Did ERP vendors learn anything after the 2009 ‘Great Recession’?

Profile picture for user brianssommer By Brian Sommer April 1, 2020
Summary:
When the economy cratered in 2008-2009, software vendors were not universally loved.  Some of these firms exhibited behaviors that soured their customer relationships. Will their institutional memory kick-in and trigger better behavior this time? What should customers do? Here’s an assessment.

lessons
(Lessons learned?)

Boom/bust cycles are not uncommon in application software. There was a big technology decline in 2001 when the Y2K falloff and the dot-com bubble both imploded at the same time. That recession created significant challenges for all manner of web-design, consulting, e-commerce and other sectors.

Another, far bigger recession occurred in 2008-2009. That recession devastated the U.S. automobile industry, the banking industry and many more sectors. The starting point for this recession was in the creation of sub-prime mortgage portfolios and the failures of the notes within them. Those bad loans triggered losses at major banks, collapsed real estate values, dried up capital, crippled auto sales, etc. Recovery took time and some firms struggled for 6-10 years just to get back to prior sales levels. (see this piece on the Great Recession)

The impact of the last ‘Great Recession’ on ERP

Many ERP vendors didn’t handle the ‘Great Recession’ well. SAP, for example, made the tone deaf decision to boost their maintenance fees in the ill-timed Enterprise Support fiasco. In turn, that triggered some big changes in the ERP space. Many automotive suppliers, some of which saw their revenues shrink to a third of pre-recession levels, could not get maintenance price relief from their ERP vendors. These companies started shifting their ERP solutions to cloud firms like Plex as soon as was pragmatic. Those moves did a couple of things:

  • Eliminated the need for the customer to replace aging/obsolete computer hardware
  • Dramatically reduced software annual costs
  • Cleared out significant amounts of technical debt
  • Modernized the ERP solutions

The recession also reinvigorated interest in the third-party maintenance market for ERP solutions. Switching to third-party maintenance providers (e.g., Rimini Street) could save beleaguered IT budgets a significant amount of their operating budget annually.  Software vendors, obviously, didn’t like this option as it would cut into their famously profitable maintenance income.

Other vendors kept the maintenance percentage unchanged during the ‘Great Recession’, but they still managed to grow their maintenance revenue via a change to the calculation basis. How? Many standard ERP contracts then pegged the maintenance cost to the “then current list price” of the licensed applications. If the vendor increased the then current list price, it would automatically trigger an increase in the annual application maintenance fee due.

Another technique that some vendors employed to increase revenues was to split an existing application into two applications.  Now, the customer had to pay maintenance on two applications and possibly pay an additional license fee for the other half of the functionality they needed.

Software audit activity also increased during this time. In fact, the age of Wallet-Fracking blossomed into existence as vendors kept up their efforts to mine every cent possible from their own ERP install base. Small infractions were often prosecuted by vendors with a vengeance. These audits were rarely about correcting customer usage mistakes – they were a mechanism to goose sales of needless extra licenses, cloud subscriptions and other revenue generators.

Vendor behavior during the ‘Great Recession’ was a frequent discussion item with my clients, especially their CIOs, CEOs and CFOs. Privately, many expressed equal parts anxiety, frustration and amazement at the behaviors that ERP vendors exhibited especially from vendors that had previously expressed their desire to be a ‘partner’ of the customer.

Many CIOs publicly expressed their dissatisfaction. One CIO told InformationWeek:

Manjit Singh, CIO of Chiquita Brands, says he's been watching maintenance fees for the software vendors he uses creep up from an average of about 18% a few years ago to 21% or 22%. "And for that, what am I getting? I'm not getting to dictate product strategy, and I don't get premier support," Singh says. "I'm getting the right to code fix it and to upgrade."

With more pressure on his IT budget, Singh is looking at what maintenance contracts he can cancel--typically software nearing the end of its life cycle. With some other applications, he's switching to software as a service, bypassing the conventional maintenance fee structure altogether.

At the time, another CIO told a major IT publication how their firm has invited all of their suppliers, including IT firms, to meet with them and discuss mechanisms for reducing costs. It was the technology providers who were most intractable with most refusing to reduce costs. The net of that was the CIO explaining that when the company emerged from these dark times that it would hold a party for those that acted like partners. And those firms that didn’t help wouldn’t get an invitation. In other words, vendors that acted like real business partners would get continued business from this CIO and others would get kicked to the curb asap.

Why did ERP vendors behave so badly?

The quick answer to this question is: because they could. The contracts they cut with customers allowed them to do so. In today’s SaaS-heavy world, I always advise clients to add language into their contracts that allow annual subscription costs to decline whenever there are divestitures, layoffs, etc. Yet, standard software contracts only permit contract prices/subscription fees to go up. If your firm didn’t add this language at contract signing, things are going to get bumpy!

There are other factors, though. Some vendors are slaves to Wall Street. Even in a recession, ERP executives think they have to show continuing growth in revenues. It’s absurd but it’s what they do. It’s also so short-term. These vendors might appease Wall Street for a few quarters but the raping and pillaging of customers will cause weakness in a vendor’s business eventually.

Vendors also didn’t want to set precedents. Many automotive ERP users wanted price relief and ERP vendors wouldn’t do it as firms in other sectors might cry foul or demand similar accommodations.  In the book Software-as-a-Service by A. Benlian, we read that during this recession:

If customers manage to use the momentum of the crisis to pressure ISVs and re-negotiate maintenance or stop renewing contracts, ISVs run the risk of locking themselves in to lower maintenance revenues or even irrevocably losing customers to SaaS or low-cost maintenance providers. A maintenance price decline of only 1% point will make ISVs lose around $1B revenue and up to $400M operating profit.

