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Legacy ERP Vendors Make You an Offer You Can Refuse

February 22, 2016

One of the worst situations manufacturing IT groups routinely deal with is having to upgrade ERP software. This may not seem like a big deal, but consider how intertwined ERP is in a manufacturing company, from finance to production to logistics. There is an enormous amount of time, money and manpower (both employee and consultants) involved in the process, not to mention the business disruptions every time companies upgrade. It’s a nightmare.

Here’s the problem: legacy ERP software vendors need customers to upgrade routinely in order to keep the maintenance fee – typically 18-40 percent of the total software license value – cash flow coming. But customers who regularly upgrade realize the true cost of the project goes far beyond the huge annual maintenance fee.

These customers are also running in quicksand: by the time they upgrade, a newer release comes along and they are already behind once again. They can never truly keep up with the latest capabilities.

Because of the pain, some opt to avoid upgrading completely and stay on old versions. In fact, most customers are at least a few revisions behind. In many cases, customers ride out the duration of the maintenance contract to the point where they can go off maintenance. They are then left with a software package which is woefully out of date and receive little to no vendor support.

Eventually customers are forced to make a choice. Remember that quote from the movie The Godfather about making someone an offer they can’t refuse? There are at least three ways this analogy plays out between legacy ERP software vendors and customers.

First, vendors don’t like to back-port new features to old releases. So, customers are forced to upgrade to receive new features.

Second, customers who have gone off of maintenance that want support, particularly if they are on versions which have been or are close to being sunset, must upgrade to receive support. The problem is that this upgrade is really a full reimplementation, complete with huge costs and a push to accept a brand new multiyear maintenance contract.

Third, and maybe the worst scenario, is when customers are close to going off maintenance and the ERP software vendor presents them with a non-compliance report, complete with fines and fees designed to punish the customer and force them into a bad decision. The only way out is to upgrade and sign a new maintenance contract against their will or pay the fines outright. Either way, the customer loses and ends up back in the same vicious cycle.

What choices! It shouldn’t be this way, and it doesn’t have to be. ERP developed natively in and for the cloud provides an entirely different business model with new capabilities delivered to customers immediately – there is no ‘upgrade’ or falling behind; the software is always current. New features are opt-in, giving customers total control. And because cloud ERP is delivered as a subscription service (with no recurring maintenance fee), the onus falls on the provider to continually add value or risk customers defecting for other solutions.

Manufacturers have a choice on how they consume software. If staying with the legacy model, customers need to ensure they account for the cost and time associated with recurring upgrades, which will almost certainly have a significant financial impact on the company. Native cloud ERP software is an entirely different model. More than just a delivery method, it’s the only way manufacturers can eliminate traditional upgrade pains and embrace continuous innovation.  

About the Author

Jim Shepherd GVP of Corporate Strategy, Plex Systems

Jim Shepherd serves as group Vice President of Corporate Strategy, responsible for defining our strategic direction across multiple industries and global markets. Jim previously served as vice president and distinguished analyst for Gartner Inc., the world’s leading information technology research company. Among his many accomplishments, Jim was named the first AMR research fellow. He holds a Bachelor of Arts degree in English Literature from Wesleyan University.