Challenging the Status Quo on Maintenance Contracts and Refresh ...

Forrester Consulting<strong>Challenging</strong> The <strong>Status</strong> <strong>Quo</strong> On Maintenance Contracts And Refresh Cycles To Lower CostsFigure 1Reducing Costs Dominates Decision-Makers’ Priorities“How concerned is your firm with <strong>the</strong> following business issues?”Rising pressure to reduce costsIncreasing expectations from customersThe quality of technology infrastructure in your local marketThe physical infrastructure in your local marketConcernedReducing IT operational costs to free up money for newtechnology development and product/service innovationThe accelerating rate of technology change and its effect onyour product/service life cyclesThe need to improve <strong>the</strong> capabilities of yourproducts/servicesThe changing demographics of your workforce and findinggood employeesRising regulations in your industry and/or governmentinvolvement in <strong>the</strong> economyOperating <strong>the</strong> business in an environmentally sustainablemannerVery concerned37%37%40%37%36%42%34%33%35%35%39%35%28%30%30%21%28%27%25%17%Base: 304 IT decision-makersSource: A commissioned study conducted by Forrester Consulting on behalf of NHR, February 2013Businesses want to take advantage of <strong>the</strong> latest technology solutions, yet with budgets tightening across <strong>the</strong> board,investing in new solutions requires a reassessment of capital distribution. When Forrester asked specifically aboutexpected changes to IT budgets, 43% of IT decision-makers expected IT spending to increase, while 71% projected thatspend on maintenance and support on hardware and software would remain <strong>the</strong> same or decrease (see Figure 2). Thismeans that <strong>the</strong> overall support budget is getting smaller relative to <strong>the</strong> overall budget. Companies will have spread <strong>the</strong>irsupport money over a large set of hardware.Businesses hold IT responsible for guiding <strong>the</strong> integration and implementation of new technologies. With an overallmandate to reduce costs while delivering new and differentiated services to <strong>the</strong> business and its customers, IT decisionmakersare challenged to distribute funds over a wider variety of items while maintaining services levels and systemavailability. Hence, <strong>the</strong> bells of “doing more with less” ring so loud as to send cracks through IT traditions and forcenew thinking. I&O professionals should start to ask <strong>the</strong> following questions: Is <strong>the</strong> business getting <strong>the</strong> most value outour equipment (i.e., Can we keep it longer)? Do we need all <strong>the</strong> maintenance support services we were sold (i.e., Areyou paying for a maintenance contract that has a software update line item even though software updates come freewith <strong>the</strong> product’s basic warranty or <strong>the</strong> vendor no longer offers software enhancements)? Are <strong>the</strong>re market alternativesto hardware maintenance support? What metrics should we be using to measure <strong>the</strong> value of <strong>the</strong> hardware and supportservices?Page 4

Forrester Consulting<strong>Challenging</strong> The <strong>Status</strong> <strong>Quo</strong> On Maintenance Contracts And Refresh Cycles To Lower CostsFigure 2Hardware Maintenance Support Is Getting A Smaller Portion Of The Overall Budget“How do you expect your spending on <strong>the</strong> following categories to change in 2013 compared with 2012?”Decrease more than 10% Decrease more than 5% About <strong>the</strong> same Increase 5% to 10% Increase more than 10%Total IT spending3%16%37%34%9%IT services spending5%14%44%30%7%Hardware spending4%16%42%27%10%Software spending3%14%46%26%10%IT capital spending by itself5%13%46%29%6%IT staff salaries and benefits3% 9%53%29%6%Telecommunications services spending4%12%53%24%7%Maintenance and support spending onhardware/software3%15%53%23%6%Contractor spending6%22%43%23%6%Base: 304 IT decision-makersSource: A commissioned study conducted by Forrester Consulting on behalf of NHR, February 2013And Yet, Vendors Control The Purse StringsServer virtualization changed <strong>the</strong> data center paradigm and cost model, which has released business from <strong>the</strong>constraints of rigid physical environments. But this isn’t enough for business, and it shouldn’t be. I&O professionalsshould continue to challenge <strong>the</strong>mselves in o<strong>the</strong>r areas and ask if that’s <strong>the</strong> best option for <strong>the</strong> business. In regards tomaintenance contracts and life cycles, little has changed over <strong>the</strong> last 20 years. Most organizations follow mostly <strong>the</strong>same process when it comes to buying maintenance contracts and refreshing hardware, which should raise concernswith any organization inside and outside of I&O.To highlight refresh cycles, Forrester asked IT decision-makers how often firms determine when to upgrade or refresh<strong>the</strong>ir network infrastructure, specifically <strong>the</strong> hardware supporting campus networks, data center networks, routing(WAN), and Wi-Fi. The majority of respondents claimed to refresh <strong>the</strong>ir infrastructure every three to five years (seeFigure 3)While <strong>the</strong> equipment upgrades are predominantly driven by new functionality requirements, 56% of ITdecision-makers reported that <strong>the</strong> industry average refresh cycles recommended by <strong>the</strong> OEMs encouraged this decision(see Figure 4). While this may prove relevant for server and storage products, network equipment has considerablylonger useful life, often longer than <strong>the</strong> OEM is willing to support <strong>the</strong> product. Taking advantage of this fact byPage 5

