Why choose theNalpeiron Licensing Service vs. building your own licensing

A discussion document about the real costs, risks and issues associated with

Software License Management solutions. Designed to assist in business decisions

about internal development and 3rd party vendor selection.

Written by:Jon Gillespie-Brown, CEO, Nalpeiron

Sources: IDC Research, Gartner Research, Software CEO and LinkedIn forums, Proformative, NetSuite, Sand Hill Group, Intacct

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Building vs. Buying your licensing solution, a historic look of the way people work and the future of software licensing

Questions to consider when deciding which option you’ll choose for your software license management approach

Costs of in-house solutions are often hidden and not considered part of the vendor selection process. Explore and reveal these costs

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Hosted Licensing vs home-grown in-house licensing. Logic backed up by a survey of over 500 ISVs

Using a commercial licensing solution and how it can meet customer demand for more flexible licensing models

A clear guide of the benefits of using a cloud-based infrastructure for software licensing

8-9 10 11

cont

ents

Historically many ISVs have built their own licensing due to lack of flexible or cost effective enough solutions to their needs but today with the advent of standards such as web services and new vendors like Nalpeiron who offer a modern hosted paradigm many of those previous barriers to outsourcing have been removed.

In the past it made a great deal of sense to build your own licensing, often it was cheaper than the large up front perpetual licenses demanded by license system vendors but much more importantly these legacy providers did not provide the flexibility needed to integrate with in-house systems and customize the capability offered to meet the needs of the ISV precisely.

Today however, with the availability of more standards driven data interchange methodologies like web services and more open APIs this is no longer the case. Plus the introduction of competitors like Nalpeiron with a “pay as you go” model makes the whole equation the opposite - it’s now far lower cost to outsource than build in-house in real terms.

Until recently ISVs had very few choices of vendors to choose from and they all had 20 year

old business models and license management solutions based on older technology. However, in recent years a number of players have entered the market to offer the price and convenience of Amazon and Salesforce – Nalpeiron being the leader in these hosted licensing solutions.

Now is the time to review internal methodologies for licensing not only for the “shrink wrapped” and packaged software but also as a way to migrate to more flexible SaaS type models from the older enterprise paradigm.

With the move to offering end users more flexible ways to buy and more modern licensing options come many challenges and in-house licensing can rarely match the TCO and flexibility of outsourced solutions.

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Build vs. Buy?

In addition, younger CEOs are more used to running a business where many of the business functions can be outsourced as well as the infrastructure. Everyone is well aware of the ability to offshore development and to use external systems like Salesforce.com, Amazon web services and EC2 but the licensing industry in general has taken time to catch up with these advances.

So why has licensing lagged behind?

Build versus buy decisions often

come down to cost. Either

approach is going to require an

investment.

Oftentimes, the decision comes

down to whether it makes more

sense to continue spending

money on maintaining a

homegrown system or outdated

product that isn't meeting the

need, or if investing in a third-

party solution that meets current

and future needs is a better

approach

Source: IDC

A License Development program comparison

The purpose of this paper is to discuss the various licensing management system build-out options and their related costs, risk and benefits.It’s often tempting as a Software ISV to consider building the non-core licensing functionality yourself when looking to control your Software assets. In many ways it appears to make sense, you are an expert in Software development and this is an important part of your product requirements. However, often many of the issues of building in-house are overlooked.

In particular the costs and business risks are under estimated according to Gartner. In our estimation any internal development project can cost $100-500,000 plus the yearly support costs (if you include all the staff and associated costs that are way beyond a simple engineering effort), even for a very small ISV, and significantly more if you are a medium or large ISV - if you include all the engineering, support, licensing, server and related support costs vs. outsourcing.

One of the biggest real-life issues is keeping up with the needs of the business to be competitive and change with the market by offering flexible sales models plus platform changes, cracks and all the related engineering updates. This can slow down the rest of the business that is relying on the internal licensing team and dramatically affects the ability to release new products and therefore makes the ISV much less competitive in the marketplace. A big risk.

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Most of the research both from analysts and from real experience points to significant underestimation of costs and issues with licensing as whole along with an apparent shift in thinking from build your own to an outsource model.

ISVs today face profitability challenges from both internal and external sources. Factors such as variable market demand, rampant piracy, new business models and increased competitive pressures cause huge stresses on a business and cost the industry billions of dollars each year. At the same time, customers are demanding new ways of managing, understanding reporting on software licensing usage.

This in turn pressurizes ISVs to offer new flexible business models such as usage, subscription and software as a service to meet customer needs.

As ISVs expand globally, they may be faced with increasing reliance on indirect channels to grow their business. Additionally, in the face of software piracy threats, it is necessary to find ways to assure and enhance revenues and better control use of their intellectual property. ISVs need to do this all while preserving margins to retain more profits.

Software ISVs that embed software in the products using hard-coded licensing terms and inflexible pricing models have are having real difficulty responding to these changing market demands.

