Business application software licensing a labyrinthine puzzle

Managing business application licensing can be like trying to navigate a maze. It is complex and ever-changing and can have huge financial implications.

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If some of the smartest minds are building more and more robust business applications, shouldn’t business application licensing evolve into a set of simple methods and metrics?

Licensing, it turns out, is more complicated than ever. Years ago business applications could be licensed by the size of the server they were installed on. But today’s multicore, multiprocessor servers are more powerful and more capable of being sliced into virtual machines that chew up simple metrics. Some software vendors cling to processor-based pricing, while others create elaborate systems that assign values to various components to create maze-like licensing tables.

What about the cloud, Software as a Service (SaaS) and things like user-based pricing? Do they provide answers? Not really. Business application licensing challenges just morph with computing trends. For some of those trends, such as cloud computing and virtualization, software licensing scenarios can have a negative effect, shackling companies to traditional computing models rather than unleashing efficiency and innovation.

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The result? Confusion for businesses that can, in the end, cost them big bucks.

“I still encounter clients whose IT operations functions have gone ahead and implemented virtualization without checking the software licensing implications and have therefore created unapproved, unreported liabilities of millions of dollars for their employers,” said Duncan Jones, vice president and principal analyst of sourcing and vendor management for Forrester Research Inc. in Cambridge, Mass.

Challenge of finding value

Enterprise business applications can serve a variety of organizations -- a smallish company with $5 million in annual sales or a global enterprise with $5 billion. Software vendors want to sell to many different organizations, so sizing comes into play.

Jones said that sizing isn’t always easy to do. User-based pricing is good for some applications, but not all. Take an e-commerce application, for example, in which users are difficult to count because they are the consumers placing the orders. An e-commerce application also needs several supporting technology layers, such as an operating system, possibly virtualization, a database and middleware.

Jones said that hardware-based metrics provide the least business value.

“Given technology developments such as multicore processors and virtualization, it’s really obsolete, but it hangs around because there is no perfect alternative,” he said. As a result, each software vendor has different approaches for amending old pricing systems to adapt to current trends. That can be confusing for consumers.

“It’s impossible to compare and contrast in a few lines IBM’s Processor Value Units (PVUs) sub-capacity licensing with Oracle’s Core Processor Factors and hard partitioning, let alone bring in Microsoft’s new per-core licensing of SQL Server, which is itself different from the way Microsoft licenses Windows Server.”

Processor-based metrics

In the old days, there was per-processor pricing. But as processors increased in power, vendors decided that customers were getting too much value out of one software license. So they devised plans to charge more.

IBM, for example, started measuring processor speed. This led to PVUs, units that measure how fast a processor is. The higher your processor’s PVU score, the more you pay. IBM publishes several complicated PVU tables designed to illuminate the changing metrics.

But what happens when a company consolidates servers? In IBM’s case, there is sub-capacity licensing. This allows companies to, say, activate three cores of a quad-core processor if the fourth isn’t needed. That could provide some savings.

Oracle, meanwhile, has database software, business applications and Sun-based server hardware, all of which need licensing schemes. But it takes a different approach than IBM in some areas.

“Oracle has some applications that are licensed around expense reports or cost of goods sold or freight management, so it’s not the simple named user and processor licensing anymore,” said Tim Hegedus, a senior analyst for Miro Consulting Inc., a Microsoft and Oracle consultancy in Woodbridge, N.J.

Instead of PVUs, Oracle’s hardware-based licensing rates the processor according to so-called core factors. For example, typically, if you move from an x86 Intel server to a server with IBM Power chip, the core factor will go up. If the servers have the same amount of cores, that means you’ll pay more. But some think that Oracle plays favorites with its own Sun servers, keeping the core factor low so licensing is cheaper there.

“It’s all part of Oracle’s stated approach to reduce your computing costs and yet become a bigger part of your overall business,” Hegedus said.

