Nightmare or necessary evil? Software licensing is certainly the latter and without the right processes in place will undoubtedly become the former. With issues such as dual-core processors beginning to emerge, the situation has become only more complex.
To try to clarify some of the issues, we spoke to six vendors, all of whom agreed it was a good idea to do so. In the event, several failed to respond to a series of questions posed.
We also spoke to three senior IT people on the customer side to ascertain their issues and to try to find out if they thought things could be done better. They all agreed that software needed to be treated as an asset, managed accordingly and subject to regular audit. It's a matter of legal compliance as well as cost.
Ross Hughson, CIO at Westpac, says the main issue is making sure the appropriate level of maintenance is in place and focusing on support levels. “You need to be in discussions with vendors about what’s current and what isn’t,” he says.
To that end, he says there is a challenge for vendors to be proactive. “They could do better by coming to us on a six-monthly or annual basis and say ‘here are the options’. That may work in their favour.”
Over the past 12 months, Westpac has been reviewing its installed base to see what is current and what is needed. Hughson says a person was dedicated to look at asset management.
“We wrote to all our vendors to confirm the options and to make sure we still had our software on the right programme. We pay several millions of dollars a year in licensing fees, and as a result of the exercise we freed up $500,000.”
He says each software licence is its own mini business case. Some of Westpac’s licensing is done on a transtasman basis, notably from Microsoft, which the bank enters into complex negotiations with every three years. Hughson says he would like to encourage more transtasman licensing.
Westpac has its own procurement staff. “Unless you keep on top of it, it will creep out of line,” he says. “It needs to be managed. The legal compliance is to make sure you are licensed for the correct number of licences.”
As an aside, he points out that vendors shouldn’t expect another full licence fee for disaster recovery because that is used so seldom.
Paul Jones, who has been involved in service delivery in the government and private sector for more than 20 years, says that, based on a number of experiences, software licensing is fraught with pitfalls. “It’s complex and vendors don’t always act in the interests of the customer,” he says. “At one extreme are those who are predators; at the other are those who have a reasonable understanding of where the customer’s business is heading. All too often you are faced with a bill, without a lot of contact from the vendor, for an urgent renewal date that has to be met because of legal requirements.”
Things vary, depending on the nature of the engagement, he says. “A channel partner can add value but dealing directly, particularly with an offshore organisation, may not allow adequate time to form a strategic view on directions. “Businesses need to make an investment in staff or external advice to manage software as a fundamental asset.”
He says that with out-of-the-box software it is necessary to have an effective tracking mechanism for what is on each PC. “It’s important to have discipline so techos can’t load software without filling in the appropriate paperwork.”
Too often, he says, software contracts written offshore are attached to the software and the installer just ticks the box. “The installer may not be competent to tick that box, and the licensing conditions may be written for another country’s laws.”
Jones poses a question: “What other products do you buy from day one that are likely to have faults. The ability to enforce a remedy is difficult.”
Terms in on-going maintenance agreements are not static. Because of this, an organisation needs an internal audit process and, often, expert advice as to how licenses are utilised, he says. “You need to read the small print – but sometimes that’s very hard to read (make sense of).”
The IT industry is known for rapid change, either generating expansion or consolidation. A customer may sign up for a year’s maintenance and find that in three months’ time it does not have the same number of servers. The difference is not always refundable.
Jones says an organisation should conduct a full software audit no less than six monthly. “Software is a liability that can become a nightmare if it is not adequately managed. That’s because licensing is so complex.” He points out that the supplier has the right to demand an audit at any time. “Sometimes, it is not realised how important it is to an organisation to ensure compliance, for legal reasons.”
The total cost of ownership of an IT facililty is hugely dependent on the on-going costs of software, Jones says. “Industry needs to run the right tools to monitor the desktop. Software architects need to consider the cost of ownership.” He concludes that the ability in New Zealand to influence licensing agreements is minimal.
NZX (the stock exchange) has a lock-down policy that measn any changes to software have to be requested from the IT department. CIO Chris Corke says this eliminates many possible problems. Licensing is handled internally. ‘That’s part of my role.”