In summary, homegrown solutions are much more expensive when considering TCO than expected, they generally offer a very small feature set and are much “weaker” than commercial alternatives. On the other hand in recent years licensing vendors have become more cost effective, offer a wider set of standard APIs and flexible licensing options and a much lower TCO than homegrown.

Are you making a technical or business-based decision?

Software publishers should

consider the entire life cycle from

manufacturing to distribution in

order to properly evaluate the

decision whether to build or buy

a licensing solution in its broader

context

Source: IDC

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Questions and considerationsIf you plan to build for the first time, do you have...

• Internal expertise in licensing technologies?• Resources for the development, testing and maintenance of licensing technologies?• Expertise in integration of licensing technology with other relevant systems?• Support for the technology across multiple platforms, languages and time zones?

Other factors to consider include:

• Do you have the in-depth expertise to create a robust, hard to crack, system?• Can you constantly update the system to defeat attacks and meet market changes?• Will you adapt in-house technology in a timely manner to new licensing scenarios or to meet new customer demands and market realities?

Reasons often stated for building in-house:• The ISV understands the license software as we developed it with our own team• The ISV can change it if they need to and make it meet our specific needs today• The solution we develop will work with our own internal business systems• We don’t care about piracy or other business models so “basic” is good enough

Risks from internal licensing development:

• Inability to shape internal licensing to the needs of customers/new markets/competition• Slowing the speed to market of your products• Paying higher costs for a non-core activity than outsourcing• Licensing staff leave preventing future improvements and changes• Greater levels of losses due to piracy

In the IDC report on this subject the research highlighted these advantages to outsourcing:• Reduced cost and increased efficiencies • Avoid systems that do not meet the needs of dynamic software environment• Reduced cost in product fulfillment• Standard infrastructure across products• Faster time to market with new products• Improved enforcement of software licenses

Summary: Build Vs. Buy

Source: IDC

A software publisher's understanding of its core competencies with

regards to building and maintaining a licensing technology platform

is often a key driver in the build versus buy decision. Some

publishers may believe that since the company's core business is

developing software, this capability can and should be extended to

software-based licensing technologies. Executives at other publishers

may come to the conclusion that although developing software is a

core competency, developing and maintaining a platform of licensing

technologies is not.

BuildSoftware development is a

core competancy

Buy/OutsourceIt's better to focus on your core

products and customers

It may be cheaper? In-house is more expensive

if you include the costsall

It will work with our systems

and processes

Using a modern licensing system

offers this and lots more

We are too busy to change But you could be adding 10%+

to your bottom line

We can make something

“good enough” for us

You could gain competitve

advantage instead

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Counting the costs

Oftentimes licensing projects appear much cheaper to build in-house but get abandoned later due to the mounting costs of not only the build but maintenance phases, these run into $100Ks even for a simple project and can take years – today in that time a business can easily fail or a new business model can emerge.

These sophisticated modern requirements mean a much more complex solution than previously associated with software licensing. They extend the scope of the project to build in expected future requirements such as new platform and business model support (think SaaS and subscription

models) as well as constant modification of the solution to meet changing market dynamics (e.g. new licensing and distribution models) and piracy threats. The end result is higher initial costs and ongoing maintenance expenses plus the inherent risks of experience engineering team turnover without adequate knowledge transfer.

When considering whether to build or buy, you must also take the costs of “copy protection” into account. Not only are these recurring costs that directly impact TCO (protection mechanisms must be constantly updated against new threats). Effective protection requires a specialized skill

set that may not be readily available within every software vendor’s development team. Acquiring these skills in-house – either through supplementary training or recruitment – can be extremely costly.

All of the above doesn’t include all the other costs of infrastructure, 3rd party software, training and more.

Before embarking on – or continuing – an in-house license management system, you should look beyond the startup development costs to the overall TCO inherent in a comprehensive solution.

Costs of in-house solutions are often hidden and not considered as part of the vendor selection process. The trap many ISVs have fallen into when considering the costs of build vs. buy is to simply underestimate the complexity or sophistication required to offer the business what it really needs to compete in the market today.

Other forms of CostsOpportunity costs: These can be very large indeed, but very hard to easily calculate. Indeed, these are really about strategic thinking behind focusing on core competency and growing that way rather being a “jack of all trades”. There are some easy to show hard costs like engineers dedicated to the licensing but this category should also include how well you could do if you avoided non-core activity that slows down the rest of the team and is a diversion from your own innovation efforts.

Speed to market costs: This breaks into several areas; one is the time it takes for your own team or an outsourced one to respond to your initial requirements and then any changes in market needs. When considering outsourcing you need to consider the on-premise vs. hosted models as relates to speed along with the initial setup times – these vary wildly and increase PS costs significantly. For your internal development there is not only the fact you are likely to have limited resources to make changes, they can also slow down the business as you wait for licensing work to complete – a big downside to competitiveness.