Forrester Consulting<strong>Challenging</strong> The <strong>Status</strong> <strong>Quo</strong> On Maintenance Contracts And Refresh Cycles To Lower Costsleveraging third-party maintenance vendors that will continue to provide support will lower capital and expensebudgets.Functionality upgrades and strategic technology changes aside, industry reported averages govern networkingequipment timelines. The questions that need to be asked are: Is this optimal for <strong>the</strong> business? Is networking equipmentbuilt better, and can it last longer, <strong>the</strong>reby delivering more value to <strong>the</strong> business? Where does this refresh cycle numbercome from? To understand how IT decision-makers are coming to this decision, Forrester asked what informationsources inform <strong>the</strong>ir equipment upgrade decisions. The top two reported sources were both vendor-providedinformation (see Figure 5). This implies that even when no new functionality is needed, customers still choose torefresh <strong>the</strong>ir networking equipment as per <strong>the</strong>ir vendor’s directive.Figure 3More Than Half Of Organizations Refresh Their Infrastructure Every 3-5 Years“When thinking about each technology, what is your refresh cycle?"1 year 2 years 3 years 4 years 5 years 6 years 7 years 8 years 9 years 10 years or moreCampus networks10%22%16%39%1%5% 3% 2%1%Data Center Networks2%10%20%17%33%11%1%4% 1%Routing (WAN)2%11%21%17%28%9%7%1%3%Wi-Fi4%16%23%15%24%3% 4%5%1%Base: 269 IT decision-makers who know how network infrastructure is managed from an IT perspectiveSource: A commissioned study conducted by Forrester Consulting on behalf NHR, February 2013Page 6

Forrester Consulting<strong>Challenging</strong> The <strong>Status</strong> <strong>Quo</strong> On Maintenance Contracts And Refresh Cycles To Lower Costs• Is underutilized. For example, when networking equipment needs to be replaced, almost half of <strong>the</strong> respondentstrade in legacy hardware or sell it to a third party for reuse (see Figure 7). If vendors are giving trade-in value orthird-party recycle companies purchase it, <strong>the</strong>n <strong>the</strong>re is still untapped value or useful capability that is being lostby <strong>the</strong> business. This doesn’t include <strong>the</strong> one-time operational and business cost of tearing <strong>the</strong> infrastructure outand implementing <strong>the</strong> new solution.• Has a longer life cycle than <strong>the</strong> industry reports. More than half of respondents indicate that <strong>the</strong>y replacenetworking equipment based on industry refresh cycles (3-5 years) 4 . However major network equipmentvendors report on <strong>the</strong>ir websites that <strong>the</strong> average mean time between failures is twenty-plus years. I&Oorganizations should dismiss <strong>the</strong> fear about networking equipment failure rates after three years.• Can be used after vendor end-of-life notice. 85% of respondents admitted <strong>the</strong>y would discard networkingequipment because networking vendors no longer support it (see Figure 8). Companies need to disconnect <strong>the</strong>belief that equipment is no longer useful after <strong>the</strong> manufacturer no longer supports it. Besides <strong>the</strong> availability ofservice contracts from third parties, close to 90% of edge networking devices never go through update. 5 Thisimplies that lower-cost support models that provide hardware replacement and technical support are a better fitfor a large portion of <strong>the</strong>ir network, specifically legacy gear and edge devices.Figure 7Companies Throw Away Value By Turning In Equipment Before The Value Has Disappeared“What do you do with equipment at EOL?”(Select all that apply)Trade <strong>the</strong> equipment inSell to third party for reuse or sell <strong>the</strong> equipment toan asset companySend <strong>the</strong>m to scrap recycle40%39%44%Move <strong>the</strong>m to backupGive <strong>the</strong>m to charity23%26%Throw <strong>the</strong> equipment awayStill working out a strategy about <strong>the</strong> equipment14%17%Base: 269 IT decision-makers who know how networking infrastructure is managed from an IT or IT and procurement perspectiveSource: A commissioned study conducted by Forrester Consulting on behalf of NHR, February 2013Page 9

