Software Licensing Strategies

SynopsisIt is no exaggeration to describe computer software as the lifeblood of today's business and commerce. It is also the largest category of capital spend in the US, ahead of other categories such as industrial equipment and transportation equipment. Software technology has become embedded in almost every aspect of business today. Whether business is being conducted purely electronically, for example an on-line store, or along more traditional lines, such as a transportation company or a local authority, somewhere in the current processes there will be crucial software components keeping the organisation operating effectively and in control of its operations. Although some may argue whether the business world has gained the required amount of productivity and benefit from application systems, few organisations would be able to operate effectively today without these systems.

Software is a unique product, in that it is not a commodity in the same way as, for example, books and CDs are. It is an intangible asset with multiple distribution mechanisms. The perceived value of a software product is wide ranging, initially based on its price but in the end based upon the use and benefits that customers get from it. After the sobering effects of the economic downturn on the IT industry, the outlook is now somewhat brighter, and both vendors and customers are looking for wins. Whereas because it is their business, vendors are smarter than their customers when it comes to software licensing, customers now have the opportunity to correct this imbalance and regain their influence. Vendors will be looking to beef up their prices, but buyers will be seeking value for money and Return On Investment (ROI) more than at any previous time in the IT industry's history. In Butler Group's opinion, the strategy of buyers should be to retain flexibility, reduce costs and increase the value of their software by gaining greater functionality.

Increasingly, organisations should be looking for opportunities to match their licensing strategies more closely to their business models, further aligning IT with the organisation's overall objectives and strategy. They need to be considering options such as pay-per-use licences, term licences, shared �risk and reward' methods, and hosted software services. In order to connect licensing costs to business performance, they need to look for methods of sharing the pain, as well as sharing the gain. New technologies will also aid the emergence of new licensing models to closely align customer benefits to software costs. Subscription-type licensing models promise the vendor a continuing relationship with the customer, making it more likely that additional business will be forthcoming, and the customer should experience a level of commitment from the vendor.

Unless customers have the facts, they cannot negotiate from a position of strength. They also need to have the details of licensing agreements available for the checking of vendor charges, as they should not assume that vendor back-office systems can cope with all contract terms that may be agreed. There is also the matter of compliance with the increasing focus on stamping out software piracy and regulatory pressures for better IT governance. Butler Group believes that to support these two areas of compliance and negotiation, organisations should utilise a Software Asset Management (SAM) solution. Organisations without a SAM solution should conduct an immediate audit of the licences that they hold and the software that they use.

Key FindingsKey Findings

Butler Group believes that there is a fundamental shift in the way that both vendor and customer organisations are approaching software licensing.

The customer is regaining the balance of power in licensing negotiations and demanding that vendors are flexible.

User organisations must negotiate with vendors from a position of strength. To do this they need up-to-date information about their software products and their usage.

Software drives global business and commerce. It is the largest category of capital spend in the US at more than 20%.

Organisations should consider options such as pay-per-use licences, term licences, shared �risk and reward' methods, and hosted software services, which more closely relate licensing costs to business revenues.

Software Asset Management (SAM) solutions are becoming a necessity to ensure compliance with licence agreements, monitor and track software invoices, and provide information for management and negotiation.

Both vendors and users will benefit from less piracy, and poor software asset management can prove expensive and painful for organisations and their officers.

Major software vendors are stressing that they are offering customers flexibility and choice.

Organisations need to undertake a strategic review of their software licensing. New business models provide opportunities to consolidate licensing costs.

Organisations should evaluate the Open Source Software (OSS) market carefully as an alternative to software that is traditionally licensed. Currently, SCO's aggressive actions are causing disruption and uncertainty in this market.

Management Summary

Introduction

It is no exaggeration to describe computer software as the lifeblood of today's business and commerce. It is also the largest category of capital spend in the US, ahead of other categories such as industrial equipment and transportation equipment. Software technology has become embedded in almost every aspect of business today. Whether business is being conducted purely electronically � for example, an on-line store � or along more traditional lines, such as a transportation company or a local authority, somewhere in the current processes there will be crucial software components keeping the organisation operating effectively and in control of its operations. Although some may argue whether the business world has gained the required amount of productivity and benefit from application systems, few organisations would be able to operate effectively today without these systems.

