Save Your Money: Review Software Licensing Options

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1 About this research note: Operate & Optimize notes provide recommendations for effective and efficient IT practices that help improve the performance or reduce the cost of technologies already deployed in the enterprise. Save Your Money: Review Software Licensing Options Publish Date: February 2, 2009 Software licenses represent a material part of every IT budget. They can be complex to negotiate and are often forgotten after a contract is signed. Understand how to better negotiate license agreements in the first place, and how to renew them for the lowest cost Info-Tech Research Group

2 Executive Summary Improvements in an organization s approach to software licensing options on acquisition and on renewal can lead to cost savings with minimal downside. This note addresses several key considerations for better negotiation and renewal of license agreements:» Understanding organizational responsibility to pay for software.» Understanding the drivers of cost and how to avoid overpayment.» Determining whether software maintenance is necessary and how to obtain it at a lower cost.» Identifying ways to push back against standard vendor positions on pricing and maintenance and reduce lifetime costs. Organizations can reduce software costs by actively reviewing and modifying the software agreements proposed by their suppliers. Operate & Optimize 2

3 Optimization Point Software licenses are complex agreements that are difficult to understand. As a result, IT generally accepts the terms offered by vendors without analysis, often missing opportunities to reduce lifetime software licensing and maintenance expenses. More active assessment and negotiation of software contracts can lead to material reduction in the total cost of software in the organization. Key Considerations A software license defines the rights of an organization to use software for a specific period of time. Software can be an application system, such as Microsoft Office or SAP, or part of an operating system, such as Vista, or technical software, such as the Oracle database system. The right to use software is defined by a license agreement when the software is installed on the organization s equipment. For example, all the users of MS Exchange must be licensed. It also determines who can use software available in a hosted environment, such as salesforce.com. License terms for each expensive or organizationally important piece of software should be reviewed because terms vary significantly, even for different products from the same supplier. As the cost of the licenses usually varies, either with the number of users (for example, MS Office) or the number or size of processors on which the software runs (for example, MS Windows Server 2008), there is a possibility that the organization is paying for more users or processing capacity than necessary. Additionally, because the use of software without sufficient licenses is illegal and can result in prosecution, some organizations over-purchase licenses to reduce risk. The license cost is generally augmented with an optional support or maintenance agreement that adds 15 to 20% per year to the original cost of the licenses. In some cases, this maintenance expense is of limited value and should be omitted. Improvement & Optimization Track and Analyze Actual Usage When organizations use software owned by a third party, they have a responsibility to have a software agreement in place with the software owner, and to pay for the software according to the agreement. Most software vendors depend on the customer to ensure that all users are legally entitled to use the software. Therefore, the organization must track the number of users and the platforms on which the software runs. Organizations can generate savings by extending their tracking activity to an analysis of actual levels of usage. Operate & Optimize 3

4 Match Units Purchased to Units Required License agreements are complex primarily because their pricing depends on the number of licensed users or the size or number of processors. Very few agreements establish pricing based on actual usage in a time period. Most require a lump sum payment for a pre-defined number of users or processors. And most licenses are perpetual, meaning that a single payment is due at the beginning of the agreement, regardless of the expected period of software use. If the usage exceeds these pre-defined numbers, the organization must buy additional licenses. If the actual usage is less than the pre-agreed amount, there is no rebate for unused licenses. For each software agreement, the organization should understand how the level of usage is measured, and therefore, how the costs are determined. And it should only buy as many licenses or the capacity that it needs at the time of purchase. As an anticipated future need may not materialize, organizations should not pre-buy licenses for future requirements. Rather, the agreement should allow for the purchase of additional licenses or capacity at a predefined price in the future. There are two situations, virtualization and hardware capacity on-demand services, that complicate the pricing and cost of software. First, server or desktop virtualization, often implemented to reduce overall IT costs, may not reduce certain software licensing costs at all. Software agreements that are priced by processor should ideally be based on the number of actual physical servers, not the number of virtual servers. The cost reduction achieved by optimizing hardware infrastructure is then extended to software as well. Second, in the case of hardware capacity on-demand pricing, such as that available with IBM, where equipment is configured with spare capacity for temporary or permanent future needs, some software pricing is based on the maximum capacity of the computer system, not on the amount actually used. Therefore, the pre-installation of capacity for future periods may result in higher than required licensing costs. Isolate the Cost of Implementation Support Contracts with software vendors typically include license costs and maintenance. They may also include consulting services in the form of implementation support. While the supplier may propose a combined contract for all services, assess the support component separately. For some broadly implemented software, there are independent contractors who can provide equivalent implementation support on better terms than the software vendor. The organization can also take direct control of software implementation without external help, if it has internal expertise (for example, deploying a new version of MS Windows). Operate & Optimize 4

