Online licensing stresses need for SAM

By Staff -- Purchasing, 8/24/2000

Few in the industry will deny that one of the biggest trends in software distribution is the move toward automating the process: online sourcing or e-procurement.

As ordering software on the Web becomes more commonplace-researchers at GartnerGroup estimate that by 2002, 80% of suppliers will have online capability-suppliers will be offering corporate buyers new licensing options. And, at the same time, buyers will have more responsibility for reducing costs of software. (Gartner also shows that IT spending is expected to rise as a percentage of a company's total revenues, with these expenditures becoming especially important at financial institutions and telecom firms.)

Key to a successful software purchasing strategy then is a good software asset management program (SAM). At the GartnerGroup Software Asset Management conference, or swami as it is known by attending software acquisition professionals, held recently in New Orleans, Patricia M. Cicala, vice president, worldwide asset management practice, examined some of the more dominant trends in software licensing through 2005, and their impact on the sourcing function.

Software asset management, as defined by Gartner, is the "cohesive merging of the physical, financial and contractual elements of the software asset."

At her session, Cicala told attendees that they've got to get involved in SAM from a proactive stance. "You've got to become of value to the business from the planning, decision, purchase and management of the software asset. You cannot just get involved at the purchase stage any longer. You have to start planning, that's what is going to make it of value. It's going to be a necessary evil. It's here to stay. There are close to 400 people at this conference. This means that your business cares about this or they would not have sent you."

As Cicala sees it, relationships with suppliers are crucial. There's less competition among software suppliers and more lock-in to agreements. "Corporate buyers have to depend on their relationships with suppliers. It's like a marriage. Buyers have got to work to make it work. It's not just negotiation anymore."

One of the first trends Cicala examined during her presentation is e-business integration, which she refers to as a "new Industrial Revolution." As such, corporate software buyers are going to have to become more agile. "Speed and agility are not normally incorporated in software licensing," she says. Her advice: "Check your licenses. See if speed and agility are up to snuff."

In the era of e-business, Gartner anticipates that there will be new licensing models. "It will foster a new explosion of brand-new licensing," says Cicala.

A second key trend is that software buyers will be constantly challenged to lower software costs. Best-practice organizations that have good asset management programs in place can reduce costs 10%-30%. "If you are already managing these assets," Cicala says, "you should set a goal for yourself of setting a per-unit cost for that software and try lowering that cost by 5% to 10% per year."

Most organizations are going to have to simplify, segment and standardize.

Segment-users and capacity-by platform, then by supplier, suggests Cicala. Most organizations will be forced to do this over the next few years because software licensing will dictate that they standardize. As such, corporate buyers will have to consolidate their company's contracts and clarify contract terms and conditions. It isn't easy.

Standardization doesn't mean homogenization. There is no one right solution. Cicala explains: Standardization exists as a program of flexibility that addresses your business while narrowing your software portfolio so that you can have the software in-house that's most critical to your business, that's giving you the best return on the investment, and that is well suited to business needs and performance."

As such, buyers no longer will be entering into short-term agreements with software suppliers. They will have to standardize on a methodology in which they are thinking five, 10, 20 years out. Software has a much longer life cycle than hardware. It becomes embedded in the business. Buyers will want to make standardization decisions based on key management issues. "You've got to become one of the more important and critical pieces of what the business thinks, plans, and the value equation your company is offering its customers and its clients," says Cicala.

Licensing trends

It's the collective opinion of the SAM group that hardware capacity base models are re-emerging. Independent software suppliers are trying to charge for full capacity. Perhaps most important is that some of the newer companies like i2 and Blue Martini and some of the other emerging companies are experimenting with flat maintenance fees. For the first time analysts at Gartner are seeing maintenance fees with no tie whatsoever to licensing. Buyers familiar with software licensing know well that maintenance fees have always been tied somehow to the licensing agreement, with very few exceptions. "Now, in this new economy, maintenance in and of itself is a price," says Cicala. "It doesn't necessarily go up with the license fee but it can escalate on its own."

As a result, service levels are going to become very important. Understanding how software suppliers determine their fee, especially with emerging software suppliers, is going to be critical. These companies have not been in this business very long. Some are making it up as they go along. They are experimenting.

