by Thomas Wailgum

Software Licensing and Pricing Is Still Too Complex and Costly

Jan 28, 20085 mins
Enterprise Applications

A Forrester Research survey of IT professionals finds that enterprise vendors have yet to solve pricing and complexity "pain points."

A January 2008 report from Forrester Research, which combines survey data and interviews with IT managers, states that software licensing and pricing continues to be “marred by complexity, soaring maintenance costs, and a lack of flexibility and alignment with business goals.”

Forrester interviewed 25 clients of top enterprise applications providers and surveyed 215 business process and applications professionals about their software licensing and pricing experiences, according to the “Trends 2008: Applications Licensing and Pricing” report, by analysts Ray Wang and Elisse Gaynor.

Though the Forrester analysts reason that “application innovation trends like service-oriented architecture (SOA) and software-as-a-service (SaaS) will be the impetus behind a shift in how firms view apps licensing and pricing and what they demand,” this recent batch of survey data shows that vendors still have a long way to go to meet their customers’ needs.

Overall, software users are dissatisfied with the current state of licensing agreements and costs, as well as maintenance pricing. Here’s why:

License agreements remain too complex. While some people will concede that licensing and pricing complexity is “a necessary evil to combat misuse of applications and to accommodate a heterogeneous community,” a little less than half of the respondents said that licensing structures and language are still too complicated and are among the biggest problems with licensing today. “Users felt there was often a lack of clarity regarding the exact value they were receiving for the pricing and often did not understand the rationale behind expenses, discounts, or provisions for changes to their licensing,” the analysts write.

Imposed maintenance costs continue to lack value. Companies believe that maintenance costs are way too high. Surveyed companies reported that they were paying an average of 26 percent of their total cost of ownership, while approximately 87 percent of these respondents believe a fair price for maintenance is 24 percent or below. “Striking a particularly strident chord for licensees,” the analysts write, “many clients Forrester spoke with indicated they paid maintenance fees but never used the services.”

Rigidity and misalignment of metrics persists. Those IT managers who were interviewed expressed dissatisfaction with their vendors’ inability to accommodate their individual business needs. Specifically, Wang and Gaynor write, users want vendors to “understand how their companies actually operate and acknowledge the structures that are most in line with these operations, instead of force fitting existing structures to each client.”

Mergers and acquisitions (M&A) create a hodgepodge of licensing and pricing models. M&A activity brings its share of renegotiation issues, and in the cases of “rapid employee change from acquisition or from divestiture, customers want the freedom and agility to change models to match their new circumstances,” the analysts write. But according to one client they interviewed, it’s “always a problem in licensing, and vendors either agree or never respond—leading clients to run illegally until completely off the system.”

In addition, users offered these specific “vendor offenses” that exacerbate their disappointment with the licensing and pricing process.

Treating existing customers like second-class citizens. “Despite significant discounting for new customers, some vendors have adopted tactics of closing off negotiations for existing customers,” Wang and Gaynor write. “In some cases these treatments are consistent across the board irrespective of client size and spending. Many small and midmarket enterprises cited little to no influence during negotiations and that off-the-shelf pricing appears to be the norm.”

Hiding discount rationales. While a number of vendors now provide public price lists, the analysts found that many IT managers often were not supplied with a discount rationale if they were credited with one. “Several respondents echoed that in later negotiations, they are then unable to point to previous rationale to justify any future discounts,” Wang and Gaynor write. According to one IT executive: “There was a discount based on the number (volume agreement bought), but they do not let you know what the discount is. They run numbers but don’t really document the discount.”

Favoring a one-size-fits-all approach. Vendors may prefer the internal ease of offering limited and standardized metrics and pricing. “However this one-size-fits-all approach often does not meet a customer’s changing business needs and goals,” the report states. “Meanwhile, others feel pressure from their apps providers to transition into licensing models that are more beneficial for the vendor’s bottom line but not in line with the user’s business goals.”

Placing limitations on value to clients. According to the analysts’ interviews, IT managers worry that over time they will slowly lose previously negotiated terms and benefits “the longer the relationship continues with their apps provider,” Wang and Gaynor write. “They also fear vendor lock-in when it becomes too costly to change horses.” One IT executive reported that his vendor “eliminated a lot of the value benefits over time. In the agreements we used to have things like unlimited support calling, but we can’t do this anymore. Based on the number of licenses, we get X amount of credits to call with. This is a problem; we must pick and choose and use them only for emergencies now.”

Resolving multiple licensing and pricing models post integration. Following vendor M&As, which seems to be happening a lot these days, vendors often leave newly acquired clients in the lurch with regard to reconciling future models and negotiations, the analysts found. And companies “whose previous structures will be honored still complain that direction for future support and enhancements is not always well communicated.” Should renegotiation be necessary, Wang and Gaynor write, “they are left unsure about their options.”