPM vendor. In doing so, you maintain the option to not have the mandatory automatic renewal every year and gain some leverage.

The growing awareness of third-party maintenance is leading to an increase in its adoption in the enterprise landscape. Whether it will make sense for you ultimately depends on your company’s post-warranty needs, more so if you have complex and specialized software systems. Also consider that finding a reliable TPM service provider with suitable operational characteristics isn’t all that easy as not all of them are created equal. 

Time is your friend - do your due diligence and account for scenarios that may emerge (e.g. cost hikes, vendor stability) so you have all your bases covered before budgeting for this crucial operation.