SAP Chief Says Software Support Fees Needed to Fund Research

May 19, 2011, 10:55 AM EDT By Ragnhild Kjetland

(Updates with DSAG comment starting in 10th paragraph.)

May 19 (Bloomberg) -- SAP AG co-Chief Executive Officer Bill McDermott said the fees charged to customers for software support and maintenance are fundamental to fund research and development of new offerings.

In 2009, toward the end of now-Hewlett Packard Co. CEO Leo Apotheker’s reign at SAP, the company had quarreled with some customers about maintenance prices. A company such as Siemens AG, Europe’s top engineering firm, may spend about 30 million euros ($43 million) in annual maintenance fees, said Helmuth Guembel, managing director at consulting firm Strategy Partners.

“The systems that SAP sells and that customers use to run their business are mission critical to the operation of their company so the investment in support is well worth it,” McDermott, 49, said in an interview in Orlando, Florida. “The only way software companies can stay in business is by refueling the research and development machine and constantly innovating.”

Amid a maturing market, software makers face weaker growth in sales of enterprise software. Walldorf, Germany-based SAP, the world’s largest maker of business management software, is planning for about a quarter of its 2015 sales goal of 20 billion euros to come from new mobile handset products, services and real-time analytics technology.

In January 2010, SAP caved in to customer pressure and froze planned fee hikes. The company also started offering clients a choice between a full range of tailor-made services and a lower-priced standard package with basic software backup.

Disagreements

Karl Liebstueckel, the head of the German-speaking SAP user association DSAG, with more than 2,000 member companies including Siemens, Bayerische Motoren Werke AG and Deutsche Bank AG, said at the time that the group’s “core demands” had been met after “intense disagreements and heated discussions regarding the pricing of support.”

Guembel, formerly responsible for research firm Gartner Inc.’s software market strategies in Europe, said the software industry needs to become more sustainable, comparable to the automotive industry, where an engine can handle many more kilometers today than it could a couple of decades ago before it needed an oil change.

“This is pure gravy for the software industry,” Guembel said in a phone interview. “It isn’t in sync with the rest of the economy.” He added that many software maintenance contracts can’t be revised downwards even if a company’s number of users drops.

Innovative Offerings

SAP had 6.1 billion euros in support revenue in 2010, representing 49 percent of total sales. In the first quarter, support made up 55 percent of the total as last year’s price- increase freeze came to an end.

“We now have a choice between enterprise support, standard support and a defined ramp-up curve, where there is an upper limit for price increases, and in most countries the price increases depends on the development of the economy,” said DSAG Vice Chairman Andreas Oczko. “That means that when times are bad there will be no price increase, or an increase below the ramp-up curve.”

McDermott said customers benefit from the development of innovative offerings which are financed by maintenance fees.

New services that allow clients to analyze information in real time or access data through mobile phones and tablet computers such as Apple Inc.’s iPad can make operations “far more efficient” and lower costs of information technology as a percentage of revenue, he said.

Improving Relationships

SAP is “on the right track in improving customer relationships,” said DSAG’s Oczko. “But there’s still a long way to go before we get back to the same situation as it was before the maintenance conflict. It’s like in real life: when something goes fundamentally wrong, it takes time to get back to where you were before.”

McDermott and Jim Hagemann Snabe were named co-CEOs in February 2010 and have been racing to get products out the door more quickly.

Last year, they acquired database and mobile-device software maker Sybase Inc. in a transaction valued at $5.8 billion, to boost SAP’s presence and revenue from mobile devices such as laptops and tablet computers and help it fend off competition from Oracle Corp.

--Editors: Simon Thiel, Robert Valpuesta.

To contact the reporter on this story: Ragnhild Kjetland in Frankfurt at rkjetland@bloomberg.net

To contact the editor responsible for this story: Kenneth Wong in Berlin at kwong11@bloomberg.net

View the original article here