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Licensing’s Labyrinth
digestmay 2012, volume 1, issue 2
Business Applications essential knowledge on enterprise applications
business applications digest • may 2012 2
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editor’s letter
software licensing a
labyrinthine Puzzle
Key Questions to Present to Public cloud,
saas Providers
advantages found in big,
small systems integrators
editor’s letter
When the calendar turns to April, I think of only one thing—opening day for baseball. As a lifelong Boston Red Sox fan, I naturally spend time thinking about the New York Yankees. While putting together
this month’s issue of Business Applications Digest, I ran across a saying by one of the most well-known and quotable Yankees, Yogi Berra. He said, “A nickel ain’t worth a dime anymore.” That pretty much sums up the economy.
To help make your nickels go further, this issue examines three ways to cut costs:
n Identifying unnecessary business application licensesn Moving applications to the cloud—and getting the most from cloud provider
service agreementsn Selecting the right size system integrator for your company
In the cover story, “Software Licensing a Labyrinthine Puzzle,” Chris Maxer looks at the increasingly complicated software licensing market, where concepts such as the cloud, virtualization and licensing based on processor speed can lead to buying more licenses than necessary.
Another option for trimming costs is to move some applications to the cloud. Adam Riglian reviews what to ask public cloud service providers before entering into agreements in “Key Questions to Present to Public Cloud, SaaS Providers.”
Finally, in his article “Advantages Found in Big, Small Systems Integrators,” Todd Morrison finds out that selecting the right size system integrator is crucial to keep-ing an implementation budget under control.
What are some ways your company has cut costs? Let me know.
Jacquelyn HowardExecutive EditorBusiness Applications and Architecture
On BaseBall and Cutting Business app COsts
home
editor’s letter
software licensing a
labyrinthine Puzzle
Key Questions to Present to Public cloud,
saas Providers
advantages found in big,
small systems integrators
cover story
if some of the smartest minds are building more and more robust business applications, shouldn’t 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
software Licensing a Labyrinthine PuzzLeManaging this part of business application software can be like trying to navigate a maze: complex and ever-changing. by chris Maxcer
business applications digest • may 2012 3
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editor’s letter
software licensing a
labyrinthine Puzzle
Key Questions to Present to Public cloud,
saas Providers
advantages found in big,
small systems integrators
cover story
for some applications, but not all. Take an e-commerce application, for ex-ample, in which users are difficult to count because they are the consumers placing the orders. An e-commerce ap-plication also needs several supporting technology layers, such as an operating system, possibly virtualization, a data-base and middleware.
Jones said that hardware-based met-rics provide the least business value.
“Given technology developments such as multicore processors and vir-tualization, it’s really obsolete, but it hangs around because there is no per-fect alternative,” he said. As a result, each software vendor has different ap-proaches for amending old pricing sys-tems to adapt to current trends. That can be confusing for consumers.
“It’s impossible to compare and con-trast in a few lines IBM’s processor value units, PVUs, sub-capacity licens-ing 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
elaborate systems that assign values to various components to create maze-like licensing tables.
What about the cloud, Software as a Service 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 compa-nies to traditional computing models rather than unleashing efficiency and innovation.
The result? Confusion that can, in the end, cost businesses big bucks.
“I still encounter clients whose IT operations functions have gone ahead and implemented virtualization with-out checking the software licensing implications and have, therefore, cre-ated unapproved, unreported liabilities of millions of dollars for their employ-ers,” said Duncan Jones, vice president and principal analyst of sourcing and vendor management for Forrester Re-search Inc. in Cambridge, Mass.
chAllenge of finding vAlueEnterprise 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
each software vendor has different approaches for amending old pricing systems to adapt to cur- rent trends. that can be confusing for consumers.
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home
editor’s letter
software licensing a
labyrinthine Puzzle
Key Questions to Present to Public cloud,
saas Providers
advantages found in big,
small systems integrators
cover story
value out of one software license. So they devised plans to charge more.
IBM, for example, started measur-ing processor speed. This led to PVUs, units that measure how fast a proces-sor is. The higher your processor’s PVU score, the more you pay. As shown in Figure 1, IBM publishes several com-plicated PVU tables designed to illumi-
from the way Microsoft licenses Win-dows Server.”
Processor-BAsed MetricsIn the old days, there was per-pro-cessor pricing. But as processors in-creased in power, vendors decided that customers were getting too much
Source: IBM
Figure 1: this table maps out ibm’s method of measuring processor speed, based on pvus, or processor value units.
