There are two ways to look at this topic, either it is one of the easiest parts of Technology management or it is one of the biggest pains in the neck. Of course, I am referring to annual maintenance fees and their management. Hold onto your hats with this topic.
For the non-technology reader, almost every application and some hardware utilized by an organization has some sort of annual maintenance fee associated with it. These fees exist to ensure the vendors have a steady stream of annual income (so jaded), but also allow the operator access to software or hardware updates and upgrades as well as provide a resource to call for support when the software or hardware malfunctions. Be aware, just because one has maintenance does not mean there is a support desk one can call for help. The maintenance may mean one can simply use an application, and there is nobody to call for assistance. For example, everyone pays annual fees for licensing to Microsoft, but good luck picking up a phone and talking to someone at Microsoft for assistance when the CFO’s Sticky Notes mysteriously disappear forever from their computer. In the hospitality industry, all the major hotel, accounting, gaming and point-of-sale software vendors provide 24-hour support desks, or at minimum, an on-call person on the graveyard shift.
Are these maintenance costs necessary? It depends on the application or hardware and how important it is to one’s operation. Vendors will always support the software for those with current maintenance. For the company that chooses to not pay maintenance, many vendors require a PO#/method of payment prior to any services beginning. Those without maintenance may also find themselves at the bottom of the list of return calls. In other words, once everyone else is assisted, the non-maintenance carrying customer will be assisted. I have seen vendors not provide any assistance at all until a maintenance “renewal” is current. This is where a fee is levied against the software user that covers the timeframe of missed maintenance. It may be a strategic decision to not incur maintenance expenses only to find out how expensive it can be when vendor assistance is needed.
Again, are these maintenance costs necessary? Not everything in Technology needs to have maintenance. Anyone using Cisco equipment puts their network core, ASA and WLAN controllers under SmartNet, but edge switches and access points? No need when it is far more cost effective to purchase a couple spares and replace a failed switch or access point. (That crashing noise was someone at Cisco passing out.) To this end, some software may not need maintenance based on the software itself. Do you really need maintenance on that Minesweeper app? Hardware is even easier. How difficult is it to replace that piece of equipment? If it is $400 one time and it never breaks again, why pay $1,000 a year for multiple years for hardware maintenance?
To help clarify annual maintenance, for the rest of this article, I will use the example that we are operating a resort with 500 hotel rooms. Before we even purchase the hotel system, the vendors will battle it out in “the Thunderdome” via a Request for Proposal (RFP). Dog and pony shows will be presented to the general manager and hotel teams by the vendors, decisions will be made, contracts will be signed and then Technology will be brought into the picture to implement whatever hotel system was purchased. Included in the capital purchase of the hotel software will be a line item about annual maintenance. This number is usually around 18-20% of the software’s cost (outrageous!), which should be negotiated down to 10-12% before anything is signed. What? Technology was not part of the decision and the contract has already been signed at 19%? So typical. Remember, the software is going to be capitalized, but every year for as long as the application is in use, there will be an operating expense associated with the hotel application. Wise technologists will want to make sure that operating expense (OpEx) number is as small as possible. It is critical to manage the initial purchase agreement and negotiate superior maintenance language limiting increases to certain percentage points or specific year allowances – for example, only allowing a 1% increase every other year. (That thudding noise was every vendor’s sales vice president passing out.)
With the initial hotel software implemented and maintenance agreed upon, the next challenge Technology will likely encounter will be add-ons to the original software implementation. This may include interfaces between the hotel system and other vendors like reservation wholesalers that require HTNG configurations. Add-ons may also include interfaces between the vendor’s own applications, like the hotel and point-of-sale system. Very few vendors include interfaces in the base maintenance cost. Every time an interface is added, there may be an additional maintenance expense incurred. Be aware that vendors may introduce new modules to their base systems. In the case of a hotel, perhaps the vendor creates a new mobile check-in module that is not included with the base hotel system. Always request to have additional maintenance charges co-terminated/aligned with the primary maintenance contract. Trying to manage the base contract and 15 interface contracts with different renewal dates can become unmanageable, confusing and time consuming.
