Cash-Strapped Agencies Seek Lower IT Maintenance Fees

Some revenue-starved municipalities are targeting ongoing maintenance fees paid to IT vendors as an area for cutting costs.

by / November 2, 2010

A conflict is brewing among local government IT departments and vendors over the degree to which vendors should adjust their prices to save government jobs. Some revenue-starved municipalities are targeting ongoing maintenance fees paid to IT vendors as an area for cutting costs. Typically when an agency buys hardware or software, it also purchases an ongoing service plan for repairs and parts replacement. Maintenance fees can be lucrative for vendors, and the fees frequently increase annually. Some CIOs, like Steve Emanuel, CIO of Montgomery County, Md., believe today’s maintenance charges no longer reflect realistic amounts governments can pay. He wants the county’s vendors to lower their profit expectations for those services, but many vendors seem reluctant to do so, according to Emanuel. CIOs often see maintenance fees as gravy for vendors, while vendors insist that maintenance fees seed future product upgrades and ensure quality service.     

State and federal legislation frequently mandates changes in the way government systems operate, and these changes are included in vendor software upgrades. Government IT departments report that private-sector willingness to eat maintenance fees tends to depend on how easily government can switch vendors. Smaller companies seem more willing, while larger ones tend to dig in their heels. Emanuel said vendors risk losing government business if they don’t adjust to governments’ current fiscal realities.

“In some cases, it’s going to drive us to other products,” Emanuel said. “In some cases, it’s going to drive us to other service providers. In some cases, it’s going to make us take the risks we really don’t want to take.”

Vendors vary on their approach to revising maintenance fees, but most insist the charges amount to much more than gravy.

“We have a cost of doing business just like there is a cost of doing government,” said Mark Testoni, president of software vendor SAP’s Public Services division. “We have to balance that with our ability to make sure we don’t degrade the service that we’re offering to our customers.”

Video: Vendors charging high maintenance fees put on notice to cut their rates by Steve Emanuel, CIO of Montgomery County, Md.

Meaning of Partnership

Government agencies and vendors love to call each other “partners.” It makes the two parties sound like they’re on the same side. But many CIOs warn that willingness to cut maintenance fees will be a test of a true vendor partnership.     

“If we’ve been a good long-term customer, then this is an investment they need to make in order to keep that long-term relationship as a partner,” Emanuel said.

Testoni said a partnership is a two-way street on which governments must acknowledge that vendors need to survive this economy just as governments do. And agencies need to be careful about how much they ask vendors to sacrifice, said Dick Leurig, director emeritus of future technology and innovation initiatives at Montgomery College in Maryland.  

“If they go out of business, there would be even less money for local government,” Leurig said. “Local governments want to go out and do economic development, and in the next breath they’re saying, ‘Well, let’s just get the vendors to [sacrifice] all the money they can.’ There is a disconnect there. You need to encourage the vendors to work in your area, to help put money back in the economy, but also be fair to the governments.”

But not all governments are demanding cuts that would ruin their vendors. According to Vicki Irey, director of IT for Overland Park, Kan., Oracle was the only one of her vendors that refused to renegotiate maintenance fees. Oracle’s JD Edwards Enterprise powered the city’s financial system, and Oracle’s PeopleSoft supported human resources.

Irey responded to Oracle’s refusal by soliciting a third-party vendor to replace the software giant’s maintenance support.

“I will say that Oracle called us and called us and begged us not to leave them, but they didn’t want to negotiate,” Irey said.

She hired software maintenance provider Rimini Street at half the price of Oracle’s maintenance.

“We knew going into it if we left Oracle and went to a third party for support, we would no longer be able to receive any upgrades. That meant we were at the end of the road on that software,” Irey said, explaining that she’d have to repurchase Oracle’s software if Overland Park wanted to resume the company’s maintenance.     

Irey acknowledged that running Oracle’s software without upgrades was only a temporary fix. She’s convinced, however, that she can get a better price from Oracle by repurchasing the vendor’s software. “That is the one and only time you’re in the driver’s seat with negotiation,” Irey said.

Any government attempting this tactic should make sure to include fixed annual maintenance fees into the new contract, insists Catherine Maras, CIO of Bexar County, Texas. This way, she said, a CIO can be sure the vendor isn’t offering a lower price up front with the intent of later backfilling it with maintenance fee increases.  

Irey added that several attractive alternative providers have cropped up since Overland Park signed with Oracle in 2000.

 “We have found [Rimini Street] supports us better,” Irey remarked. “Their callback times are better.”

Oracle did not respond to multiple e-mails from Government Technology requesting a response.

