Oracle Enterprise Licensing A detailed overview of how it works Authors: Richard Spithoven & Razvan Dumitru In this whitepaper we will address software compliance issues and complexities related to the Oracle Enterprise Licensing model. Specific clauses in the contracts can sometimes be a nuisance, but they also offer insight in how the products are measured, how and when the end user should report or other necessary details. Being informed allows you to make full use of the software programs you acquired, without the fear of facing non-compliance.
Contents Introduction... 3 Oracle Enterprise Licensing at a glance... 4 The Expansion Clause... 5 Types of Expansion Clauses... 6 Oracle review process for Enterprise Licenses... 9 Common issues related to Oracle Enterprise Licensing... 10 Oracle Enterprise Licensing takeaways... 14 2
Introduction The Oracle Enterprise software licensing model is based on so-called Enterprise metrics, which are defined by an organization s size of some kind, for example: Enterprise Employee, Enterprise $M in Revenue, and $M Revenue under Management. The Enterprise metrics are independent of the real number of users or systems on which the Oracle software is installed. This may seem easy to understand and apply but in reality many companies encounter various difficulties when fulfilling their annual reporting obligations. Decreasing the risk for organizations of not being compliant with Oracle policies and contractual rules or regulations requires a clear understanding of the rationale behind the Enterprise Licensing type. Addressing and discussing details and issues will reduce the risk of non-compliance since end-users will be educated, equipped and enabled to manage their software licenses properly. The products licensed on an Oracle Enterprise Licensing model may vary from PeopleSoft and JD Edwards to products such as Siebel, Hyperion, Agile, Demantra or E-Business Suite (EBS). 3
Oracle Enterprise Licensing at a glance Enterprise Licensing means that an Oracle end user is able to purchase Oracle software licenses measured on the total number of employees of the company, on the company s revenue or the company s budget instead of Technology metrics such as Processor or Named User Plus. The metrics used for the products licensed on an Enterprise model are either finance related like Reported Revenue, Operating Budget or Enterprise $M in Revenue or non-financial metrics such as Employee Count, Student Count or Enterprise Employee. The Ordering Document for the software products licensed on an Enterprise Licensing model has specific clauses in their contracts which specify the way products are measured (the license metric definition) how and when the end user should report the current quantities (e.g. number of employees, reported revenue) and what fees the end user should pay in case they are exceeding the quantities of licenses and need to acquire additional licenses (the Expansion Clause). The number of individuals that can make use of the licensed software is unlimited (unless otherwise stated in the contracts), the idea being that the end user is required to pay additional fees if and when the enterprise increases in size. 4
The Expansion Clause The Expansion Clause mentioned above provides end users with all the necessary details regarding the additional fees needed to pay to Oracle if the reported quantities exceed the licensed quantities. This clause contains three major pillars: License Base (total number of licenses that the end user owns) License Increment (additional licenses that an end user should purchase in case of an additional usage) Fees per increment (for licenses and support) License Base When an end user purchases Oracle products under an expansion clause, the initial purchased quantity represents the so-called License Base. Normally, the incremental quantity for further expansions of license quantity will be calculated as 10% of the initial purchased quantity. Based on the original fees paid by the end user, Oracle will establish the incremental license fee and the incremental support fee, also as 10% of the initial purchase license and support fees. Example: If an end user purchases Oracle Financials with the metric Enterprise $M in Revenue and a quantity of 100, the latter serves as the License Base and in a standard deal the License Increment quantity would therefore be 10. License Increment The incremental step represents a fixed number of licenses (set in the Expansion Clause) that an end user will have to purchase in case the licensed base is exceeded. Depending on the delta between the current usage and the License Base, an end user should purchase one or more increments. In case the difference is a fraction (e.g. 2.5 Incremental Steps), then the number of steps will be rounded up to the next whole number of steps. Example: An end user purchased Oracle Financials on the metric Enterprise $M in Revenue and a quantity of 100, the Incremental Step is Enterprise $M in Revenue 10, and the end user reports after one year an Enterprise $M in Revenue of 117. The Expansion Clause specifies that additional Increments need to be purchased whenever the licensed quantity is exceeded. In this case the delta is 17, so it represents 1.7 of the Incremental Step. Since additional licenses can only be bought in whole numbers of increments and not in fractions the end user will need to purchase 2 whole increments. Fee per Increment Defines the actual fee that the end user will need to pay for 1 Incremental Step, if the current usage exceeds the licensed base. There are two types of Incremental fees that a customer needs to pay in case of a license expansion. One is for licenses and the other one is for support. As a general rule for Oracle licenses, the support fee needs to be 22% of the license fee. 5
