Enterprise Software Licensing: New Options, New Headaches

CIO — For decades, software buyers have been engaged in an "arranged marriage" type of relationship with software vendors: too much tradition, too little choice and a partnership of unequals from a deal's beginning. Typically, these deals had two key variables: the number of seat licenses (volume) a company purchased and the amount that the software publisher was willing to discount the purchase price, which was linked back to the volume.

Both sides haggled over those figures during the forced courtship that is the RFP process, but the outcome between the partners was usually predetermined. There wasn't much bliss; just some angst on the buyer side because she knew that a legacy of fixed costs and bloated shelfware lurked, and a future divorce would be unpleasant and costly.

The rules of the game were far from perfect, but at least—more or less—everyone knew the rules. As one of the mainstays in businesses' software-purchasing decisions, CIOs have long recognized the dearth of options and been asking for more choice, more flexibility from their vendors. The global recession was an accelerator of the demands.

Well, CIOs, you finally got what you asked for: new software-delivery models (SaaS and on-demand as well as cloud-based and virtualized computing options) have created new licensing options for software buyers today, says Amy Konary, IDC's research director of software pricing, licensing and delivery. (IDC and CIO.com share the same parent company, IDG.) New options include such offerings as pay-per-use and subscription pricing means—what's commonly referred to as utility computing.

Choice can be a good thing, of course. But when it comes to enterprise software, more licensing choices necessitate a new role and responsibility for CIOs, Konary says: The Economist CIO who can crunch the financials of these metric-laden agreements.

In addition, before CIOs sign on to, say, a pay-per-use software license, CIOs actually have to understand what their organizations' actual application use is, which is no easy task, Konary points out.

CIO.com Senior Editor Thomas Wailgum recently spoke with Konary about the trade-offs between traditional and new licensing, what's worrying software vendors right now, and why CIOs and their companies will likely have to pay more for that flexibility.

CIO.com: With so many new choices coming onto the market, what's the big picture for CIOs and IT staffs?

Amy Konary: What CIOs are going to have to do is look at their overall needs, at different workloads, at how those are used, and seasonality associated with those, and figure out: Where does the pay-per-use cloud approach make sense? Or where does running the traditional in-house deployment work better? Or where does a subscription-licensing agreement, but one with more of a more traditional per-user metric rather than pay-per-use, make the most sense?

I was talking to the Microsoft (MSFT) Azure folks about their pricing. They started to talk about peak and off-peak pricing, and three different options: peer consumption-based, and a subscription based and then different types of workloads you could have—say, unpredictable spikes or seasonality spikes. Things like that.

All this changes the role of the CIO, since they have to be an economist now: How can I spend the least amount of money for just the capacity I need? Everyone agrees that the situation today with shelfware and the licenses that almost force you to buy more than you need or use is not a good solution. But on the other hand: Does a CIO want to add that kind of licensing expertise to their staff?

They already have to know that [type of information] to a certain degree, from a compliance perspective, but now they're going to have to look at all of these choices they are getting from everyone: Which one makes the most sense for me now, three years from now and also six years from now? Because, ultimately, there's going to be a lot more choice.

CIO.com: Sounds like a "be careful, you might get what you wish for" situation. Is this a good thing?

Konary: I hope so, because that's what they've been pushing for. The net is this: In a year from now, there will be a lot more choice than there was a year ago. The problem is: There isn't a lot in place to help CIOs figure out what is the right option for them. And I don't think the software sales rep is going to be in a good position to do that either.

I work a lot with companies that make these licensing changes, and I see that people tend to gravitate back to what they know. Even though there might now be a subscription pay-per-use option and it might be compensation-neutral to the sales rep—meaning they get the same money in their pocket either way—they still would probably push the one they knew, because who wants to add time into the sales cycle, unless the customer specifically says "I want that."

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