He looks to redeploy software where it has become superseded in one area. “Once you’ve paid for a licence, you don’t have the chance to get the maintenance back.” That said, some vendors will provide a negotiable option, he says.
Regular audits are part of the software management policy.
Corke feels the process could be improved if vendors adopted a standard of floating licences.
As a channel partner, Gen-i provides licensing advice. Licensing expert Linda Ti Malpi says the use of software, from the desktop to the server and on to the mainframe, is a significant part of an organisation’s technology budget. “It’s critical to choose the right licensing model for each organisation, to recognise software licences as assets, and to manage those assets cost-effectively,” she says.
“The current licensing options for New Zealand businesses are far more extensive than they were five years ago. This doesn’t necessarily mean more complex. It means there is far more choice, and businesses don’t need to settle for a ‘one size fits all’ option.’
Gen-i provides a definitive view of each option. “We help to identify the most appropriate, cost-effective and flexible licensing model that also offers protection so businesses can scale and grow as required. We also recommend that clients recognise their software licences as assets. Adequate management of these software assets is often overlooked as it is a confusing area to many people and often requires specialist focus. “There are a number of key issues we address. We help our clients to implement processes that allow for accurate collation and recording of purchases against install numbers and we conduct regular audits to mitigate any contestability regarding compliance. We also give guidance in leveraging existing software contracts, give product and licence updates of emerging technology and changes to existing licence contracts and terms, and proactively manage key software vendors to ensure the best return on investment.
“It’s important that the software management partner the customer chooses should have not only effective process skill but complete and accurate systems to support the audit and reporting requirements of the vendors. This takes a lot of pressure off the clients because they can be confident of their environment status when negotiating with the vendors.”
IT lawyer Michael Wigley, of Wigley and Co, which specialises in IT contracts, says vendors can call it pretty much as they want. “We haven’t seen any negotiation other than on some of the detail. The general experience is that the larger hardware and software vendors will tend to stick to their overseas principles, the international model. There is a lot of negotiation on the terms of the licences. That might be around the number of CPUs, geographical limitations, or the number of end users. Some vendors are more prepared to negotiate these things than others, who say ‘take it or leave it’.”
Licence models can be CPU-based, server and/or seat-based, perpetual, term and enterprise. Most licence agreements forbid the on-selling of the software and its licence, and vendors insist the software is licensed in the name of the end-customer (this can be a named user or a role such as an architect), and not the service-providing intermediary.
Chipmakers have recently adopted multicore techniques as a way to keep processors from overheating. Dual cores already exist and there are plans for chips with four, eight or 16 cores. These challenge the long-standing licensing convention of pricing server software products on the number of processors.
The industry is divided. Microsoft has indicated it will count dual-core processors as single units. Oracle has adopted a policy of charging the cost of two processors for a server equipped with a dual-core chip. IBM has a two-pronged approach, charging as two processors for the base version, but as one for the iPower architecture because it regards the power increase as an incremental improvement. Novell will change for its SuSE Linux software as a single licence, while BEA Systems plans to charge a 25% premium above the standard per-processor fee for software that runs on dual-core servers.
With dual core, the customer gets the same processor speed they get today, with perhaps 60% more power. It seems to be an incremental increase rather than a doubling. However, customers may still pay a premium because server manufacturers may charge more for dual and multi-core servers
It poses a potential problem when an organisation has to migrate applications or perform server upgrades. The return on investment.on a project may be thrown out of kilter if the organisation has to move when it upgrades from, say, a four-processor box to one that might have multicore processors, with the inherent additional costs.
We asked vendors what licensing models they supported, the basis for deciding on those models, how the enterprise licences were based, how term licensing was calculated, the additional cost of software for specific projects, and whether their licences forbade the on-selling of the software and its licence. Here are the responses.
Server products can be licensed by processor or by server plus a client licence, with the option of external connectors. Application and desktop operating system products are licensed on a per device model.
Customers who choose to license on a server plus client basis are required to license the server as well as the devices accessing the services of a server. In some cases, there are options of per device or per user. A number of server products are available in per processor (allowing unlimited users to access), which eliminates the needs for client access licences.