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editor’s letter
software licensing a
labyrinthine Puzzle
Key Questions to Present to Public cloud,
saas Providers
advantages found in big,
small systems integrators
cover story
are licensed around expense reports or cost of goods sold or freight man-agement, 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 ac-cording to so-called core factors (see Figure 2). For example, 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, then you’ll pay more.
nate the changing metrics.But what happens when a company
consolidates servers? In IBM’s case, there is sub-capacity licensing. This al-lows 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
Source: oracle
Figure 2: this table show how oracle’s licensing rates processors—it’s according to what the company calls core factors.
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editor’s letter
software licensing a
labyrinthine Puzzle
Key Questions to Present to Public cloud,
saas Providers
advantages found in big,
small systems integrators
cover story
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 soft-ware 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 consump-tion and result in cost savings. Theo-retically, it’s win-win, right?
Wrong.According to Alexa Bona, a vice
president of research in IT asset man-agement for Connecticut-based re-
But some think that Oracle plays favor-ites with its own Sun servers, keep-ing the core factor low so licensing is cheaper there.
“It’s all part of Oracle’s stated ap-proach 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 (see Figure 3). The package license gives you the functional elements of the software, while the user licenses count the kinds of people who use the pack-ages. 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 num-ber of contracts tracked and so on. Then the named users come into play.
Source: SaP
Figure 3: sap has two types of licenses: package and user.
business applications digest • may 2012 8
cover story
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editor’s letter
software licensing a
labyrinthine Puzzle
Key Questions to Present to Public cloud,
saas Providers
advantages found in big,
small systems integrators
search house Gartner Inc., some appli-cation 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 virtualiza-tion 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) depart-ment 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. Mi-crosoft, meanwhile, has certified audit partners. All software vendors retain the right to audit in master agreements with customers.
According to Gartner, software us-age 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 custom-
ers 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, roBotsAs if the licensing schemes concern-ing 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-de-vice 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 applica-tions—may need to be licensed. Mean-
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.
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cover story
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editor’s letter
software licensing a
labyrinthine Puzzle
Key Questions to Present to Public cloud,
saas Providers
advantages found in big,
small systems integrators
while, 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 organiza-tion with 30 machines that sense when they are low on stock and automati-cally 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 AwAyOne of the biggest gotchas is a huge focus on maintenance and support fees as part of a vendor’s software applica-tion 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 ven-dors have the right to reprice the re-maining 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 com-pliance features are only available if a customer is on annual maintenance and support contracts.
strAtegies for successSome companies can hire consultants to help them with business applica-tion licensing. Forrester’s Jones rec-ommended that organizations create a center of excellence—beyond a simple procurement office—where IT and business leaders funnel potential tech-nologies for advice on the potential licensing impact. And for right now, Jones has a simple but effective recom-mendation: Ensure that no one virtual-izes 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. n
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editor’s letter
software licensing a
labyrinthine Puzzle
Key Questions to Present to Public cloud,
saas Providers
advantages found in big,
small systems integrators
cloud AdoPtion
it managers considering public cloud providers, including Software as a Service (SaaS) vendors, have the right to ask questions of the many vendors looking to sell them the next big thing. But what are the right questions?
Security is a primary concern to enterprises that deal with sensitive data and are reluctant to put it into the cloud. Paul Burns, president of analyst group Neovise in Fort Collins, Colo., said that while people have gotten used to the multi-tenancy aspect of many cloud services, they still should have other security concerns.
“Is the data stored in an encrypted fashion? Is the data encrypted dur-ing data transfer? Who holds the encryption keys?” Burns said.
Michael Canniff, a professor of management information systems at
Key Questions to Present to PubLic cLoud, saas Providersbefore committing to a public cloud provider, skip the small talk and quiz vendors about price, reliability and security, industry watchers say. by adaM rigLian
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editor’s letter
software licensing a
labyrinthine Puzzle
Key Questions to Present to Public cloud,
saas Providers
advantages found in big,
small systems integrators
cloud AdoPtion
trust the SaaS provider [for security].”Jeff Kaplan, managing director of
consulting group THINKstrategies in Wellesley, Mass., extends Canniff’s ar-gument to the public cloud in general.
“The fact of the matter is the cloud is gaining acceptance in all quarters,” Kaplan said. “You can’t make a turn in this world without being exposed to the terminology of cloud.”
understAnd cloud service-level AgreeMentsWhile a security breach is every IT de-partment’s worst nightmare, a service outage doesn’t come far behind on the list. Canniff recommends examining the disaster recovery and backup plans of a SaaS provider before making a decision.
