by Thomas Wailgum

Enterprise Software Licensing: New Options, New Headaches

Mar 16, 2010
Cloud ComputingEnterprise ApplicationsERP Systems

IT has told enterprise software vendors that they want more choices. Now, licensing models have morphed and IT has its wish -- and a whole new set of chores, IDC's software licensing guru Amy Konary explains in this Q&A.

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 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. 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. 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 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. 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.” Do the software vendors have a good grip on these new models, how they’ll track usage and how they’ll make money?

Konary: They’ve tried to, at some level, because they have to, especially at the public companies. Where the unknown comes into play—particularly for peer consumption-based models—is: What is the [software] consumption going to look like? The reason for that is actually the flip side of the licensing discussion, regarding the metering and tracking of usage. For the most part, there is nothing in either traditional software asset-management systems or built into software products today that track usage at a granular level.

So if you’re an SAP customer, you might know what machines of yours have software installed on them. But you don’t know at a granular level what your usage patterns are. Extrapolating that to a situation where you’re paying per-use for SAP, say, that is based on “number of screen views” or “number of recs opened.” The problem is you don’t have any easy way of finding that out so you can determine what works better from an economics perspective.

Same goes from vendors. Someone [at a vendor] told me the other day: “We know what we sell to customers, but we don’t really know what they deploy, and we have no idea what they use.” That part is pretty frightening for vendors when they think about customers moving to a consumption-based model. So this might be difficult but, perhaps, a good exercise for CIOs to go through? Maybe not for vendors, though.

Konary: The dirty little secret is that people buy a lot more [software] than they use, generally. Most prudent businesses tend to overbuy because they don’t want to have to think about compliance. Vendors know there’s going to be some delta between what [customers] buy today and what they would buy in a consumption model. But the size of that is unknown. How much will this “flexibility” cost software buyers?

Konary: In general, you pay for flexibility. There are two levers that move the level of discount you’re going to get: One is volume, and one is commitment. And that also translates over to the pay-per-use and cloud subscription worlds: If you commit to month-to-month, you’re going to pay more than somebody who commits to a multiyear deal. If CIOs can become this “economist” and save the company some money on licensing, might there be an opportunity to win a CFO friend or two?

Konary: There is, especially when you start talking about cloud and some offerings with different options: such as peak versus off-peak. It’s similar to what we’re seeing in the electricity industry with smart meters.

There are these various elements, and there’s a possibility of gaming the system, if you can get really good at pushing your workloads to, say, off-peak times. But it’s going to require a lot of work upfront. Then the question becomes: At what point do other tasks take over and become more important? In big companies, it would seem to be an impossible task to pull together all this information.

Konary: I was talking to one firm that has 1,400 apps and 40 enterprise agreements. They’re going through each agreement and trying to automate the way they track and collect information on usage. They hope it’s going to give them the ability to make smarter decisions on what they purchase and will set them up for a situation where they can have more flexibility on licensing.

One thing CIOs can do now as they start to prepare for these choices, is find out what kind of information they can get out of their environments right now, and what type of effort it takes to get that. If they want to optimize spend, you have to get a sense of what the usage patterns look like. But if you’ve got 1,400 apps, you’re probably not going to be able to look at all of those at once. So start at the high-value end [of your applications].

Then, as a CIO, you’ll be able to say: These are the usage patterns and these are licensing options available to me. Given those, I can calculate that Option B is going to be the best choice, given X, Y and Z. Without having that information, you’re relying on the vendor to tell you what’s best for your environment, and what they tell you might be what’s best for them.

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