Flexible licensing: Way to vender - CIO synergy

Shipra Arora

A common ground for software licensing between vendors and the CIOs has always been an unattainable territory. But, things seem to be changing as emerging technologies and software delivery models like Software as a Service (SaaS), SOA, virtualization are ushering in licensing models that are not rigid, besides giving users more alternatives than ever before.

However, even as licensing models are gradually becoming more flexible and user friendly, software licensing still continues to be a grey area. For one, with the utility model/pricing posing a threat to the bottomline for software vendors, the big question will be how far the vendors can sustain these new models and how well they can work their way around it. Also, with numerous models emerging on the scene and some newer technologies (like virtualization) yet to arrive at consistent licensing models, it's time for complications and inconsistencies as well.

Flexibility is the Key

A number of software licensing models have been around. Traditionally, perpetual/fixed (one time, which is like a one time payout for unlimited use. Typically, does not include upgrades/maintenance) has been the most widespread way of licensing. However, as business complexities increase and there is constant pressure on the CIOs to optimize TCO, control costs and prove they are getting the most value from their hardware and software purchases, enterprises are seeking more flexible licensing models than are being offered by vendors.

In general, licensing models have largely not been taking into account the customer's experience with software over time, nor have they been catering to their changing needs. However, as Sandeep Mehrotra, country sales manager for Adobe Systems, India, points out, there is a definite shift that is occurring in the software marketplace today where the industry is building around customer perceptions of value as well as strategic implications. In this era, new market dynamics are pushing growth of the traditional licensing models into more flexible environments-where the user can optimize usage and look into the cost implications as well.

Giving the customer perspective, Ravi srinivasan, senior vice president for Client and Technology Solutions at OfficeTiger, points out that OfficeTiger favors pricing plans that take into account actual, simultaneous usage and the direct benefit derived from applications. For the company, flexibility in site licensing and enterprise licensing schemes that adequately allow expansion both within the country and across countries will be welcomed. This holds true for many BPO service providers considering that they are now routinely setting up multi-country operations.

According to Akhilesh Tuteja, executive director, KPMG, users are seeking actual usage pricing within a distributed network rather than hardware-dependent pricing schemes. Many users want pricing to be on the basis of a software product's overall business value, ie actual usage levels, not the number of servers, concurrent users or size of the CPU.

Disruptive Influences

The door is opening up to an increasing number of alternatives, emerging models, notably subscription, utility and per-use schemes. Meanwhile, disruptive market dynamics including open source, grid-computing technologies, virtualization, SaaS, SOA, multi-core processors are further accelerating the rate of change and movement away from perpetual licensing. The license pricing models are evolving at the same time as computing environments are changing, thereby changing the software licensing ball game.

According to Tuteja, a growing number of software vendors are adopting value-based pricing models that focus on customer demand and value perception and are directly tied to the customer's insight into how the software affects its business. "And, this transition to value-based pricing is also attributable to a number of technology developments that change the way in which software is designed and delivered, including the SOA approach, component software, dynamically configurable business process execution engines, and the ability to provision enterprise software over the Internet by using a common application platform," he explains.

While subscription based and utility-based models are climbing up the popularity charts at full throttle, other alternatives are beginning to gain foothold in the market gradually. According to Asheesh Raina, principal analyst at Gartner, project based (term license) licensing is comparatively a new proactive approach adopted by vendors and SaaS is also new on the board, but expectations are high with subscription based model. "We can safely assume that currently the 'pay per use' or subscription based license is offloading benefits to the customers," he adds.

Overall, with the advent of technological changes, the licensing strategies as a whole now revolve around services and become more service oriented and simpler, opines Raina. "The alternative trends like subscription based model with varying timeframe as a parameter will see the demand. The growth, especially of open source, is directly displacing the commercial revenues of traditional software vendors (eg Applications Development Tools revenues) but at the same time some other vendor in some other form will generate the revenues based on the same technology and for the same reasons, say, by providing support and other value-added services," he explains.

Wary Customers

General wariness with perpetual model has been on the rise over the last two years. So, why are the customers wary? It all boils down to the cost dynamics. If one buys a perpetual license, one has to pay a large amount of money whether he wants to use the software for a month or for 10 years. Over a period of time, it is possible that other competing companies release better products. According to Sanjay Agarwala, director, ESS, if one has bought a perpetual license, he or she either has to write off the earlier investment or lose out on the benefits of a better product. It is for reasons such as these that subscription and utility-based licenses are now scoring higher over perpetual licenses.

According to Raina, one among the factors driving subscription based licensing is its two-way scalability. It typically takes care of the peak period of an organization. "With rapidly changing technology and requirements, it gives flexibility to organizations to try out new applications without paying upfront. Also it allows organizations to disown older/obsolete or inefficient applications/software rather quickly, which otherwise was a highly stressful activity for CIOs-to take decisions due to the heavy investments made with perpetual licensing," he explains.

Typically, SaaS too has a per-seat, per-month scheme that averts the upfront costs that are incurred in conventional licensing. The cost of entry is reduced even further by the lack of hardware and installation costs.

Vendors: Getting There

According to Tuteja, more vendors are moving from the established practice of selling perpetual licenses for packaged software to newer approaches that include software as a service (SaaS) and commercial open source. Software pricing and delivery become more and more based on the software vendor's ability to provide differentiating value for the customer. In many cases, the end game is the disappearance of license fees as vendors differentiate themselves solely through maintenance and support services.

