SAP and Siemens: Rumors, Reality, Maintenance, and TCO

Rumors of the end of the world are pretty commonplace these days, and you don’t have to be following the current debate about healthcare in the US to catch a whiff of Armageddon in our times. The latest inclination that the world is coming to the end has emerged from Germany’s Wirtschaftswoche, a BusinessWeek equivalent that has a reputation for aggressively following SAP.

The rumor that WW has published, unconfirmed, is that Siemens and its 160,000 users will soon be using a third party service provider to manage Siemens’ vast SAP system. This event has been touted as any number of things, including SAP’s comeuppance and the best way for Siemens to focus on innovation and cost savings.

But is this supposedly leaked rumor real, or a bargaining ploy, or some combination of the two? It’s impossible to say, as neither company is talking except to say that Siemens and SAP are strategic partners and are planning to increase, not downgrade, their relationship.

Until facts intervene to clarify the issue, I’m going with the bargaining ploy option, for the following reasons. The first is that, with all due respect to Rimini Street, one of the putative replacements for SAP’s internal maintenance organization, I don’t see how they can gear up to provide comprehensive maintenance and support to SAP for what is either the world’s largest or the world’s second largest SAP installation (Nestle is the other contender). It would take something more than a Rimini to handle a customer of this size, despite their track record in third party maintenance.

According to WW, there are two other service providers in the running, IBM and HCL, both of which have the bulk to handle a client the size of Siemens. But would they take on such a task and risk the ire of SAP? I doubt it. HCL is considered inside SAP as a top partner, and one that has been growing its SAP practice at a phenomenal rate. More importantly, HCL is part of a vanguard of Indian SIs that are supplanting the traditional Accentures and Deloittes in the SAP market, and reaping tremendous benefits along the way. Taking away SAP’s Siemens business would be the end of that preferred status, and would, in my estimation, mean that HCL has chosen to be an antagonist and not a partner to SAP. Not exactly what I would expect from this company.

IBM might want to risk a similar rift, assuming they too had made an executive decision to start aggressively distancing themselves from SAP. But would the price be worth it? According to WW, Siemens currently pays SAP $43 million for maintenance. Assuming IBM would provide the kind of discount that Rimini provides, the value of the contract to IBM would be in the $20-25 million range. While this would mean a lot to a Rimini, $20 million pales in comparison to what IBM earns from its current SAP business, both in terms of what Global Services can command in the market as well as what IBM Software is selling to SAP’s customers. Again, would jeopardizing this much larger SAP business, worth over $1 billion a year to IBM, be worth injecting itself into this contentious issue? I doubt it.

This leaves us with a much more plausible scenario: Siemens wants to negotiate better terms for its SAP contract, and someone inside Siemens decided to put a little pressure on SAP by leaking this story. I certainly applaud the concept of negotiating better contract terms., though leaking this kind of potential bombshell may backfire inside Siemens, which doesn’t need any more funky publicity since it changed management and moved beyond its recent financial scandals. My sense is that Siemens will be sticking with SAP for maintenance, and while we’ll probably never know what the actual terms end up being, both sides will find a way to remain partners without resorting to the nuclear option.

Which brings us to the last point. The main reason why this whole issue of the value of maintenance is on the table at all is that SAP, and, frankly, the entire enterprise software market, has done a dismal job of justifying these costs to its customers. Discussions during quarterly financial calls about how maintenance revenues have kept these vendors afloat during the recession doesn’t exactly help.

What is needed is a concerted effort to do two things: the first is to define the actual value of maintenance dollars to all the stakeholders involved – excepting shareholders – in such a way that puts the reality of the issue on the table. There is a tremendous amount of confusion about what customers are getting for their maintenance dollars, and what vendors are doing with those dollars, and the debate needs more facts and less innuendo in order for this issue to be analyzed and understood in all its complexity.

The second is that vendors need to address the maintenance issue as part of a concerted effort to define total cost of ownership for their software, ideally in a way that shows how each vendor provides a competitive TCO. SAP is bearing the brunt of an industry-wide issue that right now is focused on a single metric – maintenance cost – while ignoring the larger, and much more salient, issue of TCO. Making maintenance cost the rallying cry of the disaffected ignores a much more complex and nuanced way to really assess whether one vendor or another is providing value to its customers. There is more to the cost story than maintenance, and the industry needs to expand the dialogue to make this story more complete.

I’m certain the powers that be at Siemens are looking at the value of their SAP relationship in much broader terms than just their maintenance costs, and I believe the results of that analysis will likely yield a continuation of the relationship, though probably with some lower costs somewhere in this vast partnership. Give and take makes sense between two partners makes sense, going nuclear doesn’t.

4 thoughts on “SAP and Siemens: Rumors, Reality, Maintenance, and TCO

  1. Risk the ire of SAP? Josh, shouldn’t customer inteersts come first. Besides last time I checked we are still coming out of a recession. A multi-million $ opp is not something to sneeze at.

    The best scenario: SAP discounts and continues as a reasoanble partner.. As it should with plenty of other mature customers.

    Time for SAP to quit pretending companies like Siemens don;t understand economics of sw.They write their own code in many units, they have call centers of their own, they have offshore units of their own. And they read Safra brag about how extortionately profitable sw really is.

    • Of course customer interests should come first, which is why the whole issue of TCO needs to be addressed, of which maintenance costs are but one element. I think it’s universally acknowledged, even among the vendors, that overall TCO, especially for core enterprise software has to come down. And your best case scenario is a good one, and reflects a need for some relativity in the cost of maintenance and service.

      Siemens understands the value of software, and services, and last I checked they charge market-rates for maintenance for their products as well. The fact is that the concept of maintenance payments — and their profitability — is deeply embedded in our global capitalist system. Siemens would risk breaking its own internal economic model by calling SAP on its maintenance charges.

  2. Pingback: Siemens Renews Maintenance Contract with SAP. Now For the Real Issue « Enterprise Matters

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