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Should software companies charge for maintenance agreements?

I was listening to the Radio 4 " The Bottom Line " again, recently ( I’m getting quite into R4 " must be an age thing)! The  Chief Executive of Sage was on saying that they could almost give the software away as they make their money through the service agreements; is this right?

Guy Berruyer (Sage CEO) faced a grilling from the other guests on the programme about this revelation, although one of them was a hedge fund manager, so didn’t really have much of a moral leg to stand on (so to speak)!

tax need not be taxingIt was suggested by the other guests that there was no real incentive for software companies to ensure their solutions were intuitive, if their business model relies on support contracts. It was also suggested that Sage usepain based sales techniques to ensure sufficient businesses sign up to their support contracts.  Businesses are reliant on Sage’s software to meet deadlines set by HMR&C that carry their own penalties, so are prepared to pay " what equates to an insurance policy " for a support agreement.

Sage and other accounting software solutions are in a unique positions, in that a third party hold the metaphorical stick that the business user will be beaten with if they fail to comply with regulations set by HMR&C.  This puts them in a powerful position and in part is the reason why their business model relies on support contracts.

Guy Berruyer countered with the argument that in general, users only utilise 15% of the functionality. There are elements of the software that users only access once or twice a year; end of year returns, etc., These functions are often complex and users require support during specific phases of the fiscal year.

He went on to say that the users valued the fact that there was a Sage employee at the end of a phone line to help them when needed, especially when they are trying to do things at the last minute (such as annual tax returns and PAYE). He suggested that the  open source help model maybe fine for consumers, but businesses would rather have professional support as and when needed.

So are businesses being held to ransom through fear of not being able to operate if they can’t use the software? Should software companies just build more intuitive solutions?

The support answer?

The answer isn’t straightforward; as with Sage and other companies, on occasion we have clients who only use parts of the software once or twice a year. Generally most clients are able to use it without contacting us, but we are there to help at the end of a phone line to guide them through, if needed. As we don’t have annual maintenance agreements we only charge for the time we spend helping the client which can be a lot cheaper than charging an ongoing maintenance agreement.

Our approach to support contracts is based on fairness and value for money, using a simple pay as you go philosophy, that ensures neither party feels aggrieved as charges are  based upon actual work.  This is contrary to Sage’s approach, but then we aren’t selling an off the shelf solution like Sage Line 50.

Depending on the business model adopted by the software company, the application of support contracts will differ widely, but we believe they should all offer value for money and some would question the industries approach to this valuable revenue stream.  We have certainly seen some questionable behaviour by companies both big and small.

The question both parties need to ask is, is it fair for the other party?  A business that expects support 24/7 and uses it regularly should expect to pay more than a business that only need support from time to time.  The user should also realise that a provider cannot fulfill an endless demand for support without some sort of remuneration, it simply isn’t viable.

So, as I said before there is no straight answer and there are a wide variety of options that fit a variety of different business models.  I have listed some typical options: "

  • Ad-Hoc Support
    Client pays for the support as and when needed.
  • Annual Maintenance Contract (with Service Level Agreement)
    Yearly fee for a fixed number of emails / calls / hours support.
  • Support Credits
    Associated with blocks of time, particular jobs are assigned a number of credits, similar to a schedule of rates the building industry uses.
  • Discounted support rates
    Time purchased in advance , usually 6 " 12 months.

Conclusion

The list could go on, but there is no right answer.
You need to choose what is right for both parties (the service provider and user). Yes, maintenance contracts are good for the providers cash flow, but can also alienate users if they don’t provide value for money or peace of mind; there need to be transparent and fair for all involved.
As we say, make the other person more important than you and you are more likely to end up with a solution that suits everyone involved.

Resource

The Bottom Line Episode : http://www.bbc.co.uk/iplayer/console/b014qnwx

Tags: businessbusiness modelssmall business

Date: 10/10/2011

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