There are three key ways customers can purchase a licence: OEM, where the customer buys the licence with the hardware; full package product, where individual licences are bought from a retail store; volume licence programme, where product licences can be purchased over a two or three-year agreement term, five to 20,000 plus seats. Microsoft recommends that customers with 5-250 seats look at its Open Business Programme or Open Licence Value Programme. For customers with 250-plus devices and who have a requirement for ad hoc purchasing, it recommends its Select Programme. The Enterprise Programme is for customers who have at least 250 seats.
An enterprise licence is a three-year agreement term with optional one- or three-year renewal terms. The number of desktops is established at the time of signing and new desktops may be added during the term of the agreement. At each anniversary, the customer reports any increase in desktop count.
Many of Microsoft’s volume licensing programmes have a three-year term agreement. The Open Business Programme is two years. If software is purchased for a specific project, any additional cost depends on the licensing programme in place.
Internal use licences are for the use of the contracting entity and its affiliates. Full package product and volume licence agreements provide for a one-time transfer of the licence, which is covered in the applicable end-user licence agreement. Service providers cannot acquire licences through these programmes to provide commercial or hosted services to their customers. There is a separate services provider licence agreement, a month-to-month licensing programme that enables hosting outsourcing and other software services.
In the mainframe environment, most products are licensed under a system capability model using monthly licence charge pricing. In distributed systems, products are offered under a variety of licensing models, with one-time charge pricing and/or fixed-term license pricing. Some products are offered under multiple licence types (per processor and per user). There are many different licence types: per processor, per server, per user (concurrent and authorised), per managed object, per storage capacity, for example.
IBM says that for any product the licence type is based on what is best suited to the product’s typical use and for the market environment.
Enterprise licences are based on a count of what a customer is using at the start of the contract, with a further uplift during the review to cater for growth. Special enterprise licence arrangements are typically based on a count at the beginning of the agreement period with periodic review and reconciliation.
Term licensing is standard in the mainframe space. In distributed systems, fixed term licensing has recently been introduced for a selected number of products in the Rational desktop development portfolio.
Most standard licences do not allow on-selling or for service provision. However, for the ASP environment, IBM makes provision with specific limiting terms and conditions, to be modified on a case-by-case basis for qualified ASPs.
For its technology products, Oracle has two primary pricing models: Named User Plus and Per Processor Pricing. Named User Plus is for organisations with discrete and countable user populations. For uncountable populations, processor licensing is required. The processor pricing model is based on the number of processors a customer has installed and the number of those processors that are operating.
The vendor also offers custom enterprise licensing models. These use an enterprise metric, such as employee or revenue. A company’s entire enterprise has access to the licensed technology software.
Oracle says that, in the past, it has used other means to price software but it has found that its customers are most satisfied when they can easily identify and predict what their licensing fees will be.
It says that as technology evolves, software licensing models evolve to be in concert with those changes, often driven by hardware advances.
In addition to perpetual licences, term licensing is available for all products, ranging from one to five years. Five-year licences are available at 70% of perpetual licence price; four-year at 60%, three-year at 50%, two-tear at 35% and one-year at 20%.
Oracle says there is no additional cost if the software is used for a specific project.
It has an ASP policy but the standard Oracle licence and services agreement doesn’t allow licences to be on-sold.
The path least taken
Government departments are closely watching a trial of open source software by the country’s 21 district health boards, which are keen to reduce the licensing fees they pay to Microsoft.
The Wanganui District Health Board is undertaking a pilot to ascertain the effectiveness of open source at the lower end. The pilot will be about the strengths and weaknesses of the respective software, not about the environments.
Lawrence Millar, director of the e-government unit, which is taking the lead for the government agencies, says they’re pleased about the trial. “We should get out of it some facts about operational issues that will be helpful in the negotiations.”
Negotiations begin this month between Microsoft and a public sector committee, on which the district health boards will be represented, for the G2006 iteration of the government’s bulk-licensing agreement with Microsoft. The initial agreement was signed in 2003.
The health boards have estimated they will have paid more than $20 million in licensing fees to Microsoft during the three years of the current agreement.
The Wanganui pilot seeks to establish how many users there are with just basic computing needs and whether it is possible to meet those with a non-Microsoft environment. It is based on SuSE Linux and OpenOffice.org.
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