Support and Maintenance Margin Pressure Puts Shareholder EPS at Risk

Over the last few years, while license revenue for enterprise software has slowed, the contribution made by support and maintenance and its share of revenues has dramatically increased. At an operating margin level, support and maintenance is often more profitable than new products or licenses. The result is, for many companies, support and maintenance accounts for a disproportionate share of earnings per share (EPS).

According to SSPA Research’s 2005 Support Demand Enterprise Series, maintenance contracts account for 19% of customers’ total cost of support and maintenance (TCSM). More than ever before, customer CIOs are scrutinizing the pricing of their maintenance contracts. The survey results suggest that pricing is one of the three most frequently used levers to reduce TCSM, with vendor consolidation and support automation. Further, 64% of the customers in our survey cited reducing the price for the same level of service as the primary driver for renegotiating maintenance contracts.

The research suggests that the pricing pressure will continue into 2005-06 because the pressure on CIOs to increase efficiency by reducing “day-to-day” costs is expected to continue. Customers will also apply more sophisticated purchasing techniques when it comes to buying complex IT systems.

These pressures and others put your support and maintenance revenue (and EPS) at risk. Given the high contribution of support and maintenance to IT vendors’ overall profits, a 10% drop in maintenance pricing can reduce the EPS of mature application software vendors by 12%

Vendors must actively address this pricing pressure to mitigate the risk to EPS. This could also be an opportunity for vendors to offer new services based on their understanding of the drivers behind the pricing pressure.

For more information about the 2005 Support Demand Enterprise Series, contact John South, SSPA Director of Membership Sales, jsouth@thesspa.com, 858-674-5491.