Third-party ERP Support: When It Makes Sense
Cost and other factors can lead companies to consider getting ERP support from a third party. But is it a good idea?
If you need service for your car, your washing machine or even your blender, you can take that gear to any number of repair specialists, who have access to documentation and parts from the manufacturer.
It's a far more complicated matter for enterprise ERP software -- but should it be?
Though third-party maintenance for ERP systems has been around for years, a lawsuit in which the SAP subsidiary TomorrowNow was caught downloading Oracle’s copyrighted materials set the industry back. Frank Scavo, president of management consultancy Strativa and IT research and advisory firm Computer Economics, calls it a “nascent” industry at this point, though it’s growing.
Two of the largest providers of third-party maintenance for ERP systems, Rimini Street and Spinnaker Support, in August reported gains. Spinnaker Support, which provides support for Oracle, JD Edwards and SAP ERP systems, reported revenues were up 44 percent for the six months compared with a similar period of 2011 and sales bookings were up 48 percent. Meanwhile, Rimini Street, which services JD Edwards, SAP, PeopleSoft and Oracle implementations, reported second-quarter revenue at $10.5 million, an increase of 30 percent over the quarter a year ago and a new record for the company.
“There are strong economic drivers behind the move to third-party maintenance,” says Scavo. “The OEM vendors are charging high amounts for their ongoing support. If you look at the financials of SAP and Oracle, you see that they realize very high margins on that and in many cases, the value of those services are not up to the price that customers are paying.”
Indeed, cost is a significant factor. In the report “Extending ERP’s Lifecycle with Third-Party Maintenance,” Aberdeen Group research analyst Nick Castellina wrote:
“In organizations between $100 million and $500 million in annual revenue, the average yearly cost of maintenance is 15.7 percent of the software license for third-party maintenance, compared to 18 percent for vendor-managed support. The difference in potential savings could be almost $25,000 for those organizations.”
But cost isn't the only factor. Beyond cost, Castellina said, companies want to get full value out of their systems – which might mean keeping them even after vendors discontinue support.
“Many companies feel upgrades to the system don’t really add value and the ERP vendor is forcing those upgrades on them and hindering them in their processes. So they’re looking to third parties to extend the value so they don’t have to continually upgrade. It’s all about if you find something that works and being able to continue to use it,” he said.
Looking at the Big Picture
When does third-party maintenance make sense? Eric Kimberling, president and chairman of Panorama Consulting Solutions, advises focusing on three variables:
- Cost. He points to companies’ tendency to buy more software licenses than they need, which sends maintenance costs even higher. And while a few companies try to take over maintenance internally, that’s often not a feasible option. Indeed, in Aberdeen’s survey, 57 percent of respondents cited lack of internal resources among the reasons they’re unable to get full value out of their ERP system.
- Complexity of customization and upgrades. According to Panorama’s research, 89 percent of ERP implementations have some degree of customization, which the vendor might not support anyway. “In general, each customization needs to be rewritten or readdressed each time there is an upgrade, so the value of an organization’s ERP support largely depends on whether or not it is able to improve or upgrade the software without worrying too much about the effects on its customized components,” writes Kimberling.
- Legal considerations. Kimberling points out that lawsuits, such as Oracle’s complaint against Rimini Street that has yet to go to court, make customers nervous. Says Scavo: “I think it’s important for the buyer to have some level of assurance that the rights of the OEM vendor are not being violated. Whether that’s through having access to an audit or having contractual assurances that the customer is indemnified from any IP violations that the third party might be accused of – I think that’s important as part of the due diligence at the time you’re contemplating this arrangement.”
Third-party ERP support is probably not a good choice for companies that consider it important to have access to a vendor’s current version, patches and updates, Scavo says. However, “I think there are plenty of examples of companies that have gone off maintenance and at some point in the future decided to come back to the vendor for an upgrade. It’s very hard to imagine a situation where the vendor will not take that customer’s business back,” he says. Doing so might save you money.
He offers three use cases when third-party ERP maintenance might make sense:
- You’re on an old version of the ERP software. You’ve made a lot of modifications to it, so the vendor’s not supporting a lot of the modules anyway. Going to third-party maintenance would allow you to have a minimum level of support for things like regulatory upgrades, tax-law changes, compliance, bug fixes and database updates.
- If you’ve made modifications to your system, the third-party maintenance vendor might actually provide support for the modifications. Oracle and SAP won’t do that. So a third-party vendor might offer value that would go beyond what the original vendor would offer.
- If you are on a current version, but planning at some point in the future to leave a vendor’s system – going to some other solution, but staying on the current package for two or three years – it may make strong economic sense to go off vendor maintenance because you’re leaving the system anyway.
Though dissatisfaction with vendors’ response is a common complaint, going with a smaller organization might prove risky if it lacks the staff to adequately provide the service, Castellina cautions.
“Weigh all your options,” he advises. “See what your overall cost would be. See what the relationship is between your third-party vendor and the original vendor. Don’t make that [decision] based solely on price. You’ve got to weigh the value of the services being provided and the availability of support staff.”
Susan Hall has been a journalist for more than 20 years at news outlets including the Seattle Post-Intelligencer, Dallas Times Herald and MSNBC.com. She writes for IT Business Edge, Dice.com and FierceHealthIT.