The software industry as we know it today began over 30 years ago when IBM unbundled its software products from its mainframe hardware. Since that time there have been many developments in technology, and most of the software vendors that we recognise today have been formed and grown up in that time period.

Software is a unique product, in that it is not a commodity in the same way as, for example, books and CDs are. It is an intangible asset with multiple distribution mechanisms. The perceived value of a software product is wide ranging, initially based on its price, but in the end based upon the use and benefits that customers receive from it.

After the sobering effects of the economic downturn on the IT industry, the outlook is now somewhat brighter and both vendors and customers are looking for wins. However, in general, vendors are smarter than their customers when it comes to software licensing, but users now have the opportunity to correct this imbalance and regain their influence. As to whether it will manifest itself in the same way as the powerful user groups of the 1970s and the 1980s, when these groups wielded considerable power over the policies of the major IT manufacturers, remains to be seen. Vendors will be looking to beef up their prices, but buyers will be seeking value for money and Return On Investment (ROI) more than at any previous time in the IT industry's history. In Butler Group's opinion, the strategy of organisations should be to retain flexibility, reduce their costs, and increase the value of their software by gaining greater functionality.

Business Issues

Organisations are looking to reduce procurement costs by reducing the number of vendors that they trade with. Customers are demanding flexibility and choice. It is significant that in our discussions with major software vendors in preparation for this Report, without exception they have stressed the flexibility in their software licensing policies and the choices available to their customers. Customers need to undertake a strategic review of their software licensing and new business models offer organisations the opportunities to consolidate licensing costs and provide greater flexibility to relate the spend on software to business requirements. Increasingly, organisations should be looking for opportunities to match their licensing strategies more closely to their business models, further aligning IT with the organisation's overall objectives and strategy. They need to be considering options such as pay-per-use licences, term licences, shared �risk and reward' methods, and hosted software services. In order to connect licensing costs to business performance, they need to look for methods of sharing the pain, as well as sharing the gain. New technologies will also aid the emergence of new licensing models to closely align customer benefits to software costs.

The subscription-type models of licensing also have benefits for both software vendor and customer. The vendor has a continuing relationship with the customer, making it more likely that additional business will be forthcoming, and the customer should experience a level of commitment from the vendor that was not achieved with other up-front licensing models. Of course, it is essential that organisations should be aware of the current licences that they hold and the usage of the software products in their organisation. Not only is this information vital to ensure that they are complying with their software licence agreements, but also so that they have the necessary information to use in negotiating the best deals from the software vendors. Customers need to be able to negotiate from a position of strength and it is only through possession of the facts that they are able to do this. They also need to have the details of licensing agreements available for the checking and approval of vendor charges. Customers should not assume that vendor back-office systems can cope with all contract terms � they sometimes cannot, or the information has not been correctly relayed to the vendor's invoicing system.

Butler Group believes that to support these two areas of compliance and negotiation, organisations should utilise a SAM solution. It is not only in the interests of software vendors that piracy is controlled and reduced; it should also benefit customers through keener pricing. If organisations do not currently have a SAM solution, we believe that they should conduct an immediate audit of the licences that they hold and the software that they use. When we refer to compliance, there are a number of factors that are relevant. Although its importance cannot be minimised, there is not only the increasing concentration on stamping out software piracy supported by software vendors and industry bodies such as the Business Software Alliance (BSA) and the Federation Against Software Theft (FAST), there are also regulatory pressures for better IT governance, incorporating the maintenance of software licences to comply with Sarbanes-Oxley and Basel II regulations.

Poor software asset management can mask software piracy, and this can prove to be very expensive for an enterprise and its officers. Lack of intent is deemed to be no defence in piracy cases. Small to Medium-sized Enterprises (SMEs) are reported to be the worst offenders, although it is also surprising that in a recent survey of piracy in business, the IT industry itself was found to be the biggest culprit.

