Software Licensing Problems, Opportunities

and a Process for Solution

One of the key concerns in the software industry is how to deal with the issues of "software
licensing". Increasingly customers are putting more pressure on software development firms to
provide them with software solutions in a manner that matches their use of the software. This
pressure is intensifying as IS managers pay more attention to managing their software costs.
Software development firms see the issues from a different perspective. They are greatly
concerned with unrealized revenue and excess costs in the form of software piracy, unauthorized
use, excess discounts and lengthened sales cycles. nd !oth sides see high administrative costs.
These factors have led to a situation where many costly, adversarial relationships have
developed !etween software firms and their customers.
There is an increasing need for software development firms to !e engaged in the "uestions of
"#ow do we remove software licensing as an o!stacle to sales$" and "#ow can we !uild long
term, profita!le !usiness relationships with our customers$" These "uestions must !e answered
in the face of a rapidly changing technological environment.
The answer lies in context and a commitment to an ongoing licensing process as technology and
!usiness re"uirements change. Software developers must provide products and services to
customers in a manner that fits their customers% !usiness. They must recognize that their
customers are not homogenous& that they may have different use patterns of the software and
that they may have different !usiness re"uirements. The conse"uences of not taking this
approach is to !e vulnera!le to the "price'discount death spiral" and to (eopardize the potential
future financial well)!eing of the firm.
To uncover the !est solutions to the issues surrounding software licensing, we first have to look at
the !usiness transaction !etween the software provider and customers. There are two
components of value for which a price is paid* value for function +technical pro!lem solution, and
value for product delivery +!usiness pro!lem solution,.
-roduct delivery for software is made up of a num!er of components, pieces of which are often
referred to as "software licensing." These components are*
-hysical delivery -ricing
.etrics /iscounts
0icense periods Support and .aintenance
0icense management Tech support
1hange in use level 2ug fixes
-latform .igrations -roduct enhancements
.etrics +e.g. per user, per node, per transaction, and license periods form the !asis of value while
pricing and discounts create the degree of value.
Software product delivery is analogous to a manufacturing process where a supplier can
rewarded with price premiums for "(ust)in)time" delivery. If the delivery value is inferior or does not
meet customer needs, the effect is to devalue the functional or technical value !y giving higher
discounts or creating expensive special deals.
The apparent driving force !ehind the changes in software metrics is and has !een the pressure
applied !y customers on software providers to have costs correspond to actual use. #owever, on
closer examination the driving force is more the opposite side of the same coin. 1ustomers have
!een primarily reacting to paying for excess capacity. This is caused !y a num!er of things,
including situations where metrics and license periods do not match use, purchase for peak use
leads to idle assets, and fear of contention for licenses leads to ever purchase.
n example of the changes caused !y the pressure from customers has !een the movement
from node locked licenses to concurrent use licenses in the 34I5 market. This change however
did not satisfy the entire capacity issue. .any customers still have a concern with peak loading
and are unwilling to pay for peak loads when their average use is much lower. This has lead
some firms to offer monthly use licenses as an option to perpetual or annual use license periods.
In addition, some customers have !egun to realize that when purchasing a floating license, they
are actually purchasing 67 user hours. This again gives rise to capacity concerns. In some cases,
customers want to float licenses across the world for 67 hours or pay less for the licenses they
have for use in a specific location. 3nfortunately, the !usiness assumptions +often unarticulated,
underlying software providers pricing decisions assume a 8)9: hour use day. In response, many
are trying to prevent world wide 67 hour use, again creating an o!stacle to sales.
The !ottom line for customers is that, at some level of cost relative to pro!lem importance the
unwillingness to pay for excess capacity drives the purchase decision and decreases the
software providers% leverage.
This, in turn, leads to pro!lems on the provider side. ;hen metrics and license periods do not
approximate use, the sales cycle lengthens and !ecomes more costly, and excessive discounting
occurs to get the deal. Special deals may also !e created and these often result in high
administrative costs.
<ven if the metrics and license periods match use, without the software asset management tools
to measure the use according to the metrics and periods, a great deal of unauthorized use may
occur. This comes primarily from customers not knowing what they are using, rather than outright
piracy. s an example, some software providers have sold their software !ased on the num!er of
concurrent users without administrative tools. ;ith neither customer nor software provider
knowing the actual use, costly, adversarial relationships can develop.
The piracy issue also needs to !e addressed since it can !e source of unrealized revenue. 2efore
a decision regarding how !est to manage the selected product metrics can !e made, it is
important to uncover the software provider%s !eliefs a!out piracy and unauthorized use across
account category, geography and channel of distri!ution. It is important to articulate !eliefs
regarding each of the intersections to formulate appropriate !usiness decisions. =or example,
many software providers !elieve that piracy in not a ma(or concern within ma(or accounts in the
3.S., even though unauthorized use does occur. In this situation, !enign license management
may !e much more effective than the hard core control and compliance re"uired in the Third
;orld to com!at piracy.