Types of Expansion Clauses The acquisition of additional licenses as defined within the contract is usually called Expansion or Incremental License Fees. These clauses establish that in case an end user exceeds the licensed quantity, then the end user should pay a fee and acquire additional licenses and applicable support in order to expand the License Base and remain compliant. One of the oldest types of licenses, in use by PeopleSoft since 1997, is this Extended Enterprise Capabilities clause: Extended Enterprise Capabilities means functionality in the Software modules which enables the expansion of Licensee s usage and deployment of licensed PeopleSoft Software modules using a Windowsclient, Web-client or Intranet within a hardware configuration determined by Licensee to meet their internal business needs. Incremental License Fees Such a clause was used in the PeopleSoft and JD Edwards contracts previous to the PeopleSoft acquisition by Oracle in 2005 and it usually had two versions. One (which is more common) determined that the end user should report once a year 90 days prior to the anniversary date (which represents the day and month of the ordering document) the usage for the enterprise licenses. In case the reported quantity would exceed the licensed base (even by 1 single unit), then the end user should pay a certain fee for a certain increase of the licensed quantity (typically 10% of the initial license fee for an incremental step of 10% of licensed quantity): Incremental License Fees for the EC Software: Licensee may use the EC Software licensed pursuant to this Schedule in accordance with the terms of this Schedule and the Agreement, to process its data at no additional license fee, provided that the Employee Count does not exceed 1.350 ( Base Employee Count ). Each year ninety (90) days prior to the Anniversary Date, Licensee shall report to PeopleSoft the Employee Count as of such date and, in the event the Employee Count as of such date exceeds the Base Employee Count, Licensee shall pay, on or before the applicable Anniversary Date, additional non-refundable, noncancelable license fees. Upon receipt of such license fees in the amount $5,080. Licensee s Base Employee Count shall be modified to increase by 135. Licensee shall pay as many increments of $5,080 as necessary so that the Base Employee Count exceeds the Employee Count as of that particular Anniversary Date. Employee Count shall mean the full or part time employees of Licensee and all related entities for whom Licensee and such related entities withhold payroll taxes, and contractors who are or would be deemed employees under applicable laws. EC Software shall mean those Software modules licensed pursuant to this Schedule which are priced based upon the Employee Count, as indicated in the Software/Services table above. 6
The other Incremental License Fees version sets a threshold for the expansion (which is greater than the licensed quantity) and establishes what fees the end user should pay for each increment in case this threshold is exceeded. If the end user exceeds the licensed base, but does not exceed the threshold, then no expansion is needed. Given this, if the end user has Enterprise Employee 1,149, then no additional fees need to be paid. But if the end user grows to Enterprise Employee 1,151, then he will need to purchase 1 Incremental Step, raise the License Base to Enterprise Employee 1,150 and set a new threshold at Enterprise Employee 1,300. Expansion This clause is used in current Oracle contracts for all products licensed on an Enterprise license model and similar to the first version of the Incremental License Fees. It establishes that the end user should pay when the licensed quantity is exceeded a fee equal to 10% of the initial license fee for an incremental step equal to 10% of the licensed quantity. This clause comes with an Expansion table which contains the list of products licensed under the Expansion clause, the metric, the incremental step, the license fee/increment and the support fee/increment. Here is an example: Future Purchases Expansion A a. If you exceed your licensed quantity you must order the programs (and first year Software Update License & Support for the programs) at the appropriate license and support fees specified on the attached Expansion Exhibit A. The number of additional program licenses to be ordered shall be equal to the actual number of Enterprise Employee as of the order date less the total number of licensed quantity (under this ordering document or other ordering documents) rounded up to the next increment on the attached Expansion Exhibit A. b. The license definitions and program specific terms contained in section D of this ordering document will apply to program licenses ordered pursuant to this section. c. Oracle has no delivery obligation for program licenses ordered pursuant to this sectio 7
Expansion Exhibit A Listed below is the license fee and first year Software Update License & Support fee for the program(s) listed in section A, grouped by license type, that must be ordered pursuant to Expansion clause. Program description Increment License fee per increment First year software update license & support fee per increment PeopleSoft Enterprise ecompensation Enterprise Employee 10 1000 100 * the above figures are for example purpose 8
