December 22, 2008Doug Hadden
A major enterprise software vendor recently increased maintenance fees. These fees cover product support and provide software upgrades. Do these fees help governments to sustain PFM implementations?
No. Maintenance is but one necessary component for sustainability.
Governments calculate multi-year support and maintenance costs when comparing proposals from multiple vendors. This is for good reason: high recurring costs can make software financially unsustainable. Yet, these costs are often insignificant when compared to other built-in (but less explicit) costs, including:
- Continuous technical training for large IT staffs to maintain complex technical infrastructures.
- Long-term contracts with expensive consultants to maintain systems and processes. For example, a recent analysis of an IFMIS implementation showed that consulting fees represented three times the cost of the software.
- Change management processes and consulting fees to support upgrades to new versions of the software (particularly when it is necessary to maintain any code customization) and to support reform and modernization.
Maintenance is Vendor Revenue
Internal civil service and external consulting personnel often cost more than maintenance fees. Yet, many vendors receive more than half of annual revenue from these maintenance fees. These vendors often force customers to upgrade and incur costs by refusing to support previous software versions.
Commercial Off-the-Shelf (COTS) software does indeed require customer support and maintenance fees. But government customers should not be forced to upgrade software outside of budget cycles. And, the personnel costs to maintain software should be optimized. However, the current modes of assisting customers in software upgrades have remained static for too long. Software vendors receive the same maintenance fees regardless of the customer personnel costs.
FreeBalance has developed an alternative approach that reduces this Total Cost of Ownership (TCO) to make software more financially sustainable. This should really be though of as the Total Cost of Sustainability.
Generic Software Maintenance Model does not provide Financially Sustainable Systems
Why is it so rare to find software vendors that are focused on the total cost to the customer? There are numerous factors at play that affect vendor priorities:
- Many vendors are focused on making their organizations operationally efficient or innovative—two of the business models advocated in the famous Discipline of Market Leaders. Most software vendors avoid the third business model, ‘customer intimate’, because they view the market as being Inside the Tornado.
- Many vendors rely on third-party consulting companies for implementation. Some vendors have large professional services departments that generate revenue for software upgrades. Making software easier to implement and upgrade reduces the vendor and partner revenue streams.
- Larger vendors focus on ‘owning the customer’ by providing a complete portfolio of infrastructure and application software. These vendors compare the high cost of maintaining a single vendor set of applications to maintaining multiple vendor sets of applications. Vendors have no incentive to reduce upgrade costs for customers unless it is driven by competition. And vendors who ‘own’ customers recognize that switching costs can be more prohibitive than supporting current software.
- Most vendors do not integrate the product development, support and implementation groups within the company. The customer support group attempts to overcome product upgrade problems through documentation and the formulation of troubleshooting guides. Customers often band together in user groups to help each other out. This only mitigates the upgrade costs.
At FreeBalance, we believe that the expertise developed from our sole focus on government financial management and the integration of business groups has enabled us to develop software that is much less expensive to upgrade than the average. This ‘customer-centric development model’ was confirmed by our achievement of ISO-9001/2000 certification last year.
Better Sustainability Calculations
Government organizations can determine the Total Cost of Sustainability by requiring vendors to reveal the following:
- Average amount of time taken by other government organizations to upgrade to a new version of the software and the number of consultant hours required.
- Average number of personnel required to maintain and support the system within the government.
- Features and functions that reduce the burden for upgrading, including parameters, accelerators, and other configuration options.
- Average amount of time taken by other government organizations to change the system configuration to support reform and new national standards.