“Most of these providers will have an ongoing backup routine,” he said, adding that it is still the buyer’s respon-sibility to find out. “Has the SaaS pro-vider done a disaster simulation, what were the results of that disaster simu-lation and were they able to get back online?”
Burns also warns against simply as-suming that a cloud provider will have a backup plan.
“A lot of SaaS providers don’t have their own data centers. They tend to go to data center providers or just go to a cloud provider and get dedicated or virtual servers through them,” Burns said. “It’s sometimes worth knowing, Who’s your provider?”
Negotiating for disaster recovery
University of the Pacific and senior partner with San Francisco-based Mer-cury Consulting, thinks enterprises should take a three-pronged look at se-curity—data center, data management and access rights.
“If I was a corporate IT person and I’m looking to get into SaaS and start buying licenses from [vendors], the CIO or IT director are going to need to look at that SaaS provider and find out if their data center is run in a secure manner,” Canniff said. Enterprises should ask about multi-tenancy and if there are systems in place to keep one client’s data separate from anoth-er’s. Access management capabilities should also be a concern.
Canniff adds that many SaaS provid-ers have a proven track record with se-curity and are more competent at han-dling it than many enterprises.
“If you’re dealing with Fortune 100 or 500 companies, they’ve got very sophisticated IT operations,” Canniff said. “But if it’s the small to medium-sized businesses, and I’ve done con-sulting for a few, then I would rather
“you can’t make a turn in this world without being exposed to the terminology of cloud.” Jeff KaPLan, Managing director, thinKstrategies
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editor’s letter
software licensing a
labyrinthine Puzzle
Key Questions to Present to Public cloud,
saas Providers
advantages found in big,
small systems integrators
cloud AdoPtion
ways that are potentially more valuable but aren’t factored into a cost analysis.
“One thing I think that some people may not look at from an IT perspective is, Where is their core competency? Where do they want that to be?” Can-niff said. “For an on-premise solution, by definition, you have to have a core competency in data management, net-working, server upgrades and all of that detail.”
He adds that the SaaS model often works well with startups and small businesses that can’t afford the up-front spending that accompanies an on-premises product. n
during the contract phase of an agree-ment is also key, according to Canniff. He said that while standard contracts often include some sort of partial money-back guarantee if the provider exceeds a certain amount of down-time, it often is not enough.
sPend cloud coMPuting dollArs wiselyAnd while in negotiations, all sides recommend discussing cost and having a thorough understanding of pricing models. Different SaaS applications use different models, with the most popular being pay-per-user. Some of-fer pricing models based on how much data is stored.
Burns warns to look at the fine print and be sure to have an exit strategy. He said that while costs may be low while the application is being used, hidden fees may lurk in contracts if the company later decides to move data in-house or to a different SaaS application.
Canniff believes some enterprises are not weighing cost correctly, sug-gesting that moving to the cloud al-lows IT resources to be spent in other
different saas applications use different models, with the most popular being pay-per- user. some offer pricing models based on how much data is stored.
home
editor’s letter
software licensing a
labyrinthine Puzzle
Key Questions to Present to Public cloud,
saas Providers
advantages found in big,
small systems integrators
wHetHer a company should go with a larger, tier 1 systems integrator for its software implementation projects or a smaller, tier 2 niche provider depends on the kind of project the company has in mind—and whom it asks.
Many companies consider tier 1 systems integrators, such as IBM or Accenture, because they’re well-known brands or because they can bring a wide range of implementation resources to a particular project, but that can be a mistake, according to Liz Herbert, principal analyst with For-rester Research Inc. in Cambridge, Mass. Tier 2 implementation firms often specialize in certain industries or geographical regions and can offer expertise and advantages that some of the larger firms can’t, she said.
advantages found in big, sMaLL systeMs integrators while many businesses turn to the big guys for software installations, don’t count out niche service providers. by todd Morrison
systeM integrAtion
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editor’s letter
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Key Questions to Present to Public cloud,
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advantages found in big,
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systeM integrAtion
associated with going with a smaller firm, according to Herbert. For ex-ample, smaller firms can be as much as 10% cheaper on average, she said. They can also be more flexible when it comes to pricing plans.
“Sometimes our clients just want to work with tier 2s just because they can get more attention, better pricing, better flexibility,” Herbert said. “But in other cases, they also are the best source of niche, sometimes industry-specific, skills.”
Many companies also look to smaller systems integrators because they can deliver better service than many of the bigger shops, according to R. “Ray” Wang, an analyst and CEO of Constel-lation Research Inc.
