Intelligent Enterprise

Gartner's had a good webinar series lately, including one last month with Alexa Bona on software licensing and pricing (link to "roll your own webinar" download of slides in PDF and audio in mp3 separately), as part of its series on IT and the economy. As enterprises look to tighten their belts, software licenses are one place to do that, both on-premise and software-as-a-service, but you need to have flexible terms and conditions in your software contract in order to be able to negotiate a reduction in fees, particularly if there are high switching costs to move to another platform.

For on-premise enterprise software, keep in mind that you don't own the software, you just have a license to use it. There's no secondary market for enterprise software: you can't sell off your Oracle or SAP licenses if you don't need them anymore. Even worse, in many cases, maintenance is from a single source: the original vendor. It's not that easy to walk away from enterprise software, however, even if you do find a suitable replacement, you've probably spent three to seven times the cost of the licenses on non-reusable external services (customization, training, ongoing services, maintenance), plus the time spent by internal resources and the commitment to build mindshare within the company to support the product. In many cases, changing vendors is not an option and, unfortunately, the vendors know that.

There are a lot of factors in software licensing that can come under dispute:

• Oracle's (and many other vendors') definition of "named user" includes non-human processes that interact with the database, not just the people who are running applications. This became a huge issue a few years back when enterprise systems started being connected in some way to the Internet: Is the Internet gateway process a single user, or do all potential users have to have individual licenses?
  
• Virtualization and multi-core issues need to be addressed; in many cases, hardware partitioning is not adequately covered in license contracts, and you need to ensure that you're not paying for the maximum potential capacity of the underlying hardware, not what you're actually using.
  
• Make sure that you have the right to change the platform (including hardware or underlying database) without onerous fees.
  
• Watch out for license minimums embedded within the contract, or cases where upgrading to a larger server will cost you more even if you don't have any more users. Minimums are for small organizations that barely meet discounting thresholds, not large enterprises. Vendors should not be actively promoting shelfware by enforcing minimums.

Maintenance fees are also on the increase, since vendors are very reliant on the revenue generated from that in the face of decreasing software sales. Customers who have older, stable versions of a product and don't generate a lot of support issues feel that costs should be decreasing, especially since many vendors are offshoring support to save money. Of course, it's not about what the maintenance actually costs, it's about what the market will bear. Gartner suggests negotiating maintenance caps, the ability to reduce your maintenance if you use fewer licenses, and the right to switch to a cheaper maintenance offering. Document what you're entitled to as part of your maintenance, rather than relying on a link to the vendor's "current maintenance offering," to ensure that they can't decrease your benefits. Watch out for what is covered by maintenance upgrades: sometimes the vendor will release what they call a new product but what the customer sees as just a functional upgrade on their existing product. To get around that, you can try licensing the generic functionality rather than the specific products by name (e.g., stating "word processing functionality" rather than "Microsoft Word").

When polled, 64% of the Gartner Webinar audience said that they have been approached by a vendor to do a software audit in the past 12 months. In some cases, vendors may be doing this in order to recover license fees if they have lost a sale to the customer and feel that they might find them out of compliance. Be sure to negotiate how the audit is conducted, who pays for it, and what price you pay for additional licenses if you are found to be out of compliance. Many software vendors are finding it a convenient time to conduct license audits in order to bolster revenues. For the first time ever, I've heard radio advertisements urging people to blow the whistle on their employer if they are aware of pirated or misused software licenses, which is a sort of crowd-sourced software audit.

Software as a service licensing has its pitfalls as well, and they're quite different from on-premise pricing issues. Many SaaS contracts have minimums or do not allow for reductions in volumes, leading to shelfware-as-a-service -- consider it a new business model for wasting your money on software license fees. There is aggressive discounting going on right now -- Gartner is seeing some deals at $70/user/month for enterprise-class software -- but there may be much higher fees on renewal (when you're hooked). There are also some unrecognized fees in SaaS contracts: storage (if beyond some minimum that they provide as part of the service, which is often charged at a rate far above cloud storage on the open market), additional costs for a development and test sandbox, premium maintenance that is more aligned with typical on-premise enterprise software support, non-corporate use (e.g., customers/partners accessing the system), integration, and termination fees including the right to get your data out of their system. Make sure that you know what the SaaS provider's privacy/security policies are, especially related to the location of the data storage. Most of the Canadian financial services firms that I deal with, for example, will not allow their data to be stored in the United States, and many will not allow it to be stored outside Canada.

Furthermore, SaaS vendor SLAs will only cover their uptime, not your connectivity to them, so there are different points of failure than you would have for on-premise software. You can hardly blame the vendor if your internet connectivity fails, but you need to consider all of the points of failure and establishing appropriate SLAs for them.

Bona finished up with some very funny (but true) reinterpretations of clauses in vendor contracts, for example:

• What the vendor means: "We are going to send you software that you are not licensed to use. If you use this software in error, you will be out of compliance with this contract, and woe to you if we audit."
  
• What they actually wrote: "Licensee shall not access or use any portion of the software not expressly licensed and paid for by the licensee."
  
• What you probably want to change it to: "Licensor shall not ship any software to licensee that licensee is not authorized to use."

The summary of all this is that it's not a task for amateurs. Unless you want to just let the vendor have their way with you on a large contract, you should consider engaging professionals to help out with this. Gartner provides this type of service, of course, but there are also high-quality independents (mostly former analysts) such as Vinnie Mirchandani.

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