Visible Means of Support

Vendors are trying to make service and maintenance programs more palatable to end users.

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In the "which came first" question, perhaps money is the egg and trained support personnel is the chicken. Or is it the other way around? Will either scenario let the reseller cross the road? Supporting customers is a requirement in the software business, whether it is technical support or maintenance, such as providing enhancements. Somebody has to do it. Alex and Ed Solomon, owners of New York-based Net@Work, decided a long time ago that they were the people to do it.

"I think we built the model," says Solomon, whose firm is the largest value-added reseller to sell only Sage Software products. With its recent purchase of American European Consulting, it is on a pace of more than $10 million a year. More than half that amount comes from services, including support contracts.

"Nobody is happy with service," says Solomon, describing the user attitude. From the reseller's perspective, the problem is usually how to fund the positions needed to support clients. A growing reseller can often find itself unable to keep up with user demand.

Partner Insights

Net@Work solved the issue by selling all service contracts in pre-paid blocks. Users roll unused hours from month to month and year to year. By collecting all the money up front, "We are making sure we have enough people to support them," says Solomon. Also, where clients usually see support as an expense for something they don't use, they now view the cost as a service. The process has let Net@Work build its support staff to nearly 40 people.

Yes, support is a big business for both reselling firms and vendors. To be more accurate, two related concepts are big business to these parties. One element is technical support-the familiar scenario in which a software user with a problem makes a telephone call to a technician who is supposed to resolve the issue. The other category is maintenance, a service that usually gives paying customers the ability to receive software upgrades and fixes for free during the life of the maintenance contract. Maintenance is generally calculated at a percent of the software license fee and most sellers make it a mandatory payment during the first year users own a software package. Most vendors add 15 to 20 percent for this required service.

Maintenance income represents a tremendous source of revenue for many vendors. It's also a huge expense for many end users.

Among vendors that break out the category, Epicor reported $32.8 million in maintenance revenue for the quarter ended June 30, or 46 percent of the $71 million total for the period. Sage reported that 50 percent of its $1 billion in income for the year ended Sept. 30, 2004, came from support revenue. Blackbaud, which lumps maintenance and subscription income together, says that category accounted for 44.7 percent of its revenue for the June quarter. Since Blackbaud's three maintenance plans range from 22 to 29 percent of the first year's software cost, maintenance is a big part of that 44.7 percent.

Delivering

End users, of course, don't care how much money the vendors make. They care about what they get for what they pay. Convincing them of the value is one of the tricks to getting them to sign up for a second year of maintenance.

Open Systems, which offers maintenance at 15 percent of the first year, lets its resellers sell the contracts and earn margin. Paul Lundquist, vice president of sales for the Shakopee, Minn.-based vendor, says that renewal rates are about 70 percent, less than the competition. But that is because it sells a great deal of source-code products, which are more difficult to upgrade when they have been highly modified.

Still, maintenance can be a big money-maker for smart VARs, especially since last year, when the company increased the amount of margin available by five percentage points. Many resellers simply roll the maintenance cost into the overall invoice price.

"They sell it and say that maintenance is included," says Lundquist.

Intuit Offers a Deal

While mid-market users pay thousands of dollars to keep their maintenance contracts up to date, Intuit says it's offering them something much more inexpensive with its QuickBooks Enterprise Solutions.

The 10-seat version of QES is priced at $3,500, including one year of maintenance. Among the features of the plan are 24-hour access to dedicated support engineers and free upgrades for any releases. "After that, it's a fixed price of $750 for renewal," says Bill Luchini, director of QES. "We don't do it on a percent of the software license. It's pretty cheap."

QES is designed for QuickBooks users that Intuit believes should migrate to a mid-market package. So far, the company has sold about 18,000 installations without resorting to the use of value-added resellers.

In fact, one of the appeals is to those who have tried mid-market accounting software that has been sold by a VAR. "One of the dynamics is that we see people who have fallen off the train for maintenance fees for products such as MAS 90," says Luchini. "They can come to Intuit and save thousands on maintenance alone."

It can cost an organization thousands of dollars in past maintenance fees to be allowed to sign up again after its maintenance contract has lapsed. For example, any organization that has used a Microsoft accounting package and has had a contract that has lapsed by more than a year must pay 35 percent of the license price to qualify for a new contract.

Some companies are priced out of the market when they sign up for a maintenance contract for a mid-market package, but the organizations fail to grow enough to support the expense of the contract.

Companies that are choosing QES "are coming over to escape," says Luchini.

Another source-code vendor, AccountMate, based in Novato, Calif., also has to deal with the issue of highly modified software. The company offers a standard maintenance plan for 15 percent of list price that provides updates and builds, and one for 25 percent that provides lifecycle maintenance, including updates and upgrades.

When it comes to renewal, "Almost all the responsibility falls upon the dealer," says COO David Render. Resellers get margin on the sale of contracts and on tech support, even when it is provided through AccountMate.

Although support contracts can be used by either dealers or end users, about 95 percent of all calls are from dealers who are working with a customer's installation. The company also provides support to small VARs who may want to take a break for vacation. Render says it is up to the dealer to tell AccountMate if the VAR or the vendor should take responsibility for the installations.

AccountMate has a generous definition of upgrades and updates. It provides product builds, updates, and upgrades with a lot of functionality, without calling them new versions.

"We try to make sure there are updates that are included that are not just fixes, but that are new features in the product," says Render. When the company added the Windows XP interface when it moved from 6.0 to 6.5, the company considered the result to be a build that is covered by the contract, instead of being a new version.

Prices don't always go up. Earlier this year, Cougar Mountain Software cut its maintenance prices dramatically. The company says it was a good move for both the company and its customers.

"We had an annual maintenance plan that wasn't as great a value as it could have been," says COO Jim Stone. So at the beginning of the year, the price was cut from about 40 percent of list price to just under 19 percent.

One reason for the high rate was that Cougar's software was relatively inexpensive and previously the company considered it difficult to set the rate lower and still be able to provide the service. Stone turned away from that reasoning.

"I just didn't see that as being very customer-friendly," says Stone. Stone says that Cougar saw immediate results. It added more than 1,000 customers because of the cut. "It's paying for itself," he commented. The company has also bundled in the payroll tax tables that it used to sell separately "for a few hundred dollars," and it introduced a customer service center to provide downloads when upgrades and fixes become available.

"Our renewal rate has gone through the roof," says Stone. Before the rate cut, about two thirds of the installed base renewed maintenance contracts each year. Now, about 99 percent are signing up.

Cougar also has extended its technical support hours now available from 7 a.m. to 6 p.m., Mountain Time, adding two hours to the support workday. It added a frequently asked question section to its Web site, with five to 10 new FAQs added weekly.

Plans Galore

The two companies that have spent a lot of time buying competitors-Sage and Microsoft Business Solutions-have another problem: They had a number of plans.

MBS is further along in homogenizing its offerings than Sage. More than a year ago, it brought Navision and Axapta into the more traditional maintenance plan that was already offered for users of Great Plains and Solomon.

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