Forrester Consulting<strong>Challenging</strong> The <strong>Status</strong> <strong>Quo</strong> On Maintenance Contracts And Refresh Cycles To Lower CostsFigure8Most Equipment Is Discarded Due To Lack Of Vendor Support“What percentage of equipment would you have kept if <strong>the</strong> vendor continued to support it?”76% to 100%8%51% to 75%15%26% to 50%36%10% to 25%26%Less than 10%12%Don’t know3%Base: 74 IT decision-makers who upgrade networking equipment primarily because <strong>the</strong> equipment is no longer supported by <strong>the</strong> vendorSource: A commissioned study conducted by Forrester Consulting on behalf of NHR, February 2013While defaulting to packaged services out of simplicity, proximity, or cost without performing due diligence ofalternative solutions, customers risk locking <strong>the</strong>mselves into overvalued service contracts. Ano<strong>the</strong>r relatively easy wayto decrease costs that occur on an annual basis is to treat maintenance contracts <strong>the</strong> same way purchases are done withinfrastructure. Even though many respondents expressed discontent around OEM service contracts, only 21% ofrespondents leveraged competitor third-party bids into <strong>the</strong>ir negotiations when purchasing service and maintenancecontracts (see Figure 9). If a company’s process is to put network refreshes out to competitive bids for differentmanufacturers to respond, hardware maintenance contracts should go through <strong>the</strong> same process. Competitive biddingresponses should include third-party vendors in <strong>the</strong> process.Page 10

Forrester Consulting<strong>Challenging</strong> The <strong>Status</strong> <strong>Quo</strong> On Maintenance Contracts And Refresh Cycles To Lower CostsFigure 9Few Organizations Know That They Have Options“When it comes to purchasing service and maintenance contracts, your organization does:”Direct negotiations43%Competitive bidding between different value-addedresellers over <strong>the</strong> same contract30%Competitive bidding of different contracts from thirdpartycompanies21%Single-source acquisition4%Default to equipment vendor2%Base: 304 IT decision-makersSource: A commissioned study conducted by Forrester Consulting on behalf of NHR, February 2013As forewarned, lopsided vendor contracts may not always have <strong>the</strong> customer’s best interests in mind. And this is notbecause of lack of options in <strong>the</strong> market. Eighty percent of IT decision-makers reported that <strong>the</strong>y would invest in athird-party solution if it was more affordable than <strong>the</strong>ir current contract (see Figure 10). If customers are willing toinvest in third-party solutions, <strong>the</strong> slow penetration of <strong>the</strong> market must be attributed to <strong>the</strong> lack of general awareness of<strong>the</strong>se solutions and not <strong>the</strong> fear, uncertainty, and doubt (FUD) that manufacturers have tried to associate with thirdpartycompanies.Page 11

Forrester Consulting<strong>Challenging</strong> The <strong>Status</strong> <strong>Quo</strong> On Maintenance Contracts And Refresh Cycles To Lower CostsFigure 10An Overwhelming Percentage Of Organizations Would Look To Third-Party Maintenance Options“If <strong>the</strong>re was an option to purchase support and maintenance contractsfrom a third party, would you do it if <strong>the</strong> cost was lower?”20%YesNo80%Base: 304 IT decision-makersSource: A commissioned study conducted by Forrester Consulting on behalf of NHR, February 2013Page 12

