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Pay... and pray

Pay... and pray

Customers are questioning how software licensing works, with some demanding a stronger link between pricing and business value.

During the Sand Hill Group's Software 2005 conference in California, Neil Cameron, CIO of Unilever, griped about being questioned by Unilever executives for shelling out top dollar for software that does not deliver corresponding business value. Adding to Cameron's remarks, John Leggate, CIO and group vice-president of digital and communications technology for British Petroleum, said vendors should spend more time developing products with customers instead of negotiating licensing terms.

Such sentiments are shared by New Zealand CIOs. As some point out, software capabilities have become detached from real customer needs even as licensing fees continue to balloon.

Phil Brimacombe, CIO of the Auckland-based healthAlliance, says his organisation is becoming so concerned and is considering open source "more and more".

Recent vendor mergers are a worry, he laments, and "In some cases we feel captured and there is no alternative but to pay what the vendor is charging."

Brian Pink, chief executive of Statistics New Zealand, concurs: "If you do not have a choice of supplier, then you do not have many options."

Merger-mania among vendors means software is becoming increasingly commoditised, but Pink warns: "Mergers must take resources within large software companies away from R&D and improvements, as they focus on integrating the acquired software and associated customer bases into their portfolio."

Buggy software is also hurting the operations of many CIOs, with Brimacombe declaring software quality a major issue. "We have to invest significant internal resource into testing software upgrades and enhancements, reporting faults, performing regression testing, and chasing vendors for fixes. Vendors are only interested in their generic package, not in each customers individual configurations and interfaces."

Traditionally, software value is defined by vendors based on the costs involved in bringing the software to market. Although feature-rich, most programs are grossly under-utilised.

A few vendors are notorious for charging for functions that can make an application harder to use without providing any real business benefit. Customers can feel they have been forced to buy more than what they need.

Complex and inconsistent licensing schemes add salt to the wound. But buyers may not keep silent for much longer. Wilvin Chee, director of software research at IDC Asia-Pacific, says end-user organisations are increasingly asking that licensing schemes reflect the value software adds to the organisations.

"At present, there's a disconnect between the price and perceived value of software," says Chee.

But there's a hitch: Many IT organisations in the Asia-Pacific region lack the governance maturity to accurately measure technology's contribution to the business in a way that could satisfy the requirements of a multi-billion-dollar software giant.

Many organisations buy more than they need, because the vendor did not tell them of all the software's possibilities and they do not have the resource to investigate these themselves.

Nonetheless, that doesn't mean traditional pricing models will triumph, as there are other ways to skin the licensing cat.

IDC's Chee suggests a more transparent payment model. Take maintenance licensing fees. "Vendors should itemise the cost of on-site support and telephone query, for instance, and allow customers to pay only for what they need. At present, such services are bundled."

New licensing schemes such as pay-as-you-go and software-as-a-service, specifically, will go down well with customers, he notes. According to a recent IDC survey, 26 per cent of end-user organisations in the US say they will be paying for subscription-based software by 2010.

Certainly, in a situation of thousands of end users, Brimacombe believes "per user" becomes cost prohibitive, so he prefers "reasonable site licences with unlimited users" but this is something the vendors have not accepted.

"We accept that it is fair enough to pay the one time upfront licence fee plus the annual maintenance fee, but it is really difficult to pay the $1200 a day or more rate for numerous minor enhancements and developments that we are continually wanting.

"When the vendor loads up the quote with analysis and project management days on top of the development and testing, many valuable enhancements are no longer justifiable. Sometimes we feel that the vendor is deliberately loading the price to put us off, because all the small work requests are too much trouble for them," he continues.

Buyers, continued a recent MIS survey, are in particular incensed by the rapid surge in the use of name-user licence models by vendors. Until the late 1990s, concurrent-user had been the most popular scheme for software payments.

Unlike named-user licences, concurrent-user licences are not exclusive to a specific individual and may be shared among several users across an organisation-although only one person is allowed to use the software at a time. Such sharing allows companies to buy fewer licences.

The downside, however, is concurrent licences are more expensive than named-user licences. The cost and requirement ratio between the two models, depending on business needs, will determine the total cost of ownership.

But buyers could be in for a very long wait if they want concurrent licence schemes to return. Vendors say that named-user methods offer a fairer deal to users, given today's hardware and usage patterns.

Jacqueline Woods, vice-president of global pricing and licensing strategy at Oracle, says: "Software licensing models evolve as IT environments evolve. Driven by the propagation of n-tier architectures, our current licensing models have moved from concurrent-user to named-user single-server, named-user multi-server and processor licensing models. We anticipate that software licensing will continue to transform as the software landscape continues to transform."

Colin Sampson, chief operating and financial officer of SAP Asia-Pacific, says: "Concurrent-user licensing worked when there were limited software adaptations based on end-user access requirements. The [concurrent-user] pricing method doesn't correspond to the reality of modern enterprise software, which is increasingly being modularised and tailored [and priced differently based on] the needs of different levels of users."

Hard negotiations

Warwick Wright, State Services Commision CIO, says it could be hard to negotiate contracts with the larger players because they can dictate prices and contract terms to smaller companies. "In the end, you may end up with limited bargaining power if you already have these products already embedded in your organisation," he says.

"You always try to protect yourself when negotiating contracts, but the rapid changes in the technology make it difficult to future-proof products. The only consolation is that if I feel 'ripped off' by a supplier, while I may not have much choice in the short-term, it certainly puts me off dealing with them in the long-term and encourages me to look at future alternatives."

Brimacombe says negotiation with vendors is always problematic and the only leverage his organisation has is by combining with other district health boards to form a consortium, and even then the concessions have not been great.

"We have had some success with strategic partnering, where in return for some price concession by the vendor, we agree to be a reference site for potential customers, or we provide intellectual property to a development that results in a new product for the vendor to onsell. When there is a commercial gain for the vendor, they are much more co-operative."

Brian Pink says users need to raise the issue of software licensing to vendors, whose New Zealand office may just offer one-or-two "by-the-book" licensing options. "If you have not got the Asia-Pacific office involved, you are not negotiating hard enough," he says.

For years, software publishers have clung to a one-rate pricing system in which they charge the same for software purchased anywhere in the world. The pricing model has been challenged lately as governments and corporations explore cheaper open-source programs.

In the near future, healthAlliance may enforce an IT policy that allows only power users access to Microsoft Office programs. Casual users would have to use an open-source desktop productivity program.

"Open source is a great option if you are starting from scratch or you use general applications. Our situation is a mature environment heavily dependent on Microsoft, with large numbers of specialist applications embedded on Microsoft platforms," explains Brimacombe.

Statistics New Zealand believes open source can be part of a solution by providing competing software applications plus "add-ons" to leading software applications.

Vendor consolidation provides opportunities for small competitors to grow in market niches or new areas. "The key is for these competitors to be under the radar so they do not attract the attention of the large players. Open source may be the answer here in many cases, such as community-based solutions rather than traditional software companies," says Pink.

Nonetheless, Brimacombe feels proprietary software costs are the major issue. "Clearly, we need our vendors to be commercially successful, we need them to support us for the long-term, but we simply cannot afford the megabucks that some vendors charge. We also need them to be more responsive to our individual needs."

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