Changing market dynamics, driven by the steady rise of open-source software and the increasing scrutiny by companies of what they spend on IT and why, are leading to big changes in the relationship between vendors and their customers.
For users, the change can't come soon enough. Take Standard Bank as an example. Herman Singh, its director of technology engineering, says the present software licensing regime is unreasonable. "Very often we find we are not receiving value for money," he laments. "Pricing is often volume-related and represents an increasing cost base as business grows, meaning that we do not achieve the required economies of scale."
Today's software licensing models were designed to protect vendors' intellectual property, says Will Cappelli, research vice-president at analyst group Gartner. "They were not designed with the customers' economics in mind."
Many organisations contruct
But commoditisation changes all of this. The protection of intellectual property in software is becoming less important. "The rationale behind a lot of these software licensing agreements, designed by the vendor for the vendor, begins to dissolve," Cappelli says.
Licensing schemes based on intellectual property protection are being phased out in favour of schemes that pre-suppose that the underlying software is commoditised.
The existing software licensing
The good news is corporate technology buyers are finally gaining the upper hand. "The balance of power has definitely shifted to customers and vendors have been forced to become more co-operative," says Cappelli. "One factor is the major incursion of Linux and open-source software on the market, further driving the commoditisation of software and the breakdown of licensing structures. Linux and the whole open-source movement cuts to the core of many of the licensing concepts that underlie current pricing structures. The concept of piracy in open source is limited. And if you undermine the concept of piracy, you end up undermining the conceptual meaning of the
"Of course, when you do the economics of Linux and open source, there are many hidden costs. In many cases, [all] you have done is shift costs from the software itself to the services level. It is important to keep in mind that moving to open source does not necessarily mean a radical adjustment in total cost of ownership. However, it does shift the power away from the software vendors," Cappelli says.
The coming change in licensing models cannot be put down to a single factor. Other contributing factors include customer procurement strategies that Cappelli says have become more sophisticated, and have increased knowledge of IT on customer sites and an intuitive feel for IT among negotiators. "The bottom line is that you will be negotiating against a cost-plus kind of backdrop, but just remember that the components of that cost are not derived from the technology per se but from the cost of sales and the cost of service associated with that software unit."
Absa's general manager of technology services, Ian Ross, sums up the trend best when he says: "Most of the 'standard' agreements signed in the past were structured around vendor requirements. The vendor was seen as your partner and friend and contracts were signed to get the admin out of the way. New contracts are structured on a case-by-case basis where terms and agreements are considered by a team of experts according to business requirements."
It's not all win-win for technology buyers, though. CIOs will have to fight hard to overcome arguably unfair pricing tactics that some software vendors continue to employ.
Take software licensing practices around multicore processors -
Vendors have different approaches. Microsoft, for example, does not charge customers on a per-core basis, while Oracle, IBM and Sybase do, Bona says. Others, such as middleware vendor BEA Systems, were looking at a 25% premium for dual-core processors.
Jacqueline Woods, vice-president of global pricing and licensing strategy at Oracle, confirms the vendor's stance: "Oracle's processor-based licensing policy for multicore chips is to treat one core as one processor. Licensing by processor is only one of several choices
That this stance disturbs customers is clear from Standard Bank's diplomatic reaction to being asked if software vendors are justified in charging a premium for multicore processor use. Says Singh: "Generally no. This is a short-term revenue growth fix for the vendor. There is a gap between price and value in this equation."
BMI-T's Walker says higher prices for multicore processors don't make sense. "It's counterintuitive. Hardware improvement doesn't drive up software costs. It increases processing ability [with] the same piece of software. The hardware has improved but what have the software vendors done? Nothing. So they're not entitled to ask for more money. If they had developed something extra to harness the additional power, then yes, they are entitled to their pound of flesh. If that's not the case, forget it, they're not earning their money."
Walker believes all the talk about
charging a premium is clutter
intended
to obfuscate the fact that the software licence model is up for
review. "Multi-core pricing is a little sub-issue that has
muddied the water and is distorting it. It's a bit of smoke and
mirrors just to confuse the issue," he says.
The
transition to a new licensing model - and the shift in power - while
already under way, is far from simple.
One trend highlighted
at a recent Gartner conference on SAP, held at Sun City in the North
West province, is the demise of what is known as concurrent user
licensing. This is a licensing metric
where organisations pay for
the maximum number of simultaneous users they might have. This saves
companies money because they aren't required to purchase licences for
every single user who requires use of the software.
Gartner's
Bona says SAP, Oracle and Microsoft have all abandoned the metric.
"Part of the reason is that software vendors are saying: 'We'd
like to get a licence fee for every user, not every maximum
simultaneous user'. It's also partly going away because organisations
are opening up applications to external parties and a user-based
metric isn't appropriate when you're looking at large numbers of
potentially unidentifiable users."
Despite the fact that
the metric began to be phased out almost a decade ago, Bona says some
customer organisations have managed to retain it in their contracts
with their suppliers which, she says, is a good thing. "If you
do have concurrent user pricing in your contract, it's worthwhile
guarding it and making sure it doesn't just disappear when you next
renegotiate your contract."
Standard Bank is one of the
lucky ones. Singh says the bank still has a number of contracts in
place that use the concurrent-use metric, though fewer than before.