When the invoice for the annual renewal is received, review it with extreme prejudice. Those of us working in Technology know that every time we receive the annual maintenance invoice, those sneaky vendors will try to slide a 1- 2% increase over last year’s maintenance into the amount. Understand the contract for increases and do not just accept these increases. Another thing to watch out for is to make sure the invoice license amounts are accurate. In the case of our 500-room hotel example, assume 25 rooms were combined to make suites over the course of the year making the room count 450 rooms. One should not pay for 500 rooms when there are only 450 of them. Something else to look for, especially in older installations, is maintenance for applications, interfaces and modules that are no longer in use. I have heard of companies paying for interfaces that are not installed anymore, but nobody told the software vendor. As a result, the vendor kept the unused interface on the annual maintenance invoice, and the company kept paying it. It is important that the property notifies the vendor when no longer utilizing an item covered by an annual maintenance agreement. Some vendors require a 90-day notice of cancellation or have forms to submit to have an unused product removed from the annual maintenance invoice.
Another item regarding annual maintenance is the length of the contract. Vendors will offer three or four-year agreements for their software. Long-term agreements are great for the vendor. It ensures a steady revenue stream and prevents their competition from replacing their application. For the property, long-term agreements limit the property’s flexibility to look at alternatives when a chosen vendor is not meeting their needs. It also allows a company to look at new technology to base installations that some monolithic vendors simply cannot implement in customized or high expectation environments. Having only a single-year agreement has risks as well. A vendor may increase one’s annual maintenance charge disproportionately as opposed to having a set rate for three or four years. While single-year agreements can usually be reached, vendors often charge a premium for single-year engagements or provide 10-15% discounts for multi-year agreements. The final decision comes down to long-range planning and strategic goals. As with many decisions, it depends on the situation and the organization.
Regardless of the length of one’s agreements, the number of maintenance agreements can add up quickly as additional applications or hardware is added to the technology environment. The operational expense is something that will need to be managed. One thing to understand within one’s organization is in which departmental P&L maintenance will reside. Some companies put anything associated with a system into the Technology P&L. Others will place annual maintenance into the primary department’s P&L, the hotel system’s annual maintenance resides in the hotel’s P&L or POS maintenance in F&B’s P&L. Technology leaders should maintain a holistic overview of all maintenance agreements in the technology environment regardless of which departmental P&L the expense resides within. Technology needs to review any invoice containing annual maintenance to ensure the company is paying for the correct software, hardware or modules.
Reviewing and managing one’s annual maintenance is challenging, however, having read this phenomenal article, one will shortly have the annual maintenance under control. Completing the budget for the next fiscal year becomes easy, as annual maintenance is relatively static year-over-year, with only slight increases and new maintenance items having to be added. Make sure to budget maintenance for planned capital purchases. Technology leaders can look like a superstar in the P&L review as the maintenance line comes in under budget and, with any luck, less than the prior year.
One final note, I met with a vendor recently and instead of using the term annual maintenance, this vendor utilizes “subscription to innovation.” How effective and marketing oriented is this? I love it.
The views of this article are solely Dr. Mike’s and do not and are not associated with or represent the views of any employer past or present. Go Cubs!
Dr. Mike has over 25 years of casino technology experience and 30 years working in hospitality. He started in technology as a vendor before working in various commercial, riverboat, and Native American casino organizations. He has been fortunate enough to be a part of property openings, mergers, expansions, and technology reorganizations. He holds Bachelors and Masters degrees in Hospitality Management from UNLV and earned his doctorate in Organizational Management from Capella University. He is the Director of Technology for the Tropicana Hotel & Casino. It is a well-known fact that Mike is a Chicago Cubs fan.