Oracle review process for Enterprise Licenses Based on the contractual clauses signed between Oracle and the end user, an Oracle license review begins with a notification which is sent to the end user by Oracle s License Management Services (LMS) department usually 90 days prior to the anniversary date of the contract. The original agreement specifies that the end user has to report the usage of Oracle products each year. The reporting process involves the completion of a declaration form with the actual Revenue, Student or Employee numbers (depending on the metric). The declaration comes in the form of a report built by LMS Consultants, used specifically for the purpose of obtaining the end user s usage declaration, which also helps Oracle to keep track of historical usage declarations made by end users. The end user has to fill out the declaration form according to the terms specified in the expansion clause, and by taking into consideration the metric definition and the territory for which the products are licensed to be used. The reported figures need to be filled out based on enduser s official records, annual report (for public companies), as stated in the end user s third party audit report or a third party accounting report. The Oracle LMS department will use the filled out declaration form to establish whether or not the end user is compliant with the Agreement terms. In case of non-compliance they will calculate the number of increments that need to be purchased and the associated fees for these increments. The reporting of usage should be done either annually or whenever the licensed quantity is exceeded, depending on how the contractual clauses set this action. 9
Common issues related to Oracle Enterprise Licensing No idea what licensing is For a start, many companies fail to understand what exactly a software license is, assuming that they actually own a software product from the moment they purchase a license, and refuse to cooperate with Oracle when time comes for a usage review. This represents a breach of contractual agreements between the parties and therefore a customer becomes liable for paying penalties to Oracle. Misinterpretation The most common issues at end users relate to the acquisition of additional licenses due to the fact that a lot of companies do not report accurately the amount of revenue and/or number of employees due to misunderstandings with regard to the metric definition. For example, there are end users that bought licenses on an Enterprise Employee metric with a standard metric definition but they only report the number actual employees that use the products and not the number of all the full-time, part-time, temporary employees, and all of your agents, contractors and consultants who have access to, use, or are tracked by the programs as the metric definition reads. Not actual but total numbers Other companies report the actual number of users or the actual number of employees based in a certain country or registered under a certain subsidiary or headquarter. This situation represents a breach of the contractual obligations because the products licensed on the Employee basis are to be measured as the total number of employees of a certain company (in some cases the clause includes in the Employee definition even the contractors!) for a specific territory (i.e. United States, France, Worldwide). In such cases, Oracle goes back to the end user asking for additional clarifications regarding the figures reported in the usage declaration and documents that could validate the reported figures. Territorial issues Also there are end users that leave out of the reporting figures entities which do not make use of the software, thus breaching the Territory clause in the license contract. If this Parent Company is licensed under Enterprise Employee metric, with a worldwide territory, the following metric and end user definitions apply: 10
Enterprise Employee Is defined as (i) all of your full-time, part-time, temporary employees, and (ii) all of your agents, contractors and consultants who have access to, use, or are tracked by the programs. The quantity of the licenses required is determined by the number of Enterprise Employees and not the actual number of users. In addition, if you elect to outsource any business function(s) to another company, the following must be counted for purposes of determining the number of Enterprise Employees: all of the company s full-time employees, part-time employees, temporary employees, agents, contractors and consultants that (i) are providing the outsourcing services and (ii) have access to, use, or are tracked by the programs. The value of these program licenses is determined by the number of Enterprise Employees. For these program licenses, the licensed quantity purchased must, at a minimum be equal to the number of Enterprise Employees as of the effective date of your order. If at any time the number of Enterprise Employees exceeds the licensed quantity, you are required to order additional licenses (and technical support for such additional licenses) such that the number of Enterprise Employees is equal to or less than the number of licensed quantity. You are not entitled to any refund, credit or other consideration of any kind if there is a reduction in the number of Enterprise Employees. In addition, each year 90 days before the anniversary date of your order, you are required to report to Oracle the number of Enterprise Employees as of such date. 11
Customer Definition Products and services ordered under this agreement may be used by you and any entity that is not a competitor of Oracle, which controls, is controlled by or is under common control with you. An entity shall be deemed to be in control of another entity if (a) an entity directly or indirectly owns more than fifty percent (50%) of the voting stock of the other entity, of (b) an entity directly or indirectly possesses the power to cause or direct the management or policies of the other entity, provided that you warrant that you have the authority to bind such entities to the terms of the order and agreement and further warrant that you shall be responsible for a breach of such terms by such entities. In this case the end user should report the total number of employees for all their four subsidiaries plus the Parent Company (even if not all the companies within the group use Oracle products) and also the number of agents, contractors and consultants that use, access or are tracked by the programs licensed on the Enterprise Employee metric. Privately held companies need to report too Another situation