The !ottom line for software development firms is that at some level of revenue loss or excess
costs, the unwillingness to suffer this loss drives the adoption of new delivery methods and
appropriate license management.
Software metrics and license periods that approximate use along with appropriate license
management decisions can !ring the !usiness transaction e"uation !ack into e"uili!rium. ;hen
this happens the !usiness transaction gets less costly and more profita!le for !oth sides.
The metrics or !asis of value decision is the starting off point for esta!lishing value for product
delivery. The initial step is to determine whether a software product should !e considered as a
"tool" or as an "asset" that should !e managed according to a dynamic usage metric.
Software products that that fit the "tool" category are usually relatively low cost and'or the
product%s value is driven !y the a!ility to solve potential pro!lems at any time rather than actual
use. Typical products that fit this category are word processors, spread sheets and even
compilers. Typical metrics are either node !ased or named user +not floating, !ased. =or these
static metrics, the num!er of licenses re"uired is relatively easy to determine for the salesperson
and the customer. In most cases these metrics are much easier to administer than dynamic
licenses.
s value increases, products are viewed more as assets. In order to manage these assets well,
dynamic licensing metrics need to !e chosen that closely approximate use or "work
accomplished". These software products can !e segmented into categories according to
functional characteristics and usage characteristics& different licensing metrics may fit each of
these segments.
1lient)side software tends to !e interactive intensive while server)side software tends to !e more
compute intensive. =or interactive intensive applications the performance of the system running
the application has relatively little effect on the use or amount of work accomplished over a
specific period of time. =or these applications, license metrics +e.g. concurrent users, should !e
independent of processor performance.
1onversely, for compute intensive applications that operate primarily on a server, processor
performance significantly effects the amount of work accomplished over a specific period of time.
=or these applications processor performance must !e taken into consideration when selecting
metrics if revenue to the software developer is to correlate closely to work accomplished using
the software. Some developers of this application category are selling their products on a user
!asis, !ut the cost per user varies with system performance.
/ynamic licenses can re"uire a much greater level of administrative support and can !e more
difficult to sell. ;ithout good usage data, neither the salesperson nor the customer may !e a!le
to determine the num!er of licenses re"uired to support the users on a system at the initial sale.
s a result, the sales cycle can !ecome longer and more costly. To effectively sell products
according to dynamic metrics generally re"uires a dedicated sales force that has a good
understanding of customer usage patterns.
2ecause of the difficulty in selling dynamic licenses and the potential administrative !urden, it is
sometimes wise to consider static metrics that approximate the underlying use. One example of
these static metrics is from the human resource market where the software is sold !y num!er of
employees. This metric approximates the underlying work accomplished regardless of where the
software is running or how many users are accessing it at any time. The metric is easy to
understand, sell and administer.
The key to metric selection is to choose metrics that approximate use where use is defined as
work accomplished. 1urrent literature emphasizes the !enefits of user)!ased licensing, !ut the
decision maker must !e aware that users approximate use in only certain situations. =or instance,
user !ased license metrics may approximate use well for O0T- applications, !ut when the same
product is used at night in !atch mode the approximation no longer holds up.
.etrics, license periods and metric management decisions can all !e made independent of
pricing decisions. #owever, this is the critical point where the process of change to new software
delivery methods often !reaks down. The key element that is missing is customer usage data.
;ithout via!le usage data, it is difficult for the software provider to select a price for the new
metrics. ;ithout usage data, the 1=O at the provider can, and often will, stop the process until
the impact to the !ottom line can !e determined.
Often the customer also is not aware of usage patterns for specific products and as a result has a
difficult time determining if the new model and the price is a good deal or a !ad deal. This puts
another road!lock in the path of a successful !usiness transaction.
The customer is in control of the usage data, !ut may or may not have access to it. This again
speaks to the need for software providers to develop strong long)term !usiness relationships with
their customers so that usage data can !e shared. ;ithout this sharing of usage data, the
road!locks and adversarial relationships will continue to !lock successful !usiness partnerships.
Software license management systems, originally developed as tools to ensure control and
compliance, now are transforming into software asset management systems. They can !e used
to collect usage data and ensure revenue integrity for the software provider. -rior to making any
shifts in licensing methods, it makes sense to use software license management systems to
gather usage data so sound !usiness and financial decisions can !e made later as the new
metrics are introduced in the future.
The Winning Formula
Software providers must !e committed to providing solutions to their customers% pro!lems
through advanced technology and new delivery methods. >ust as corporations make an
investment in technology, they must also !e committed to making an investment in delivery
methods. =or success, software providers must recognize they are engaged in an ongoing
process that must !alance their needs and their customers% needs with advances in
technology. nd lastly, !ut perhaps most importantly, software providers must !e committed to
providing products and services to customers in a manner that fits their customers%
!usinesses.
;ith the context of this formula in mind, software providers can remove software licensing as
an o!stacle to sales and can focus their efforts on developing long)term, profita!le !usiness
relationships with their customers. It is these relationships that results in handshakes rather
than adversarial situations, which in turn result in success for customers and software
providers.