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Squaring up: Fighting for the best deals

Squaring up: Fighting for the best deals

Users might think the utility-based pricing model spells the end of their fight with vendors - but it's only round one in the contest over software licensing deals.

Software licensing has always been something of a power play between users and vendors, a tug of war reflecting the state of the IT market. In the older model of perpetual licensing, users paid a large initial fee with maintenance and support provided - up to a certain point. For users, the downside was being locked in and incurring related costs in areas such as training, storage and customisation.

Then along came the software-as-a-service model, which promised lower initial costs and - through the predominant third party delivery model - lower investment in infrastructure.

At last it seemed to users that switching costs would go down and they would be on the road to the utility computing model, which IT analysts were hyping as best practice in a brave new world.

Under this new model, it appeared that CIOs would finally have the chance to make their licensing agreements work for them, with the capacity to turn their software usage on and off like a tap.

But as with most things in the IT industry, the reality is rather different.

There is a plethora of different vendor contracts, practices and delivery methods, so the licensing situation has probably never been more complex - a state of affairs only exacerbated by the advent of virtualisation. It is little wonder that software auditors are being kept so busy, and contract compliance is such an issue.

"I couldn't even tell you how many models there are out there," says ¿Brian Bogardus, a KPMG partner from the firm's software compliance section.

"Every vendor does it differently. The models are never the same."

Because about 90 per cent of businesses self-report, and lack adequate tools to track and measure their usage, Bogardus sees a margin of error of about 10 to 15 per cent in most licensing payments, and the bias swings both ways to favour either vendor or user, depending on the situation.

Many organisations, he says, struggle with the newer aspects of licensing, such as virtual partitions. He mentions one company that bought licences for software, which were then deployed on virtual partitions. But the licensing rules were based on physical CPUs. This meant that when they were overdeployed, it created an unforeseen liability of more than $1 million.

"The problem is mostly in the processes within the business," Bogardus says. "They don't have the control inside the business to track everything and don't understand the details of the contractual relationship or the licensing.

"Also, the guy who implements the software is not the guy who negotiates the contract and may not even see that contract.

"And contracts are actually written in various forms so each vendor has a different methodology in terms of applying their licensing."

Status and clout

Other variations come from the status and clout of the organisation. Depending on who you are, you can get a better deal.

Macquarie Bank, for example, has about 13,000 computer screens and is ranked 34th on the latest MIS100 Australia list of the country's top IT users.

Macquarie CIO Nigel Smyth says that the bank has a standard contract with its own rules and conditions that it presents to vendors, which "weights everything in our favour".

Because vendor agreements do the same thing, he says that what follows is a process of commercial negotiation.

In negotiation, the bank looks at the total cost of ownership and pushes to have all functional upgrades included in contracts. If the vendors have another view, Macquarie looks for compensation in other areas of the agreement.

It also has a team of full-time lawyers dedicated solely to negotiating IT licensing agreements, and is strongly focused on actively managing them over the course of the contracts.

Another CIO, from the retail sector, says paying attention to what happened at the end of the contract period was the best aspect of his own licence negotiations.

"I was really worried about what would happen at the end of the period, and terrified about any exposure to the vendor upping maintenance and costs," he says.

"We negotiated a discount to start with, but then I found they were really reluctant to yield any ground regarding the post contract period. Threatening to walk away was the best thing I ever did."

The issues for smaller organisations are often very different. Darron Kupshik is financial director of Melbourne-based PlayCorp, which operates in the apparel, homeware and leisure industries and manages a number of international and local brands such as Everlast, NRL, AFL, Marie Claire Homewares and Living with Deborah Hutton.

PlayCorp has an SAP environment acquired on a perpetual licence. And while Kupshik is happy enough with the product, he says the main issue for him is the 15 to 20 per cent annual fee he pays for maintenance and for the promise of a free upgrade.

"Really, I think this pitch is a bit of nonsense in terms of providing value for us," Kupshik says. "This is where they make their money.