Then there is SAP, which has two key licensing components: package licenses and named user licenses. The package license gives you the functional elements of the software while the user licenses count the kinds of people who use the packages. It sounds simple, but can get complicated when determining how different packages are priced, which is dependent on metrics such as how many orders are processed, the number of contracts tracked, and so on. Then the named users come into play. Some may be considered professional-level users, while others could be named as just employees, and therefore cost less to license.

Virtualization, cloud to the rescue?

The promise of virtualization and the cloud is the ability to create software application-based workloads on fewer physical servers. If that happens, hardware-based pricing metrics could become more favorable. At the same time, virtualization can reduce data center footprints and energy consumption and result in cost savings. Theoretically, it’s win-win, right?

Wrong.

According to Alexa Bona, a vice president of research in IT asset management for Connecticut-based research house Gartner Inc., some application providers make you pay for your maximum potential capacity on day one. If you’re only using eight CPUs in your private cloud -- but you could dynamically provision 64 CPUs -- you might have to pay for all 64 from the start or otherwise pay for a premium version that includes more virtualization rights.

“Even in a private cloud, your use of virtualization doesn’t necessarily let you scale software licenses based on usage -- it’s one of the promises of the cloud that hasn’t really been delivered,” Bona said.

Out of compliance?

Since most enterprise licensing is based on some trust, there is plenty of room for error. Vendors know this and are always poised to pounce.

Oracle, for example, has a license management services (LMS) department that conducts license audits. An official LMS audit can be intimidating, overwhelming and time-consuming. And it could expose you to millions of dollars in unpaid licensing fees. Microsoft, meanwhile, has certified audit partners. All software vendors retain the right to audit in master agreements with customers.

According to Gartner, software usage licensing audits are on the rise. They’re requiring businesses to invest more in processes and tools to prove license compliance. Bona said that five years ago only about 35% of customers were audited in any given year. Last year that number jumped to 65%. The companies with the highest frequency of audits are Adobe, Microsoft, Oracle and SAP, in that order, he said.

Smartphones, tablets, robots

As if the licensing schemes concerning hardware, virtualization, end users and company revenue weren’t difficult enough, the changing landscape of IT and connecting devices is creating a whole new set of challenges.

“We’re seeing a lot more device-based licensing where you’re paying for every device that can access your application services or software,” Bona said, adding that having to pay per-device licensing fees might even double a company’s licensing fees.

Worse yet, the rules are still unclear. Employees’ personal devices -- if they are used to access company applications -- may need to be licensed. Meanwhile, Gartner is also seeing situations where previously “dumb” devices are now being enabled by IP addresses or have sensors or chips that let them communicate with corporate systems.

“I was just talking to an organization with 30 machines that sense when they are low on stock and automatically order more through their ERP application, and what we’re seeing is that some vendors are now charging by any connected device or indirect access, so those 30 machines would need a license for a named user,” Bona explained.

License fees that never go away

One of the biggest gotchas is a huge focus on maintenance and support fees as part of a vendor's software application licensing strategy. According to Bona, the big software vendors are all tightening up language and wording in their contracts to make it difficult to reduce or remove maintenance.

“If you want to reduce maintenance, you can do so, but the software vendors have the right to reprice the remaining licenses at a discount that they think will be more suitable for the lower volumes,” she said. What does that mean? Your discount goes down, and you end up paying the same amount for fewer licenses.

Maintenance and support costs can often be 20% or more of the original software license cost and are being bundled together so that new bug fixes, security patches and regulatory compliance features are only available if a customer is on annual maintenance and support contracts.

Strategies for success

Some companies can hire consultants to help them with business application licensing. Forrester's Jones recommended that organizations create a center of excellence -- beyond a simple procurement office -- where IT and business leaders funnel potential technologies for advice on the potential licensing impact. And for right now, Jones has a simple but effective recommendation: Ensure that no one virtualizes anything without getting specific advice from your central resource on the software licensing implications -- with approval for the cost of additional licenses that might be needed.

This was first published in April 2012

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