Smaller vendors tend be more willing to negotiate maintenance fee reductions, according to Cory Casazza, chief information management officer for Washoe County, Nev.

“Some of the smaller firms knew we could go somewhere else,” Casazza said. “We leveraged the threat of open source against a lot of the vendors saying, ‘Either do something, or we’re going to end up replacing your product.’”

Casazza said he had to follow through on that threat with a few vendors. “I think the bigger firms we deal with, like SAP and Esri for our GIS, know they have us locked in, and they were not as willing to negotiate,” he added.

SAP increased its maintenance fees, Casazza said, which angered him given that Washoe County frequently invited potential SAP customers onsite to view the county’s success with its products.   

“Probably once a month we’ll either host a site visit or we’ll do reference calls for them. I think we’re one of their better customers,” Casazza said. “It kind of left a sour taste in our mouths, and I think we’re a little more cautious and spend less time promoting their product now than we did before.”

Testoni said SAP is willing to work with customers on any service revisions within the customers’ existing contract stipulations. He said the company couldn’t justify “arbitrarily” cutting fees for some customers and not others.

“We have contractual arrangements and agreements with tens of thousands of customers,” Testoni said. “We can’t just disenfranchise, or in the case of one group, say we’re going to reduce and make up that cost from somewhere else.”

In Casazza’s office hangs an organizational chart with pictures of his employees that he used to make a point with providers. In vendor meetings, Casazza displayed the photos and asked vendors whom he should fire if they didn’t lower their maintenance prices. He said the tactic worked occasionally.     

Demands on vendors to cut maintenance fees also raise the question of whether vendors consider working with some governments worthwhile. Emanuel dismissed worries that forcing vendors to drop maintenance costs would cause them to ignore parts of the public-sector market. He said such a move on the vendors’ part would look bad to other governments with which those vendors still wanted to do business.

“Guess what happens with that public opinion? It resonates through my partners. It resonates through my jurisdictional partners. It resonates through other agencies. That’s not a good choice for business,” Emanuel said. “They need to understand we are vocal.”

Letting Contracts Lapse

A solution to high maintenance fees among some governments is to do the maintenance themselves or subscribe to scaled down service plans, according to “New Normal” Success: A CIO Survival Guide, a white paper from Government Technology’s Digital Communities Program, a network of public- and private-sector IT leaders that focuses on local government issues.

“If you bought a good product and are any good at using and managing it, you shouldn’t need a lot of help,” said Michael Armstrong, CIO of Corpus Christi, Texas, in the white paper.   

Irey took that approach in Overland Park. She said she normally paid one of her vendors $30,000 annually for maintenance. To save money, she told the vendor to simply sell her spare parts and shifted the maintenance duties to her staff. As a result, the city paid only $10,000 to the vendor in 2009.  

Testoni said eliminating maintenance fees is one option SAP points out to cash-strapped governments, but he discouraged that route. “You lose the ability to get the product enhancements from us,” he said. “You lose the ability to file messages or engage with our support team when you’re having difficulties with something that could be product related.”

And restarting those services could involve penalties

“Letting contracts lapse is very dangerous, and if you want to go month to month, prices will go up,” said Paul Christman, vice president of state and local governments and education sales for Quest Software, in the Digital Communities paper. “Customers who stop paying now will have to negotiate and work with their vendors in the future to re-establish support.”

“Maintenance payments are closely tied to the software’s production readiness,” added Mike Bilardo, director of government solutions for Hyland Software, in the white paper. “Today’s maintenance payments fund tomorrow’s new releases and increased functionality.”

The increased functionality argument can ring hollow, however, to governments lacking the resources to take full advantage of the functionality of their current software installations, said Bexar County’s Maras.  

Lowering Service Expectations

Settling for lower service standards in noncritical programs is a compromise facing numerous government agencies.  

“We talk about service-level agreements, and I think there should be an expectation agreement out there — the expectation being maybe it will take a day now for someone to come and fix your PC. It used to be you would call, and somebody would show up,” Leurig said.

Irey suggested maintenance for software used by building inspectors might be a good fit for that approach.

Christman cautioned in the white paper that lower service standards could result from vendors slashing maintenance fees.  

“Bugs will take longer to get fixed. Expansion to new platforms will be delayed,” Christman said. “We are just like our government customers. We are trying to figure out how we can best maintain a high-level support capability when government is facing difficult decisions about how much maintenance it can afford. Government and industry are in it together. Our success is closely linked.”


Andy Opsahl

Andy Opsahl is a former writer and features editor for Government Technology magazine.