Buried in Software Licensing

The transition to cloud-based services is ratcheting up traditional enterprise software costs and adding layers of complexity.

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To Congdon, the key to moving forward is to create a viable option for moving off of those platforms. He worries not just about cost but about being locked into a vendor's software with a highly customized implementation that might lead to inflexibility -- and competitive disadvantage. "What happens when your competitors move to new systems with different attributes?" he asks.

Congdon is worried about the potential competitive threat from startups that aren't tied to legacy on-premises ERP systems. And IDC's Dover says that's also a valid concern to have about global competitors in emerging markets. "In places like India, they didn't buy traditional on-premises systems and they're going right to cloud," she says.

Congdon says Red Hat is "creating the option to move [by] working to keep our business processes straightforward and minimize customizations."

But the SaaS model has its own potential pitfalls, IT executives and analysts say. "My worry is that the SaaS vendors are going to do to us exactly what the big vendors did to us," Steinour says. "We have to make sure we have a rock-solid contract and an exit strategy."

From a vendor's standpoint, moving customers to a subscription-based service should be more attractive because software maintenance costs can be rolled into a single monthly fee. For the customer, however, a move to SaaS simply means maintenance fees are hidden within monthly subscription fees.

"You can't go off maintenance with Salesforce.com," Scavo says. And while subscription-based services can get IT off the upgrade treadmill and allow it to replace multimillion-dollar capital investments in software and hardware infrastructure with subscription fees, they may not be cheaper in the long run.

Already, Scavo says, "cloud vendors are able to charge a premium because of the limited amount of competition in some markets." For example, Salesforce.com already dominates the CRM market. While today the cloud is cost-competitive, vendors such as Salesforce.com could become tomorrow's SAPs and Oracles.

As cloud usage grows more common, there will be increased competition, Scavo says. But IT should be prepared for the possibility that a few vendors may dominate some markets.

IT may not have to move to the cloud to get subscription- or usage-based pricing, but Costa says she doesn't think those models are always fully baked.

And not all enterprise software vendors have a mature software licensing model to accommodate organizations that host infrastructure in a private cloud rather than a traditional on-premises setup -- "especially when you need to have flexibility to hit peaks and valleys," she says.

Users should assess the maturity and scalability of cloud-based systems before moving to subscription-based SaaS offerings. For example, even though Scholastic has embraced the SaaS model for some enterprise applications, Costa isn't sure that core financial tools would be a good fit for the cloud right now. But her view could change as the cloud matures, she adds.

With regard to maintenance, Scholastic has frozen its implementation of JD Edwards accounting software and outsourced maintenance to Rimini Street. It's investigating a move to the Oracle E-Business Suite. But because that option is so costly, Costa says, Scholastic also plans to investigate other alternatives, including SaaS-based ERP systems such as NetSuite.

Mix and Match

Traditional software vendors are also experimenting with subscription and usage-based models for on-premises products, while some cloud vendors are offering a perpetual license-plus-maintenance model for their SaaS wares. Pershing LLC, for example, has a usage-based "on demand" licensing model for the IBM enterprise applications and hardware running in its data center. The license "starts with the hardware itself. Then the software licensing depends on hardware you run on," says managing director and CIO Ramaswamy Nagappan.

At Scholastic, director of network service Arun Abraham decided to use mobile device management (MDM) software vendor AirWatch's cloud-based service -- but he signed up for a two-year perpetual license plus maintenance rather than opting for a subscription. "We got a very reasonable price," he says.

As SaaS options mature, organizations should start to rethink their core ERP strategies and prepare for changes, Scavo says. For now, he thinks the best approach is what many large organizations are already doing: Retain core financial systems, but "wall them off" rather than expand them into other parts of the business. "That opens the door to considering vendors that may be more forward-looking, more agile and perhaps more cost-effective," he says.

Measuring the consumption of services is another challenge. With SaaS, Steinour says, software costs change from a per-seat charge to how many people are using the service at any given time. "But how do I monitor that in the cloud internally?" he asks.

IT also needs to invest in tools that can validate the accuracy of vendor invoices, including information such as who logged in, when and for how long, Adams says. And IT needs to be able to forecast demand to better manage licensing costs, whether in the context of a traditional software license or a subscription service.

For example, iQuate's iQAnalytics tool takes into account how current software was deployed, license details, discounts and other historical data to project future demand -- and software costs. It drills down into very granular details such as what applications are deployed in which J2EE app servers, database configuration option details and Veritas cluster configurations, so that IT can model the impact of changes on software costs, says iQuate CTO and founder Jason Keogh.

All that information, Adams says, can be used to drive a better deal when it's time to renegotiate. "Most companies don't go back and negotiate the terms as well as they should. Large organizations should be able to do that," she says.

Whether you want to move to a third-party maintenance provider or not, simply making it known that you're entertaining the idea can lead to savings. "The presence of these providers is already moderating the behavior of [ERP] vendors," Scavo says.

Color Spot's Robinson says he knows that SAP looks unfavorably on his decision to move off SAP maintenance. But the decision in no way reflects dissatisfaction with the software itself, he adds. "I know SAP sees Color Spot as a rogue player, [but] nothing could be further from the truth," he says. "We love SAP, we really do. But the traditional licensing model, for the future, does not make sense."

This story, "Buried in Software Licensing" was originally published by Computerworld.

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Copyright © 2013 IDG Communications, Inc.

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