The Broken Promise of Software Maintenance Fees
There is plenty of anecdotal evidence of this broken promise, like Lawson's admission that maintenance fees are what is making it profitable right now and its assertion that this is ok because customers need the company to remain healthy, even if it is at their own expense. Considerable debate has occurred among bloggers and independent analysts regarding Oracle's ability to provide any innovation as a return on the billions in maintenance it is collecting. SAP announced earnings today and shared that in response to huge (and justifiable) customer outrage it is holding off on its planned maintenance price hike pending an analysis of the ROI customers are to get from the increased fees. Good luck with that.
In light of this I thought some hard numbers would be in order, and being a math geek I figured I could take a stab at providing them. It occurs to me that as leading vendors become more dependent on maintenance revenue, as it makes up a larger and larger percentage of their revenues, R&D spending should be increasing as well, right? They're getting this money to "maintain" the products. If they get more money they should be better able to "maintain" them. I know R&D as a percentage of total revenue is flat-lining or decreasing at these companies. So how about R&D as a percentage of maintenance revenues? I spent the better part of my morning working on this chart.
Does this surprise you? Here's a group of leading vendors who pretty much all are spending only about a quarter of customer maintenance fees back on R&D for the products they are said to be maintaining. Actually, it is probably worse than that. These are technology companies striving to innovate (well, except for Sage) so they'll be happy to tell you about the new stuff they're working on. Really, so after you spend on that new stuff how much less than one quarter of every dollar is going into the product I'm using?
I've never run a multi-million or multi-billion dollar software company, so I guess I don't know exactly how this is supposed to work. I know of course that R&D does not match maintenance revenues. I expect some profit to be taken. Maintenance is a pretty damn profitable business for vendors. Lawson had 83% gross margins on its maintenance business last quarter. I can also see the point that some of those dollars be used to fund acquisitions that fill functional gaps in my product. That's a way of maintaining and enhancing my product...buying the R&D efforts of others vs. spending it yourself. Acquisition binges the likes of which Oracle and Sage have been on, for all kinds of stuff that's unrelated to my product, are another matter.
Speaking of Sage, you may have noticed that the orange line looks a little bit different than the others. It's low all the way across the chart as being dirt cheap on R&D investments appears to be part of that company's mission statement. It's also lower because Sage does not report maintenance as a separate line item. So this is R&D as a percentage of everything that Sage does not classify as product revenue. In that sense you should pay more attention to its trajectory than its position relative to the other lines. The trouble with Sage is that it cannot make up its mind on how to report revenues. The jumps in the line are because Sage has this habit of changing the way it bundles and reports revenues. It is a shell game focused on obscuring an unrelenting decline in new licenses as a revenue source for Sage.
You might think this all leads to an argument in favor of Saas vendors like NetSuite or Salesforce.com. It's an argument Marc Benioff would like to make, but I'm not quite sold. They don't call it maintenance, but the recurring fees paid to Saas vendors have a support and maintenance element to them, and depending on your configuration and use of the software Saas can be more expensive than traditional on-premise software. Before you exclusively beat up the on-premise vendors for their R&D spend, look at the fraction of revenues that most Saas vendors put back into R&D.
In the case of highly profitable on-premise vendors like Oracle, Sage, or SAP customers ought to complain that too much of their maintenance fees are simply dropping to the vendor's bottom line. In the case of Saas vendors...instead of fattening the bottom line (there's precious little profit being made by these guys yet) you're funding ridiculously high sales and marketing spending. Pick your poison I guess.