Tuteja gives an overview of how the different software domains are making the move. Some software market segments like the server operating system and software development tool markets have already seen significant change. Others, like CRM and Sales Force Automation (SFA) markets, are now only facing the challenges of the shift. A few segments, like ERP and back-office systems, are not undergoing much change at present, but even they must eventually adapt. 

So, what's the driving force for the vendors? One of the biggest factors driving the transition for vendors is increasing customer pressure. However, the continuing market acceptance and understanding of emerging trends like hosted software and open source, grid computing technologies, virtualization, on-demand and utility computing are also showing vendors that these new methods deliver improved value and satisfaction to their customers. Also, it allows vendors to deploy their solutions in less time and increase the coverage. 

According to Mehrotra of Adobe, software vendors need to move to alternate licensing strategies in order to see growth in the years to come. The vendors today can no longer afford to stay with the traditional licensing models if they hope to see growth in revenues and provide the best services to customers. New licensing models, which provide more flexibility, are definitely the way to go in the future.

However, Ajay Bagepalli, director, Channel Sales, Autodesk India, does not accept the transition as a phenomenon that can be generalized across the board. "The Autodesk licensing model is predominantly a perpetual license one, though we do have a few service offerings that are available only through an annual subscription licensing model," he says. Around 3-4 years ago, based on customer requests, the company introduced a rental licensing option for its software. However, even after one year of its release, there were hardly any takers leading the company to finally withdraw this option. "While Autodesk provided the desired licensing flexibility, the customers found the perpetual license option to be of a better value proposition than the rental one, he adds.

"It all depends on what markets one is talking about. In the markets that we address, perpetual licenses are very much still the norm, barring a few exceptions. Having said that, there are certain software markets where the initial cost of software investment is very high. In such markets, organizational cash flow issues, combined with lack of financial/lease options for software in India, push customers to seek flexible licensing options from the vendor," he explains. Customers with highly scaleable or unpredictable business models, seeking to optimize their software investments from a resource-leveling perspective, would also prefer flexible licensing models.

The Subscription Challenge

Vendors still have to overcome some hurdles before they fully get on the subscription and licensing bandwagon. According to Sanjay Agarwala of ESS, subscription based licenses create a new challenge for vendors. They have to constantly be on their toes to ensure that they are always competitive, invest adequately in R&D, formulate smarter means of chasing delinquent clients and offer better and painless ways of subscribing and acquiring fresh upgrades.

Also, the industry is still addicted to perpetual licensing. Emerging areas like SaaS, SOA, and virtualization are relatively new and, therefore, their licensing models are yet to stabilize. "There is a lot of ambiguity, inconsistency on this front. At times it is left to interpretation and may be for negotiation value also. However, like every other change, vendors are working on more effective and innovative models," says Dhiren Savla, CIO, Kuoni Travel (India).

As Tuteja points out, one of the biggest areas for potential dispute is what gets measured and how. Software usage can be volatile and hard to predict, and coming up with a metering scheme fair to all is a fine balancing act. Customers may also have issues with how much information the software maker gets to collect. Usage patterns for key applications can provide valuable information on a company's business plans, making companies reluctant to share such data, even with the people who made the application.

However, the biggest roadblock in transitioning from perpetual licensing model toward the subscription and utility models is the threat to the vendor's bottomline. Enterprise software economics are unique. Most successful vendors earn one-third of their revenue from license revenues, one-third from maintenance fee and one-third from services income. License revenue is, of course, the driver and leading indicator: If you can't sell new licenses, maintenance and services income will go down.

According to Mehrotra, while it's becoming imperative for vendors to make the transition, for the software industry, utility pricing poses a threat to the bottomline, as it's hard to precisely predict software needs, and understand perpetual license models, that usually result in drastic overbuying. For software companies, it is about using this new approach to reach customers, segments and applications where the current model is not delivering enough value. Done correctly, it is a way to drive significant incremental revenue and margin. Done poorly, it can cannibalize revenue without any corresponding increase in share.

However, Savla shares a different opinion as he points out that the dynamics are forcing vendors to be more innovative and value driven in their positioning and creating pressure on the pricing policy and positioning but margins involved are good enough to take care of this.

Dilip Keshu, chief strategy/corporate development officer and president, ITO Division of Cambridge Solutions, provides another perspective as he points out that these emerging models may well cannibalize on the revenues for vendors but most vendors will offer the SaaS model to a very different market from their licensing model market.

Arriving at a Balance

Flexible software licensing pricing needs to develop in ways that optimize bottomline profitability for both vendors and users. From a vendor's viewpoint, the business issue is whether the pricing models result in enough revenue to fund the next generation of products. Revenue and profit estimates are more difficult to project in the changing computing environments. Tuteja informs that revenue pressure is also causing some vendors to consider shifting from the present widely-used model of a perpetual license fee with about 15% recurring maintenance revenues to other models with greater recurring revenues.

User and vendor pricing requirements must be balanced so that new as well as existing licensing approaches result in enough working capital for R&D for the development of new and enhanced software products.

Don't Write-off Perpetual

But are these subscription models likely to replace perpetual licensing altogether? According to Tuteja, while subscription-based models will be increasingly adopted by companies, one can't write off perpetual licensing. We anticipate both models to co-exist within organizations in a manner that creates maximum value for the customer. However, the focus will definitely shift from software per se to the value created by its usage.

According to Mehrotra, this change is still at a nascent stage, and we still largely have an industry that's addicted to perpetual licensing.

Vendors will need to innovate to offer both models to customers based on requirements. The focus should shift from product pushing to positioning the offering to meet customer requirements.