Digging into the details
Perhaps the most notable licensing tweaks have come from Microsoft, which in May revamped its worldwide licensing program for enterprise applications by offering software by subscription and replacing its Upgrade Advantage program with its new Software Assurance offering. Software Assurance contracts commit customers to purchasing upgrades at a discounted rate on a periodic basis, rather than purchasing the upgrade when the customer needs itâ€"a move that could raise fees from 33 percent to 107 percent for most customers upgrading every three years, according to Gartner.
In 1997, the company had eliminated concurrent-use licenses on Office products. That option had allowed customers to buy fewer licenses than they had actual users, as long as the products weren't used by all of them at the same time. Many companies had saved millions by using the software-sharing option. In fact, Gartner estimates that a company with 5,000 desktops will have paid 224 percent more over the course of five years as a result of the change.
Microsoft's not the only one playing this game. Last month, Oracle announced plans to give companies several options designed to encourage enterprise customers to rent Oracle software as a service. And last year, enterprise software vendors including IBM, Sybase and Computer Associates International announced changes to their pricing structures.
According to Robert Frances Group's Robinson, many of these new strategies take actual workload into account, rather than using server capacity or size as the metric for software pricing (see chart, below). And, say experts, such new licensing schemes could increase software costs as e-commerce and the Internet boost service workloads.
"With all of these machinations, IT managers really need to understand a vendor's pricing model before working with a sales representative on a deal," Robinson said. "The pressure on software vendors to show profit is obvious, and this is certainly good timing for enterprises to really put pressure on vendors to strike a deal."
Indeed, IT managers aren't taking the licensing changes quietly. According to Microsoft representatives, the software company has given enterprise customers five more months to upgrade to the Office XP suite in response to customer requests. Customers will now have until Feb. 28, rather than Oct. 1, to make the change as part of the company's controversial new licensing program, Software Assurance.
Software Assurance contracts commit customers to buying operating system and application upgrades at a discounted rate on a periodic basis, rather than purchasing the upgrade when the customer decides the time is right. The program lowers costs for businesses that upgrade software frequently but will force those that upgrade less frequently to pay more, experts say.
Microsoft's changes to its Worldwide Licensing Program have put many IT managers into a predicament. At Octave Communications, Kyle Lippert, director of IT, has a choice between buying Office XPâ€"and buying into the Worldwide Licensing Programâ€"now at a discount or in the future at full price. Octave, which provides audioconferencing technology to telecommunications carriers, has Office 97 installed on all its desktops. Because the company seems to be operating fine with its current suite of desktop applications, Lippert is uncertain as to whether or not he wants to commit to Office XP right now.
"As for right now, my short-term plan is that I have no short-term plan," Lippert said. "I will upgrade if the software meets our business strategy. Companies are really tightening the reins on their licensing agreements, and we have to be on top of them before we sign any deal."
Experts say IT managers need to do the math when vendors offer discounts on software upgrades purchased now and refuse to offer savings to IT managers who choose to wait until a later date. While it's true that enterprises may see immediate cost savings on software purchased at discount, IT managers who push their deployments back two or three years can see the same savings, whether through purchasing hardware already preinstalled with the software or by dealing with third-party distributors later on.
"Software vendors will have every incentive to make money whether it's now or later," Robinson said. "IT managers will still have every bit of leverage they have now when it comes time to negotiate a new arrangement. The difference is, because you've saved 12 or 18 months waiting, it could very well end up being cheaper to wait."
As Lippert contemplates his decision on Office XP, he is pressuring his software vendors to throw in services such as consulting and access to higher-level support channels. Lippert, who up until last month was director of IT at First Virtual Communications, negotiated with Microsoft for a software audit earlier this year. Microsoft employees went on-site at First Virtual Communications and helped Lippert define an asset management program.
"It was a nice process for us to go through free of charge," Lippert said. "From an IT management perspective, licenses have been difficult to manage, and this audit allowed us to see what we had and what we needed."