“We see many firms leaving the large, traditional firms for boutiques that are more relationship-focused. In large firms, the top talent in project teams graduate and are ready to move on to the next hot project to burnish their resumes,” Wang said.
going Big for softwAre iMPleMentAtion ProjectsLarger firms are still the best option for huge projects with the aim of trans-forming the business, Greenbaum said.
For these projects “you need not just technology consulting, but very signifi-cant and deep process management consulting,” Greenbaum said. “Then you might need one of those big firms that doesn’t just bring technology ex-pertise to the table, but also process
“What companies should be most in-terested in is who can help drive their business forward,” Herbert said. “The important thing is to be open-minded to considering providers beyond those 15 or 20 that [companies] might hear about that are the global, largest multi-national ones.”
the cAse for niche systeMs integrAtorsTier 2 implementation service pro-viders can be a better fit for smaller deployments as well as for small and medium-sized businesses (SMBs), according to Joshua Greenbaum, an independent analyst and head of En-terprise Applications Consulting in Berkeley, Calif.
“If you are a small or medium-sized enterprise, you don’t really want to send in the Marines. You want to find a company more your size and more of a cultural fit,” Greenbaum said, adding that niche firms also often possess spe-cialized expertise that sets them apart from their larger competitors. Herbert agreed, noting that smaller vendors can provide harder-to-find assistance with newer areas, such as CRM and analytics.
“Success is dependent on both tech-nology and business understanding,” Greenbaum said, adding that SMBs should look for a “boutique” firm that’s “knocked it out of the ballpark for companies like you and your region and your industry and go with that.”
There can also be a price benefit
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home
editor’s letter
software licensing a
labyrinthine Puzzle
Key Questions to Present to Public cloud,
saas Providers
advantages found in big,
small systems integrators
systeM integrAtion
as much experience in how the steel group operated. In those process areas, we’ve had to play catch-up a little bit,” he said.
CMC chose the smaller, niche implementation provider MySup-plyChainGroup in Birmingham, Ala., when it came to recent changes to its global available-to-promise applica-tion, a project with a much narrower scope.
CMC hired the tier 2 service pro-vider because of the niche technical skills it could bring and also because CMC felt it was being heard, Lindsey said.
Despite some occasional disadvan-tages with going with large providers, Lindsey said CMC would continue to use two classes of implementation partners, depending on the type and size of the project.
More companies are pursuing the same approach, according to Herbert, the Gartner analyst.
“There’s an opportunity for those companies to go with a multi-provider approach. They can get the best of both worlds. If they have those more [overarching] strategic needs, they can go with IBM or Accenture or Deloitte or whoever,” Herbert said. “But to get price competitiveness, or specialized skills, they can have some of those niche suppliers in there.” n
change and best practices that you might not get elsewhere.”
Wang agreed, noting that boutique firms may have a limited number of specialists on hand and often lack the full coverage to deliver in multiple ge-ographies, especially when it comes to high-demand skill sets. Furthermore, multinational partners can offer a range of services that cover the entire project lifecycle, including process consulting, technology implementa-tion and support, Herbert said.
two iMPleMentAtion Projects, two ProvidersSome companies—especially larger ones that are growing—may opt for both kinds of systems integrators.
Commercial Metals Company (CMC) has used IBM for a range of de-ployments, from its ERP to its supply chain management applications. Gen-erally, the results were positive, though it depended on who the consultants were for that particular project, ac-cording to Taylor Lindsey, a supply and demand planner with the company, based in Irving, Texas.
For example, the team for the mate-rials management implementation had skilled consultants assigned to it, he said. But that wasn’t always the case.
“Some consultants didn’t have quite
business applications digest • may 2012 16
home
editor’s letter
software licensing a
labyrinthine Puzzle
Key Questions to Present to Public cloud,
saas Providers
advantages found in big,
small systems integrators
ABout the Authors
Chris Maxcer is a freelance business and consumer technology writer. Email him at [email protected].
Adam Riglian is a cross-site writer focusing on cloud technology. Before writing for TechTarget, he was an editor at the MetroWest Daily News in Framingham, Mass. Email him at [email protected].
Todd Morrison is news and features editor for SearchSAP.com. He worked as a managing editor at HCPro, a health care publishing firm in Marble-head, Mass., and as a daily newspaper reporter in New Hampshire, where he covered everything from business to politics. Email him at tmorrison@ techtarget.com.
Business Applications Digest is a SearchFinancialApplications.com,
SearchSAP.com, SearchOracle.com and SearchManufacturingERP.com e-publication.
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Jason sparapani managing editor, e-publications
Jacquelyn Howard executive editor
David essex, mark fontecchio, todd morrison
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ed Laplante director of sales
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