Market Issues

Major vendors have been active in evolving their strategies to keep up with developments in business requirements and technologies. For example, Computer Associates completely changed its business model from the up-front logging of software sales to subscription accounting where sales were classified as subscriptions. Also, Microsoft incurred the wrath of a significant share of its customers when it introduced Software Assurance. A number of vendors are also recognising the increasing need to provide licensing models for hosting. However, the software market is in a period of disruption, with mergers and acquisitions coming thick and fast. Recently Novell acquired SUSE, the Linux distribution company, and as we went to print, Oracle was making further efforts to persuade PeopleSoft shareholders to accept its offer. The advent of OSS is also creating new opportunities as businesses contemplate taking that route to lower costs, or using OSS as a negotiating lever. The progress of Linux is unabated, despite the fear, uncertainty, and doubt caused by the SCO saga. As SCO continues what many believe to be an ill-founded pursuit of IBM and Novell, the leading enterprise Linux distributors, Red Hat and SUSE, as well as other suppliers, are indemnifying their customers against any losses sustained as a result of SCO's actions.

Linux and other OSS products are set to play a greater role in businesses, where the Total Cost of Ownership (TCO) arguments are especially important. Taking the case of Linux, both Red Hat, profitable for the first time and taking a more enterprise-focused approach by dropping its developer edition, and SUSE, with the backing of Novell, provide the maintenance and support necessary for customers to rely on the platform. Butler Group believes that Linux will, in future, certainly take on a more commercial aspect by added-value distributors. However, we believe that it will remain as OSS because of the GNU General Public Licence issued with it.

To reiterate the key messages for organisations, this is a time of major change in the licensing of software. Organisations have the opportunity to obtain the flexibility and choice that they want from vendors, and where possible, they should be looking for licensing models that relate to their business. However, in order to achieve this, they need up-to-date information and metrics about their software products and their usage. SAM solutions are key in providing such data, and in ensuring that organisations are compliant with their software licences. Software piracy is painful for both organisations and individuals that are found guilty of non-compliance, and is a significant drain on the well-being of the whole IT industry. If enterprises do not have a SAM or similar solution, they need to undertake an immediate review of their software licensing.

Report Structure

The Report looks at the licensing issues facing organisations, software market issues, the various licensing models being deployed by the major software vendors, and recommended policies to be adopted by various types of organisation.

The Report shows:

The customer is regaining the balance of power in licensing negotiations.

The need for users to undertake a strategic review of their licensing.

How customers should consider options that relate to their business.

How SAM solutions are necessary for customers for reasons of compliance and negotiating information.

How software vendors are reacting.

Vendors Included in the Report

The Software Licensing Policies of:

BMC Software

Citrix Systems, Inc.

Computer Associates

Hewlett-Packard

IBM

Microsoft

Novell

Oracle

PeopleSoft

Red Hat

Sun Microsystems

SUSE LINUX, A Novell Company

Software Asset Management Solutions from:

Altiris � Altiris � Compliance Suite�

Computer Associates � Unicenter � Asset Management

IBM Tivoli � IBM Tivoli License Manager

LANDesk � LANDesk � Management Suite 8

Microsoft � MSIA, SMS 2003

Remedy, a BMC Software Company � Remedy Asset Management, Version 5.5

Report Structure

The Report has been structured for ease of use by separating sections that will be relevant to different people within the organisation.

Section Two � The Future of Software Licensing

Following the Management Summary, this sets the scene, with The Big Picture � Issues and Policies, and External Influences. It includes the section on Upgrade and Maintenance of software, on Compliance with the effects that this has on software issues, and finally, Market Issues that are driving the software market.

Section Three � Licensing Methods and Models

This part of the Report takes a closer look at the Types of Licence, a section on Open Source/Free Software, and a look at Software Asset Management, a method of controlling software licences and guarding against the dangers of software piracy.

Section Four � Licensing Strategies

This section describes the various Licensing Policies for Large Enterprises and Organisations, Licensing Policies for Small and Medium-sized Enterprises, and Licensing Policies for Public Sector Organisations.

Section Five � The Industry Approach to Licensing

This section looks at the policies of the major software vendors, and the regulatory bodies that are having effects on the software market.

Section Six � Product Profiles

This section gives an overview of the major vendors and their individual licensing policies, and vendors of software asset management solutions and their products.

Section Seven � Case Studies

This section presents a number of case studies of organisations and their licensing strategies.

Appendix A

Provides some background on the origins of the software industry.

Appendix B

Some public policies that have a bearing on software and its licensing.