While Lippert did not do so, experts also recommend negotiating with vendors for so-called liability clauses. For example, if an enterprise signs an agreement to purchase 25,000 seat licenses over a three-year period but plans to purchase only 500 seats the first year, it should ask its vendor to bill according to how many seats were actually purchased. Traditionally, a software vendor will average the price over the length of the purchase agreement.
Experts also recommend that IT managers consider multinational software licensing agreements, since purchasing software for multiple lines of business worldwide in one fell swoop rather than by specific department often means volume discounts.
There are tricks to negotiating multinational software licensing agreements, however. Robinson warns that agreements need to stipulate which customer service center an IT manager located in a remote office should call in order to receive support for products. He also recommends hammering out exchange rate issues beforehand.
"We tell IT managers to handle the purchase in such a way that they can take advantage of exchange rates to save a few hundred dollars here and there," Robinson said. "If the ruble is down against the dollar, it makes sense to take advantage of that."
When it comes to purchasing software for overseas locations, however, IT managers need to be careful. Experts say many software vendors, particularly those in the mainframe and database arenas, dramatically raise prices to make up the margin on software sold in countries where it's common practice to give discounts of anywhere from 10 percent to 30 percent. As a result, IT managers need to look for consistent pricing across all countries and carefully evaluate whether that 30 percent discount will really save their enterprises money.
In the event that a software vendor refuses to back down, experts say the tried-and-true methodâ€"pitting the vendor against its competitorsâ€"is still the best bet.
Looking at merger and acquisition activity in the power industry, IT managers at National Grid USA, a subsidiary of National Grid Group, knew earlier this year they needed to prepare for possible growth in mainframe processor power in a hurry. The company was planning to move from an IBM 8672 R55 265-mips (million instructions per second) system to the IBM 9672-X37 480-mips system and wanted the best possible price on any new licensing agreements.
Waterman contacted the company's business intelligence applications vendor, CompuWare, in hopes of negotiating better pricing agreements and longer contract periods. When CompuWare refused to budge, he immediately began asking competitors such as Serena Systems, Macro4 and IBM for price quotes.
Macro4 agreed to a long-term contract that included free upgrades. Compu Ware, on the other hand, stayed firm on its licensing terms. The result? Waterman is in the midst of phasing out all CompuWare products from his mainframe environment and swapping in Macro4 business intelligence products for application availability, interactive testing, fault diagnosis and data manipulation, all because CompuWare simply wouldn't cut the company a deal.
"The CompuWare pricing model as it was would have killed us because we were involved in a pretty hefty upgrade," Waterman said. "It was a conscious-based decision to switch to Macro4 because of CompuWare's pricing policies."
Of course, Waterman isn't the only one contemplating a break with an enterprise software vendor. Robert Frances Group's Robinson said that many of his company's enterprise clients have been looking at alternative products in response to more stringent licensing policies. Financial services companies, for example, are now testing the Linux operating system as an alternative to more expensive software packages from Sun Microsystems Inc. and Microsoft.
And some organisations are looking at open-source applications as a way to bypass licensing hardball. Sun landed the US Defense Information Systems Agency as a customer for its free StarOffice desktop suite after the government agency decided it could not afford Office products and was unable to negotiate better rates from its vendor, Applix Inc. Last month, DISA began to install StarOffice 5.2 on 10,000 seats in 6,000 locations.
"We evaluated StarOffice as best satisfying our requirement," said Lt. Col. William Hoppe, chief engineer, Global Command and Control System for DISA, in a statement.
As software vendors change their licensing models, IT managers will find other ways to reduce costs, experts say. Nonetheless, as vendors begin selling software by subscription and over the Internet, new models will continue to evolve.
"Just because the licensing models change doesn't mean traditional tactics such as lengthening the contract term, switching vendors or looking at other alternatives are no longer applicable," Robinson said. "Continue to put pressure on software vendors in order to ensure the most bang for your buck."
Open source = no problems