5 Assess the Value of Maintenance Virtually all software licenses are sold with maintenance or support agreements that generate additional annual charges. If the software license is perpetual, the maintenance agreement is optional and should be assessed separately. If the software license is payable on a periodic basis, the maintenance cost may be built into the price. Maintenance agreements typically have up to three components: 1. The delivery of bug fixes, typically called patches or temporary fixes. 2. The provision of a service commitment to address specific client problems or questions. 3. The right to install new releases of the application as they become available without incurring a new license fee. As maintenance fees can double the initial license fee over five years, organizations should not automatically enroll in such agreements without considering their value. Even if an organization chooses to enter into a maintenance agreement for a short initial period (say one year), there may not be a rationale to extend the agreement. If the following situations apply to an application, challenge the justification for incurring the expense of a maintenance agreement:» The application is customized to such a degree that there is little likelihood of retrofitting a major new release from the supplier.» The application is stable and there has been no need to call the vendor to address major service issues.» The application is meeting functional requirements, the supported process is not likely to change, and there is nothing of key interest on the supplier s software roadmap (or there is none published). When the number of actual users or processors is less than the number of licenses paid for, organizations should avoid paying maintenance for unused capacity. When a software agreement ties maintenance fees to original licenses, it is possible to negotiate a lower maintenance percentage to reflect lower usage. In some cases, independent third parties can provide application support at a lower cost than the supplier, which is a viable approach when new software releases are unlikely to be implemented. Operate & Optimize 5

6 Negotiate Areas for Highest Cost Saving Major software vendors tend to be unwilling to change the wording of software license agreements. Smaller vendors are much more flexible. But even major software vendors are more flexible in their pricing when the economy is in a downturn. Consider the following suggestions when negotiating an initial software license:» Buy only as many licenses as you need now. Do not pre-buy capacity for the future.» Establish the price for additional licenses in the future, if they will be required.» Determine whether a virtual application implementation can reduce the number of licenses required, and therefore, the total cost.» Define the licensing units so as to enable savings from virtualization and on-demand processing if these are in the plan.» Negotiate a lower price per unit of usage than that proposed.» Structure the maintenance agreement so that the number of usage units can be decreased over time.» Consider a short-term maintenance agreement if there is some likelihood that maintenance will not be required in the future. When renewing a maintenance agreement:» Determine whether a maintenance renewal provides value, based on past history of use and future plans. Terminate the agreement if appropriate; a perpetual license allows ongoing use in any case.» If the organization s maintenance requirement involves only support, consider a cheaper alternative from a competent third party.» Assess the cost reduction impact (if any) of moving toward a virtualized application capability, where a number of users share a single instance of an application. For information on different virtualization approaches to thin client deployment, refer to the ITA Premium research note, Together at Last: Virtualization and Thin Clients.» If the actual usage is less than the number of licenses, negotiate maintenance only for the required number of licenses.» Renegotiate the pricing of the maintenance agreement. Operate & Optimize 6

7 Bottom Line Software licenses represent a material part of every IT budget. They can be complex to negotiate and are often forgotten after a contract is signed. Understand how to better negotiate license agreements in the first place, and how to renew them for the lowest cost. Info-Tech's products and services combine actionable insight and relevant advice with ready-to-use tools and templates that cover the full spectrum of IT concerns. Our practical approach is designed to have a clear and measurable positive impact on your organization's bottom line. We serve over 21,000 clients at 8,000 organizations around the world. Since 1998, we have focused on making the work of IT professionals easier - and on helping them achieve greater personal and corporate success. More About Info-Tech Operate & Optimize 7