Bottom line: Greed, insincerity and slavish dedication to Wall Street were the business practices of many ERP vendors. Will we have to watch this movie again?

What’s different this time?

Unquestionably, the scale of the coronavirus pandemic and the economic impact it’s having on people and businesses is unprecedented. Everyone is in reaction mode now and it could be awhile before we know what the new normal will be.

What is known is that some industries are definitely in trouble. Specifically, airlines, hospitality firms, retail, professional sports and more are in for exceedingly tough times. Major structural changes may occur later while survival is the chief concern today.

Other businesses are scrambling to conserve cash (e.g., payment terms of net 180 days are coming up a lot now), defer projects, etc. Business continuity plans are getting updated daily. Supply chains are being dynamically reconfigured. Old and new business models are being tested and cracks are evident everywhere.

SaaS subscriptions are often annual affairs with renewals occurring every 3-5 years. If a customer doesn’t pay their annual subscription on time, the contract may allow up to a 30-day grace period. Afterwards, the vendor is free to cut off access to the solution and delete the customer’s data. It’s harsh and it means that no matter how bad your firm has been impacted by this pandemic, you need to pay these bills and on-time, too!

I believe these annual subscription payments will be a major test of ERP vendors. For those customers in impacted industries, like hotels, they currently don’t need anywhere as many user subscriptions as before as they’ve furloughed or laid off tens of thousands of employees. They might, if their contract states as much, maintain close to the same user count and subscription payment as they did last year. Worse, they may have to also pay a pre-agreed annual cost of living adjustment increase on the subscription price.

Technology vendors didn’t crack on maintenance payments in the 2009 recession and I suspect, given the rosy comments I heard from one ERP vendor executive yesterday, that they’ll hold the line today on annual subscriptions and renewal pricing, too. I think they’re seriously underestimating the economic damage to come in the market and must come up with some kind of program to let seriously impacted firms reduce or delay payment of annual subscriptions.

The second test will come when SaaS subscriptions are coming up for renewal. For an industry that’s so programmed to show Wall Street growing revenues, growing average contract value, growth in bookings, etc., what happens when customers try to force a materially lower re-negotiated subscription? The customer count may stay close to today’s count but bookings will be lower. If vendors don’t agree to lower renewal prices, customers will seek true love elsewhere. We can expect many newer SaaS players, lower cost SaaS providers (e.g., Plex) and SaaS firms with a continuous cost reduction focus (e.g., Zoho) to come out on top.

My take (AKA what to do…)

What should ERP vendors do?

Vendors need to get ahead of this (if they aren’t already). Hopefully, their continuity plans include:

  • Scheduling calls with customers that will need to renew their SaaS subscriptions within the next 6 months - There’s a real possibly that many companies haven’t even thought of looking at their SaaS contracts yet as they are dealing with layoffs, disinfections, etc. Businesses are also doing a lot of cash forecasting with some firms hoarding cash, extending payment terms and expecting their vendors to agree to net 180 terms. ERP vendors need to talk to their customers and outline the customer’s contractual commitments, reinforce payment terms and remind customers of the consequences of non-payment.
  • Create a Plan B for SaaS customers whose businesses have been gutted – Let’s face it, some firms just don’t have the employees, cash, revenue, etc. that they did a couple of months ago and might not for a while, if ever again. Vendors need to have a triage mechanism with some viable options for firms. Call it a Quick Renegotiation that is available to the most damaged customers. Better to get some revenue and be seen as a positive force in the eventual market recovery than be known as a heartless jerk.
  • Condition Wall Street as to the potential negative hits to bookings, backlog, etc. – These are coming and Wall Street might want to hear more from a firm with a realistic and pragmatic approach to the future than a vendor still pushing pie-in-the-sky revenue projections.

If a vendor is also planning to have layoffs of its own (and this happened in both prior recessions), be proactive in communicating with customers as to the impact on support, R&D and their account.

I’d urge vendors to really dial back usage audits and litigation against customers for the near term. These activities are toxic to one’s brand on a good day and potentially devastating now. Are these activities really going to turn up sufficient monies to offset the PR/brand damage they can create?

What should ERP customers do?

ERP users should do the following:

  • Get out your ERP agreements, now! Understand what your economic exposure is and what, if any, opportunity you might have to reduce subscription costs. Also, get the key dates on your calendar and be prepared to work around the vendor’s schedule as they will likely be inundated with other firms like yours who need to adjust their subscriptions. Remember, some of these vendors have over 100,000 customers. Will these vendor have time for everyone to appeal/renegotiate their SaaS contract?
  • Determine which IT bills you can/will pay and what gets deferred – It’s time for Solomonic decisions in IT. For some old applications you may have to drop vendor provided maintenance altogether or get moved to third-party maintenance (e.g., Spinnaker Support).
  • Plan for the possibility that a vendor cuts off access to a SaaS application and/or deletes your data – Don’t let non-payment of a subscription fee shutdown your firm.
  • Backup all your SaaS data – If your vendor does cuts off access to the SaaS product and its data, make sure you have a copy of your data.
  • Have your Plan B ready – Whether it’s your on-premises or SaaS vendor that won’t help you through this economic challenge, start looking for a lower cost solution now. They exist and you may need to seriously consider one of these if your firm shrinks by a 1/3rd or more.
  • Create a renegotiation narrative – Document what has happened to your firm and have this ready to share with a vendor when it’s time to sit down and have the tough but necessary conversation.
  • Prepare to offer something to vendors as part of the renegotiation – You may have to go hat-in-hand to these renegotiations. Offer to acquire more products from the vendors in the future if they’ll help you now with the current products. Offer to pay the subscription monies but spread them out over the year (i.e., pay a little every month – not all upfront at the start of the annual term). Come up with something to offer.

Full disclosure: Brian just published a book on technology negotiations.