News and Events

ServiceSource is highlighted in Merrill Lynch Analyst Report covering Software 2006

April 7, 2006

Maintenance — Software's Strategic Asset

We attended a presentation focused on how software companies can better preserve and cultivate their maintenance revenue streams. Maintenance is typically software vendors' highest margin offering and represents a critical customer touch point - yet many vendors fail to expend effort ensure customers renew their contracts. By contrast, software companies spend millions of dollars acquiring customers, but in light of industry average renewal rates they see 15% of customers "walk out the back door".

Value of maintenance gaining focus

Increasingly maintenance is gaining scrutiny - both in M&A (witness Oracle's acquisitions of PeopleSoft and Siebel) and with the increasing number of private equity firms taking software companies private (such as WebTrends, Geac, Serena, FrontRange, MDSI) - and private equity typically values the maintenance stream. According to Alex Shlusky of Vector Capital, from the standpoint of private equity maintenance is downside protection - it is where software profits are hidden. In general, licenses are not that profitable, all the profits come from the maintenance over time. One large software vendor indicated losses on every new license sale.

Maintenance Has a Disproportionate Impact on Profits
From a profitability standpoint there is an enormous difference between an 85% and 95% renewal rate, with 85% below what is necessary to keep a stable maintenance stream. One of the biggest paybacks companies can do is invest in messaging the value proposition of the maintenance stream within the company. For best practices, companies need processes in the maintenance stream. Often customer data is spread among many different fields - vendors need to cleanse data and set up dedicated maintenance teams.

Outsourcing Renewals a New Approach
One of the most intriguing business models we have encountered comes from ServiceSource, a private firm with roughly 150 employees based in San Francisco. The company operates telesales teams on behalf of software and hardware companies and shares a portion (commonly 15%) of all renewals. ServiceSource typically sets up teams dedicated to a particular vendor, and compensation comes solely from the shared benefits model. The approach has been so successful that some vendors have outsourced all of their maintenance renewals to the firm."

--excerpts from Merrill Lynch Report B, pages 5-6