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This could be a USD7-billion opportunity for Indian tech firms. Top business software customers such as Siemens are questioning heavy product maintenance fee paid to companies such as SAP and are exploring third-party maintenance with Indian tech firms among other global vendors. As part of software license sales contract, with a vendor like SAP or Oracle, customers have to pay 22 percent of the license fee every year for any product support or upgrade services, on top of what they spend on annual maintenance of their technology and business systems. European engineering major Siemens became the latest customer to question the manufacturer-driven support and has shortlisted HCL technologies and IBM for a potential contract.
Siemens is trying to negotiate hard with SAP and is discussing a deal wherein some 200-300 of its internal support staff could move to an outsourcing vendor such as IBM or HCL, said a person familiar with the discussions. Of the total USD60-billion enterprise software market globally, business software makers SAP and Oracle gain over half of their revenues by charging customers for product-based support including new updates, etc. For instance, Siemens could be incurring over USD50 million annually towards supporting its ERP systems.
Experts such as R Ray Wang, partner Enterprise Strategy at consulting firm Altimeter say that in third-party maintenance, no money goes to the vendor, and that is why customers are in a better position to drive down the annual maintenance fee. For every dollar spent on buying a software license for an enterprise resource planning (ERP) software, customers need to pay some 22 cents to the product vendor for annual updates, maintenance and other patches. Maintenance revenues are the cash cow for Oracle and SAP, with both these companies earning in excess of USD16 billion together from this.
For Indian service providers, this is an opportunity to break free and start addressing the market collectively at the same time, he said. He added that the third-party maintenance could easily be up to USD7 billion market for the vendors.
Other top SAP customers such as Royal Philips Electronics say vendors such as SAP and Oracle are being challenged with the emergence of newer models including software-as-a-service. Traditional models will be challenged, accelerated by the economic crisis. We are open to these new models-provided it fits our future landscape, said Maarten de Vries, IT and Supply Management, Member GMC - Royal Philips Electronics.
By outsourcing maintenance to a third party such as an IBM or any other Indian service provider, Siemens and others can bring down their costs by over half, said Mr Wang. When contacted by ET, Christoph Liedtke, a spokesperson for SAP AG defended his companys stance and said customers would rather work with SAP for the best support.
Whilst third-party maintenance firms might be able to provide stand alone point solution support, SAP has the clear advantage of providing a well integrated and comprehensive set of high quality skills and services to our 86.000 customers 24/7 on a worldwide level, he said. It is our strong belief that customers will not change this approach, given the critical importance of reliable software services for their business operations, he added.
For Indian tech firms such as TCS, Infosys, Wipro and HCL, any move to aggressively target the third-party maintenance market could be viewed as some sort of breach of trust by global software product firms, who have helped these companies build their lucrative businesses around the products.
Its lucrative for sure, but not at the cost of a long-term alliance. Moreover, the jury is still out on whether customers should seek beyond manufacturer-driven support, said a senior official at one of the Indian tech firms. Globally, niche vendors such as Rimini Street have already started offering third-party maintenance services to customers. For customers not planning to upgrade to newer versions of the products, getting a vendor like Rimini to support the older versions makes lot of business sense. It would be fair to assume that almost half of SAP customers are still on older ERP version of R/3, said Mr Wang.
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