The ABCs of Annual Software Contracts
Tuesday, January 18, 2011
The ABCs of Annual Software Contracts
Most business managers view technology as a tool which provides an advantage. They invest in applications to efficiently gather data for functional processing and for historical records which are in turn used for business analysis. The investment starts with the purchase price of the software and required hardware. Additionally, a team of consultants assist with implementation and training of your personnel. But the cost does not end with the Go-Live event.
Most software publishers submit invoices for maintenance and/or support for your system each year. They require an annual fee to maintain the system. At an annual fee of 20% of suggested list price, for example, the system is repurchased every five years. Is this annual expense really necessary? Barring dramatic changes in business function or size, most consultants suggest an accounting system should have a seven to ten year life. If you manage to keep the system for ten years, you have effectively purchased your system three times over. Let's analyze the value of such an investment.
Once the system has been selected and successfully implemented, the problems we previously experienced are hopefully reduced significantly. Efficiencies are realized. The system performs as expected, and we receive a return on our investment which goes to the bottom line. We feel we have done a good job of taking care of our fiduciary and managerial responsibilities by reducing costs while increasing the quality of information provided for production and management.
At the end of year one, another invoice appears which begins a new decision making process. Good managers must justify every major expense item. As they analyze annual maintenance and support contracts, they must determine if the benefits received are worth the related costs.
WHAT DOES THE CONTRACT INCLUDE?
The annual fee usually includes up to three components of service. The fee may include periodic system updates, major system upgrades and some form of user technical support.
A - Updates usually include program fixes, periodic changes to specific data tables (such as tax tables) and simple enhancements. These fixes fall under the category of keeping the system relevant for day-to-day use. If these fixes are not provided, we may not be able to use the system. Generally, a very necessary component of keeping the system relevant for the short-term.
B - System upgrades are considered significant changes in the utility of the system. These alterations tend to extend the life of the system. They often include changes required for compatibility with new operating systems, or new features which keep the product competitive in the market place. Given a long enough time frame, if these upgrades are not provided, the system will eventually become obsolete and unusable.
C - Support is generally providing Help-Desk services to the user population. These services can vary from answering email inquiries and access to web-based knowledge base access to live toll-free telephone support. Some publishers leave support to their reseller partners, while others provide first-line support leaving more detailed consulting projects to their channel.
Some publishers include each of these in one fee, while others charge for each feature separately.
WHAT DOES YOUR FUTURE HOLD?
The real question is what will your organization require of your system today and for the future? The following considerations should be reviewed to determine the value your organization will receive.
Updating payroll tax codes or supplier pricing tables can usually be performed manually from within most systems. The convenience of someone else doing the research and maintenance of tables which periodically change is usually justified. This is a matter of maintaining expertise which smaller organizations cannot afford to do. Instead, your employees may spend their time performing the valuable services they were hired to perform generating revenue or completing business critical functions.
The general feeling is program fixes are the publisher's responsibility and should not be charged for. However, this is not subject to an open-ended time frame. In most cases, the fixes are available for all affected users of the software during their first year on a new product. Once a product is deemed "useable" for a period of time after the implementation, the publisher is under no obligation to fix specific issues. The annual contract provides for this ongoing upkeep. A year of service is provided for a specific price to keep the system performing its original functionality.
Upgrades to the system are often a major re-right of the system. They may include changes in operating system compatibility, such as moving the system from Windows to .Net platforms. Other types of changes may include a change to a more efficient user interface or the addition of a query tool for quick look ups and reporting. Upgrades often provide access to new modules which were not previously available, or changes in reporting tools as industry standards change.
Upgrades can completely change the character of a system. The publisher hopes its customers agree the changes are for the better and usually performs market research to increase the probability of a successful release. But, there have been instances where a product moves in a direction which the users found detrimental to their businesses. Most software publishers will judge the impact and rectify these issues in future releases provided a large number of users voice like concerns.
Ultimately, system upgrades attempt to keep the product relevant. If the publisher reads the markets correctly, users may never need to change products. Instead of replacing a product after seven to eight years, periodic upgrades can extend the product's life into the 10 or 15 year range. So although the annual fees may seem high, they can result in delaying a major purchase and business disruption for a significant time frame.
User support from a software publisher is usually intended to serve as a help desk. The publisher will expect you to provide your users with adequate training. However, there will still be periodic questions with which the end user needs assistance. Should these questions go unanswered, the user will lose interest in using the system as it becomes less and less effective and will declare the system too flawed to use. This will not only impair the market reputation of the system, but will reduce the future revenues of the publisher from the client.
Often, the publisher will acknowledge the importance of local support and provide support services through channel partners. Working with a channel organization which knows your needs, the setup of your system and the capabilities of your personnel can pay significant dividends. The local partner will specialize in the software product functionality far beyond what your personnel can achieve by working with multiple organizations on numerous issues. The partner can then provide you with this experience and knowledge at a reasonable cost.
MAINTAINING THE ADVANTAGE
If you believe technology is a tool, you must decide what type of tool your system represents. Will your tool be one which is used for a specific time-frame and provide diminishing returns as its features become static? Alternately, will you expect your tool to improve with time continually increasing efficiencies and providing new ways of providing a business advantage?
Although today's business needs may be adequately handled, change for the future becomes the issue. The needs of the business will change as it expands and contracts. Changes in technology are unpredictable; however, a good software publisher will take advantage of new technology to improve their product. Not only do they have to compete for new customers, but they want to keep current customers from purchasing new technology elsewhere.
Deciding on a product is the initial decision; implementing the new system is the beginning of a partnership. Make sure you have considered whether your new partner will also provide benefit for your future needs. If so, your partnership can last longer than the average seven to ten year cycle. Just think of the implementations you can avoid.
Gary C. Crouch, CPA/CITP