regarding the reporting of usage is related to companies that do not make public their annual report and for this reason refuse to cooperate with an Oracle audit, thus breaching the contractual obligations that they have. A lot of private companies refuse to disclose their revenue or employee figures due to the fact that they are not public companies and have no obligations of revealing such figures. In such cases, the end user should follow the instructions from the metric definition and expansion clause and report the usage. Otherwise, in case of an audit, the end user could be liable to pay to Oracle additional fees for the period during which the end user refused to report the usage. Termination can be tricky Terminating a license means that the software involved must be removed from the end user s systems. As a confirmation of this action Oracle will require the end user to sign a Termination Letter. The license termination can be either partial (only a part of the total quantity of licensed products is terminated) or total (all licensed products are terminated), depending on the end user s intention. For total terminations, the rights and obligations of an end user upon the licenses cease to exist starting with the date the end user signs the Termination Letter. In case of a partial termination, the end user has to sign a Termination Letter only for those products that it desires to terminate. Alongside the Termination Letter, an Amendment to the Incremental License Fees/Expansion clause need to be signed in order to have the fee per license increment and the support fee decreased and recalculated only for the products that are going to survive the termination process. 12
Example: If an end user purchased 10 licenses on Enterprise Employee metric and wants to terminate 3 of them, then the amendment should stipulate what products remain licensed, the new fee per increment and the support fee per increment. There are also cases when an end user doesn t use the software but in the same time it doesn t want to terminate it either. In such cases the licenses typically are used for extracting historical data, and not for production purposes. However this does not mean that the reporting obligations are not valid any longer. This is a wrong interpretation of contractual clauses due to the fact that Oracle considers the licenses as being used until a Termination Letter is signed by the end user. No support doesn t mean no license Another issue regarding this type of licensing is related to support. Some Oracle end users choose to discontinue the support for their licenses and therefore think that their reporting obligations cease to exist. The termination of support for the Enterprise licensed products does not mean termination of licenses and end users should be aware that Oracle can still audit them for the usage of such products if the support is terminated. 13
Oracle Enterprise Licensing takeaways Oracle end users that own products licensed on Enterprise metrics should at least take good notice of the metric definition to know how the licenses need to be counted, of the Expansion clause to know when they need to report the usage, and of the Customer definition and Territory clause to know what entities should be included in the license count. B-lay is a company of seasoned experts who deal with software license compliance issues everyday, some of us already for over 15 years. Instead of investing in staff and knowledge completely by yourself we can onboard you into a fully operational continuous license management program in less than 3 months and, that is based on and tailored to the specific demands of your company from the first moment of engagement on. 14
About the author Richard Spithoven, Director Understanding the facts enables you to make informed business decisions" Richard Spithoven is one of the managing partners at B-lay. Richard brings more than thirteen years of relevant license management experience to his role having previously served as regional director of compliance at Oracle. Richard uses his knowledge of the last decade in Oracle License Management Services to educate, equip and enable software end-users in their challenges with regards to proper software license management. Richard holds a master degree in IT, from the University of Amsterdam in The Netherlands. Contact Richard: richard.spithoven@b-lay.com About the author Razvan Dumitru "Every journey, no mather how long, begins with a first step" Razvan has been working in the Software Licensing industry for years, analyzing and understanding licensing business practices & product development from multiple software vendors and helping clients to better manage their software entitlements. Razvan leverages his experiences of working within Oracle s License Management Services team to educate, equip and enable end users to understand their enterprise software license entitlements. We share our knowledge, so you can focus on the facts! Do you want to know more about different related license management topics, we have a selection of white papers available through www.b-lay.com. If you are in need of extra expertise and a structured approach, feel free to contact B-lay. We will help you make software compliance an exciting opportunity to improve your busines About B-lay B-lay is a specialist in software license management and provides services around software compliance, software audits, software asset management tools and insight in software spend. Our services offer organizations worldwide insight into the risks associated with software licenses, help prevent license compliance issues and help create considerable cost savings by optimizing their licensing position. B-lay was founded in 2008 and has offices in the Netherlands, Romania and the US. B-lay BV Maliebaan 79 3581 CG Utrecht The Netherlands info@b-lay.com www.b-lay.com +31 88 0233 700 2017 B-lay BV. All rights reserved.