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Why CIOs should take extra precautions when buying IT support

With the continued squeeze on IT budgets, CIOs are always seeking ways to reduce their outgoings. Maintenance is one area where substantial savings can be made, but opting for third-party support requires careful assessment

Businesses can save millions by switching to a third-party support provider, but this approach comes with risks, according to Gartner.

Research from the analyst firm has found that organisations are putting a greater focus on reducing costs. From an IT perspective, the CIO is often asked to reduce their already tight budgets.

According to Gartner’s findings, third-party support suppliers offer the potential to save more than 50% on annual application maintenance fees, which can present a compelling option, given the pressure on IT budgets.

The analyst firm found that few CIOs believe the higher maintenance fees they pay direct to the main software suppliers offer comparable value.

Third-party support comes with risks

However, in a more recent report looking at third-party maintenance for Oracle and SAP enterprise resource planning (ERP) systems, Gartner warned that many CIOs overlook the need to evaluate the potential risks of switching, such as uneven third-party support coverage for certain geographic regions.

In its What CIOs need to know before adopting third-party support for Oracle and SAP ERP report, published on 12 September 2019, Gartner analysts Denis Torii and Duy Nguyen noted that, generally, the more customers a third-party support provider serves, the more products and regions it will support.

The analysts reported that the geographical reach of a third-party support organisation also tends to directly correlate with the number of employees.

“While a higher volume of customers may not be completely representative of a higher service quality, it may be an important evaluation factor for some organisations,” wrote Torii and Nguyen.

They warned that some IT departments may need to set up contracts with more than one third-party support provider to obtain the geographic and product coverage they require. Gartner recommended that CIOs check customer references through direct, one-to-one discussions with those customers to evaluate whether the third-party support provider fits the needs of the business.

Big savings and transformation opportunities

Discussing the savings that CIOs can make by switching to third-party support, Tomas O’Leary, founder of Origina, which specialises in IBM support, said it was possible to save 60% through third-party support, without exposure to risk.

“This is an opportunity that needs to be embraced,” he said. “It will transform their businesses, and transform the legacy players because they won’t be able to milk the old legacy cow anymore. It is not good for them.”

In O’Leary’s experience, the major enterprise software providers tend to spend all their innovation trying to change contract rules, rather than looking ahead at how they will compete against new players in the market.

“The right partner will help you maximise the value of your existing applications, create the capacity to fund your modernisation and free up resources to focus on transforming your IT systems”
Pat Phelan, Rimini Street

Pat Phelan, vice-president of market research at Rimini Street, and former Gartner research vice-president for enterprise software and ERP products, said businesses should carefully consider what a third-party support provider could bring to the table.

“It is important to carefully evaluate primary support capabilities, such as the breadth and depth of the support team in each global region, the comprehensiveness of the service offering, and experience and scope in delivering vital tax, legal and regulatory updates, as well as strategic capabilities like modernisation and cloud services, hybrid IT, business-driven roadmap planning and application management services,” she said.

“The right partner will help you to maximise the value of your existing applications and create the capacity to fund your modernisation, as well as free up resources to focus on transforming your IT systems,” Phelan added. “As such, another consideration for enterprises evaluating third-party support is how providers are investing in their proposition. The expertise and talent they bring into the organisation, and the innovative new services they offer, are key to helping companies transform.”

O’Leary said that, from what customers have told him, sales teams at the major IT firms tend to offer their customers software bundles, which often include many products that end up as shelfware, never being used.

Consider cloud and the bundling conundrum

As Computer Weekly has previously reported, this is a common sales tactic. These days, cloud is often part of that bundle, even if the customer has no interest in deploying cloud services yet. The major ERP providers see their existing customers as a cloud sales opportunity, and there is a very real focus on growing the cloud business.

In a transcript of Oracle’s first-quarter 2020 financial results, posted on the Seeking Alpha financial blogging site, Oracle’s chief technology officer (CTO) and chairman, Larry Ellison, said: “Not only do we have an enormous installed base of existing ERP and HCM customers, which can operate to the cloud, but more than half of the current ERP and HCM [human capital management] market is served by companies which have no SaaS [software-as-a-service] upgrade path. These companies’ products are vulnerable to being replaced, and we’re in the process of replacing them.”

The major ERP software companies also have a strategic roadmap to migrate their products and platforms to the cloud.

“If you try to take out products from the bundle, the software firms will usually try to charge the same price as the whole bundle”
Tomás O’Leary, Origina

In SAP’s second-quarter 2019 financial statement, the company reported significant growth in sales of the Hana Enterprise Cloud (HEC) platform. In a transcript of the earnings call posted on Seeking Alpha, CEO Bill McDermott said: “The Hana Enterprise Cloud now is being run by some real pros. So instead of a low-margin business that was uninteresting financially, it’s now improving steadily and you’re already over 22% with the margin performance of HEC and it will get into the mid-30s. And it’s actually performing at a quality standard commensurate with the hyperscalers now.”

Yet, while organisations are being incentivised to buy into the cloud strategy of the major software providers, it may be worth considering how to separate out the constituent parts of a contract in a bid to negotiate better terms and conditions on the parts that can be supported by a third party.

“If you try to take out products from the bundle, the software firms will usually try to charge the same price as the whole bundle,” said O’Leary.

In addition, organisations then pay ongoing annual maintenance for the bundle. From a third-party software perspective, O’Leary said it was possible to break up the support of these bundles, splitting products that can be supported by a third party from those where it is beneficial to keep support with the original manufacturer.

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