Are you paying too much for application management services?

If Gartner’s latest forecasts are accurate, enterprise software will be the fastest-growing market segment in 2020. Gartner forecasts that enterprise software spending will increase by 3.4% in 2019 and by 9.2% in 2020, and that software as a service (SaaS) will achieve 14.1% growth in 2019 and 17.7% in 2020.

Among the most lucrative areas of software spending by IT departments has been annual maintenance fees, with run rates of up to a quarter of the original contract value. These contracts were traditionally serviced by the likes of SAP, IBM and Oracle to support their respective enterprise software systems.

But in recent years, third-party providers have begun offering third-party support, often at considerably lower cost. As Computer Weekly has reported previously, the savings made by switching to a third-party provider can quickly be reinvested to fund future upgrades.

One of the poster children of this type of third-party application support, Rimini Street, is now looking to expand its offering down the food chain into application management services (AMS),  a market dominated by system integrators.

Rimini Street has introduced AMS for Oracle, which includes coverage for Oracle database, middleware and a range of Oracle applications including E-Business Suite, JD Edwards, PeopleSoft and Siebel. The new service joins its AMS service for SAP, launched in August.

Gartner’s first study of AMS identified a market worth $77bn in 2017, growing at 3.8%. The June 2018 report noted that 40% of the market is held by the 10 largest service providers, which remained largely unchanged between 2016 and 2017.

Discussing the AMS opportunity, Sebastian Grady, president of Rimini Street, said: “Our standard SAP deal may have 500 hard [maintenance] cases a year. AMS is a level down. The incidents are not the most complex workarounds, but they have to be done.”

This work has traditionally been undertaken by SAP and Oracle platinum partners, but Grady claims the work taken on by such system integrators lacks transparency. “CIOs cannot track the amount of reworking that gets done,” he said. “If a project will take 200 hours with people charged at $100 an hour and the system integrator says it will take 1,000 hours with people costing $40, it is twice as expensive.”

Grady claims the lower-cost staff may not be experienced enough to take the most efficient route to solving the technical problem the customer has. “They don’t take the shortest route from A to B, and the CIO doesn’t know any better why a project that should take 200 hours is instead is billed for 1,000 hours,” he said. “Man-hours is not the business problem. Procurement has to focus on business outcomes, to reduce the number of incidents per year.”

Grady claims the industry-accepted model of billing time and materials through so-called man-hour contracts is broken. “A lot of contracts are based on bodies, and handling incidents,” he said.

In Grady’s opinion, such contracts incentivise AMS providers to fix as many problems as possible, with as many people as possible, rather than reducing the incident rate. “You can’t have junior people roll up on the bus and learn on your dime. Most AMS contracts incentivise the providers to do more work, so there is a tonne of changes being made for the sake of change.”

Grady says Rimini wants to operate in an entirely different way. “We are experimenting with making incidents go away,” he said. “If you have 30,000 issues a year, and 300 of those incidents a month are due to a bad interface from SAP to Ariba, and I can make that go away, then I should get a bonus for that.

“The last 10 years have been about getting costs down. Now people are looking at getting better business outcomes and what is the total cost of ownership. I haven’t met any client that is getting enough done by their existing AMS provider. There is an opportunity to come up with a better mousetrap. This resonates with CIOs.”

Discussing Rimini Street’s new AMS offering for Oracle, R “Ray” Wang, CEO of Constellation Research, said: “Constellation sees a massive customer satisfaction gap in the application management services market. The battle for price over value, process over better outcomes, has led to a broken market.

“Clients seek partners who can deliver high-quality AMS support for Oracle, addressing a strong need in the market for a reliable, expert approach to application management services with an integrated solution that helps clients optimise their IT operations.”

In its latest financial filing, Rimini Street reported annualised subscription revenue of about $274m for the 2019 third quarter, an increase of 10% compared with $250m for Q3 2018. The company positions AMS as a big growth opportunity, enabling it to have a different conversation with CIOs.

Rather than discussing the merits of switching to a third-party support provider – something that some IT decision-makers may feel is risky – Rimini Street has now set its sights on business-focused outcomes for application management services – a market dominated by system integrators.