"But we don't get a lot of value out of it as a small company, and we look at it largely as a cost."

PlayCorp has about 40 users on its system, divided into a hierarchy ranging in size from super users on down. Some of the users rarely use the system but the fixed licence fee still has to be paid for them, and Kupshik believes vendors could be more flexible in this area.

In the government sphere, organisations can also benefit from the power of large-scale procurement.

Forestry Tasmania is a smallish organisation, but CIO Sean Collins says its Oracle licence, for example, has piggybacked off a three-year whole of government deal negotiated by the Tasmanian government.

At Flinders University in South Australia, CIO Mark Legg says the institution has benefited from a select agreement with Microsoft.

Negotiated many years ago, the agreement survived the Software Assurance program launched in 2002 and has significantly insulated the university from the commercial world.

Perpetual or non-perpetual

In 2005, Flinders negotiated a three-year campus agreement to cover areas not covered in the select agreement, such as office products. The agreement is based on an ongoing perpetual model with built-in upgrades and Legg says it has been "quite good, with one exception".

"The exception is the distribution of licence keys," he says.

"It's hard to administer when you've got 800 PCs in laboratories, when the licences are all tied to the individual PCs. We've been talking to them about that."

There is some innovation and some users, such as legal software provider LEAP, are reaping the benefits.

LEAP's help desk uses a Citrix product, which enables LEAP staff to take over a client's computer to diagnose problems and carry out reconfigurations.

"The licence allows us to get to our 1600 clients, with 15,000 users, but only pay for the licences for 20 help desk staff," Christian Beck, LEAP's managing director, says.

"They deliver the software to us as a service online, and then we can use it remotely with clients.

"It's scalable and clean and we carry no infrastructure risk."

While there is innovation in the marketplace, there is still a lot of legacy software in use, which is still licensed under the older perpetual model.

The Australian National University, for example, recently decommissioned its 30-year-old mainframe, and a large reason for that, CIO Rick van Haeften said recently, was the six-figure sums that the university was paying for licensing. "And then there was the staff," he says.

London-based analyst at Gartner, Alexa Bona, says that despite the hype over non-perpetual licence models, only 25 per cent of new business applications will be non-perpetual by 2012.

"There'll also be a lot of legacy out there in terms of systems infrastructure and management software, help desk and database software," she says. "That's all very much following the perpetual model and it's quite tricky to convert from perpetual to non-perpetual - not just for the customer but for the vendors, too."

Bona says users are more attracted to the non-perpetual model, largely due to the lower initial costs and the greater ease of switching. Vendors, meanwhile, are experimenting with several different models, such as what she calls business metric-based pricing.

"This is pricing based on something as general as your company's annual revenue," she says, "but it could be more specifically related to your industry, such as the number of barrels of oil per day you produce, or the number of contract accounts you have, or your assets under management.

"The business application vendors are looking in this direction and SAP has been the most aggressive, and changed a number of their pricing schemes last June to reflect an increased amount of their software licences on these business metrics.

"As they're into process automation, the number of users tends to drop away, and if they license by the number of users they would be facing an ever-declining revenue stream."

Users, however, have been less enthusiastic, often failing to see the value in linking licence fees to such metrics. The user dream of utility-based licensing, she admits, has been slow to be realised and Bona predicts it won't really gain momentum in the market until about 2012.

"I get a lot of calls from clients saying when can we have usage-based pricing, when is the utility model really going to hit?" Bona says.

"Service providers have been offering it to their clients but have been struggling to develop their own capabilities because of their legacy licensing models."

She says that unlike the telecomms area, IT has suffered from the slow development of third-party billing providers with good advanced tools to measure usage.

"Until you've got this third-party billing community, I think it will be difficult," she says. "Customers may move to invest in them, so they can be used across multiple, different service providers. But until that happens, I don't think we're really going to see utility-based pricing." MIS Australia

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Tags Utility Computingvendor managementsoftware licensingSoftware as a service

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