"Nevertheless, as software buyers, you have to be really careful," says Cicala. "What does that flat maintenance fee mean to you? What would it have been if it were tied to the license fees under the traditional percentages? (For mainframe software, traditionally, it's 15% to 20% of the list price. For distributed software, it's 17% to 26%-depending on the level of maintenance-of the net discount price). So look at the new way and look at the old way and try to get relative value."

Over the next two years, software suppliers will phase out concurrent user licenses. Later, perpetual licenses will become non-existent. Buyers will continue to see enterprise licensing and multi-platform licensing. Gartner expects a utility model to emerge: Functionality will be unbundled and buyers will pay for it separately. Perhaps most important, new versions will be unbundled; there will be a separate fee, with no maintenance.

Beware the Internet

Cicala says buyers should be aware of the pitfalls to purchasing software online. Among them: ucita.

(The Uniform Computer Information Transactions Act passed in July 1999, to clarify which laws may apply in disputes between software publishers and software users. One effect: The software industry is using ucita to make terms of its shrinkwrap license terms clearly enforceable.)

"If you don't have a contract that precedes or supercedes ucita that says your software users within your company are not allowed to commit you to ts and cs by clicking okay on the Internet, you are liable," says Cicala. "Of course, if you write overriding contracts that preclude and override ucita you will not be subject. There are many organizations that haven't thought about this. Look at your licensing fees. Make sure to protect yourself."

According to Gartner, there may be two predominant types of licensing over the next five years that are really going to affect the way users and suppliers deal with one another: one is the ATM theory. This means buyers will have to commit up front to a certain number of licenses. Buyers will pay for that number of licenses, committing conservatively or asking for overdraft protection meaning they overlicensed and used more licenses and they're allowed to do this but there's a tool to account for it. Companies get a bill and pay the overdraft fee.

Cicala suggests buyers "think about what your licensing is going to look like. You have to be creative. You have to set up all kinds of contingencies, especially in a world where e-procurement and e-licensing is going to be prevalent and you're going to have hundreds and thousands of individuals in your organization who are going to go out there on the Web and license." She compares this situation to users being able to go to a retail store to purchase software with a credit card.

Another type is utility-based licensing. Cicala suggests buyers "be careful because it's flexible-especially for small to midsize companies. Once again, software licensing is not typically flexible." She likens utility-based licensing to a consumer receiving a telephone bill. "There are people who make money off your phone bill because you don't know what you're looking at and your usage changes. It's going to be very difficult to track. We don't, however, believe utility will be prevalent early on."

Another trend Gartner has observed: Suppliers are getting very creative about trade-in programs. Under these programs, buyers are able to swap one platform for another. "You're able to trade seats for capacity and capacity for seats so you will be constantly trading different types of licensing models. This is going to cause huge complexities in your licensing agreements. You will have to allow for all these trade-in provisions."

Used software refurbishing is still another trend. Here, buyers can trade an old version for a new one and be creative about it. Several suppliers are doing this (many of them in the new economy and e-business).

What's a software buyer to do? Again, Cicala suggests they evaluate their company's license agreements. "Read about service levels. Read what it says about what's included in maintenance. Hardware agreements have thick SLAs (service level agreements) with milestones. Software license agreements maybe have a paragraph. Start to develop SLAs. Look at the language in your contracts. You want to protect yourself."

Ts and Cs

Other areas buyers may want to examine:

As always, scope of use: who can use the software and how can it be used. This is more important than ever because there may be outside partnering occurring. Scope of use has to be very broad.

Price for original and additional units. Buyers are going to be dealing with so many different types of units, so many different suppliers. Parameters, especially for additional use in the new models that are going to occur-ATM and utility models.

Allow for business change. Change is inevitable. Software use pre-, during and post-business change is very important.

Clear definitions of terms used throughout the agreement, typically the first page of a contract.

Final key issue: There is no such thing as business and IT alignment any more: They are now one and the same. The CIO is now responsible for business value, which is probably not their background. "You've got to help them," says Cicala. "You've got to adjust the software program and you've got to start educating the CIO organization. Our advice: If you're uncomfortable dealing with the business, study, get outside help."

Segment, simplify, standardize