Forrester Consulting<strong>Challenging</strong> The <strong>Status</strong> <strong>Quo</strong> On Maintenance Contracts And Refresh Cycles To Lower CostsKEY RECOMMENDATIONSI&O professionals have a large number of networking choices at <strong>the</strong>ir disposal and use those choices to find <strong>the</strong> besttechnology and prices for <strong>the</strong>ir business. And yet, most infrastructure teams don’t carry that granular investigation to o<strong>the</strong>rareas such as refresh cycles or maintenance costs. Both options leave I&O teams short of <strong>the</strong>ir ultimate goal of improving<strong>the</strong> overall value of <strong>the</strong> hardware <strong>the</strong>y purchased. Consequently, to improve <strong>the</strong> return on investment, I&O professionalsshould:• Keep what’s working. Organizations should take a pragmatic view of <strong>the</strong>ir infrastructure and do assessments ofwhat services need to be delivered and which <strong>the</strong> infrastructure can handle. Often edge switches will be replacedlong before features are needed for a new service. For example, Forrester saw organizations get caught up indemanding network access control (NAC) capabilities within <strong>the</strong>ir edge switches to ensure investment protection,but typical deployments of NAC --inception to deployment--took longer than 5 years. Consequently edge switcheswere replaced before NAC was deployed.• Be aware: Don’t pay for software updates if <strong>the</strong>re are none or if <strong>the</strong>y are available for free. Maintenanceagreements with OEMs are costly and do not always provide maintenance and upgrades for <strong>the</strong> hardware thatcustomers are running. Forrester has found that <strong>the</strong> new features in <strong>the</strong> software don’t affect <strong>the</strong> edge switches.Also, edge switches rarely get modified after initial setup. Considering <strong>the</strong>re are many edge switches to core,customers pay a lot of money for service <strong>the</strong>y never use.• Put maintenance contracts out for competitive bid to different resellers as well as third-party options. For amultitude of reasons, businesses buy <strong>the</strong>ir maintenance contracts from <strong>the</strong> same vendor <strong>the</strong>y buy <strong>the</strong>ir hardware.To decrease <strong>the</strong>ir support costs, organizations have used direct vendor negotiation to get lower prices or shopped<strong>the</strong> contract around to different value-added resellers. Companies should follow <strong>the</strong>ir procurement practices on <strong>the</strong>hardware side, and if <strong>the</strong>y put it out to competitive bid maintenance contracts, that should include third-partycompanies.• Put metrics in place to reward value, quality, and longevity, not just resiliency. Few architects and engineershave incentives to design differently, and instead just try to create <strong>the</strong> biggest infrastructure. The industry saw thistrend in <strong>the</strong> U.S. automotive industry pre-1980s, but for a variety of reasons, customers rejected buying cars with<strong>the</strong> most horsepower or top-end speed. Automotive engineers were tasked with and measured on creating highqualitycars at an affordable level. Powerful cars didn’t suffer as some markets witnessed <strong>the</strong> rise of SUVs.Page 13

Forrester Consulting<strong>Challenging</strong> The <strong>Status</strong> <strong>Quo</strong> On Maintenance Contracts And Refresh Cycles To Lower CostsAppendix A: MethodologyIn this study, Forrester conducted an online survey of 304 organizations in Australia, France, Germany, India, Japan,Singapore, <strong>the</strong> United Kingdom, and <strong>the</strong> United States to evaluate <strong>the</strong> challenges that organizations face in workingdirectly with OEMs and <strong>the</strong> value of working with a third-party. Survey participants included decision-makers inexecutive positions, finance, information technology, and procurement. Questions provided to <strong>the</strong> participants askedabout <strong>the</strong> overall business situation, how vendors are selected, upgrading solutions, end of life, and maintenance.Respondents were offered an online gift card as a thank you for time spent on <strong>the</strong> survey. The study began in January2013 and was completed in February 2013.Appendix B: DataFigure 1More Than 80% Of Organizations Buy OEM Hardware Warranties“For each of those services, what type do you buy?”OEM direct servicesReseller's servicesHardware warranty (N=236)Software (firmware) warranty (bug fixes, updates,and upgrades) (N=224)Technical support (product and solutiontroubleshooting) (N=220)54%49%62%25%30%19%Installation services (N=171)37%32%Design services (N=109)Consulting (providing guidance on vendors,products, designs, best practices, etc.) (N=129)Managed (operate and manage <strong>the</strong> hardware andsoftware) (N=117)33%39%41%31%32%27%Base: IT decision-makers who purchase maintenance or services along with networking technologiesSource: A commissioned study conducted by Forrester Consulting on behalf of NHR, February 2013Page 14