Piracy and security costs: These relate to your markets and customers and could be very high if you are working with the consumer/international or very low if you are mainly US enterprise focused. A look at the audience will help judge this but in general outsourced vendors have far better technology for protection and show anywhere up to 10% revenue gains if piracy is an issue.

Since adding the Nalpeiron

protection we have

experienced a 15% growth

in international markets, 8-

10% of which we attribute

to having the Nalpeiron

protection in place.

Thomson

Reuters

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Consider these costs:COST: Up-front planning to make certain that the solution

developed will actually meet then organization’s needs

COST: Initial development requiring years of development

resources to create a robust, comprehensive solution

COST: Ongoing dedication of minimum two developers

to maintain and update the system and respond to market

changes, many more for larger ISVs complex requirements

COST: Training existing developers in security, or recruiting and

retaining developers with these skills

COST: Continually monitoring, analyzing and creating solutions

to meet emerging security needs

COST: Infrastructure, license fees and capital costs

TCO worksheet to compare costs of various options

A TCO analysis helps an organization understand and manage the many inter-related direct and indirect costs involved in managing and licensing a ISVs Software Assets.

A thorough analysis considers not only direct costs, such as software licenses, maintenance, and required hardware, but also indirect costs, such as software asset management, desktop administration and end-user support.

In addition, there are many “soft” costs that need to be factored in when considering the licensing landscape such as revenue recovery from piracy or overuse, competitive issues and speed to market along with simple opportunity costs from developing in-house licensing vs. outsourcing.

To compare the TCO of In-house development with Nalpeiron Licensing Service ™, there are three main expense areas and additional strategic costs to be considered:

• Capital Expenses• Operating Expenses• User Management Expenses• Other “soft” costs

Build Vs. Buy - A TCO Comparison

Capital ExpensesBuilding Ourselves Nalpeiron’s Solution

Software License Solution Internal development

costs and support

Fixed based on

product subscriptions

Software Maintenance &

updates

Internal development

costs and support

Included

New hardware $100K+? No costs

Database licenses $10-100K? No costs

Installation & Training N/A Not required

Project Consulting Expenses N/A Not required

Development Costs $250-500K+? No costs for licensing

Operating ExpensesBuilding Ourselves Nalpeiron’s Solution

IT and Help Desk operations

support costs

Higher, not cloud based Very low

Desktop Management and

Administration

Higher, not cloud based Very low

Software License Management Higher, not cloud based Very low

Internal User and IT Training Higher, not cloud based Very low

Data center costs (Bandwidth,

backup, etc)

$100K+? p/year Not required

User Management ExpensesBuilding Ourselves Nalpeiron’s Solution

End-user Training & Support Higher, not cloud based Very low, easy to use,

lots of offline and cloud

based options

Downtime Higher, not cloud based 99.999% uptime

End user License Support Higher, not cloud based Very low

Fixing $100K+? p/year N/A

Other forms of costsBuilding Ourselves Nalpeiron’s Solution

Opportunity costs Very high No costs

Speed to market costs Very high No costs

Piracy and security costs Variable, 10-40% loss Make 10% revenue gains

For more detailed TCO discussions please review our whitepaper:“Total Cost of Ownership and Return on Investment model for Software Licensing”

According to Nalpeiron customers, when over 500 were surveyed, these issues were the key reasons for moving away from another vendor or away from homegrown licensing.

FlexibilityBy far the most popular reason to switch out home-grown

licensing is to provide the business with far more flexibility in

offering its customers new business models, ways to buy and

to make these changes fast and easy into the future.

Nalpeiron will allow you to instrument your business to offer

both older style and completely modern business models,

along with the capability to analyze and change over time

based on the market requirements and competitive threats.

Reduce the business riskLicensing is integral to the success of your Software business

and therefore getting the right supplier to support your long

term objectives is critical to reducing risk to your business.

Nalpeiron offers you the safety of an external supplier whose

sole focus is on producing licensing solutions that offer

you and your users 24x7 service. We are the experts in the

complex mix of technology, encryption, servers and platforms

that allows us to take care of your needs allowing you to focus

on your core business.

Our technology is battle tested with millions of users, across 8

languages, 100 countries, and Win/Mac/Linux platforms. For

years Nalpeiron has improved and refined its copy protection

and piracy protection algorithms – a capability that is far

superior to even the largest ISV.

In addition to offering expertise and resources to reduce your

risk, we also offer an Escrow service to remove the business

risk of outsourcing.

Improve your speed to marketIn today’s rapidly moving Software market, being able to

release and ship products quickly and without delays to the set

project schedules are critical. We all know hitting the ship date

is a real challenge.

Out sourcing non-core functions like Licensing can help de-

couple this critical functionality from the Software development

process internally, preventing issues with delays from other

parts of the business.

In addition, if you choose a partner who offers a solution

that is easy to integrate and fast to implement with your own

programming efforts, you can ship with a few extra days of

engineering time rather than months with in-house teams or

more cumbersome technologies.

As well as making it easy to implement, you need something

that works out of the box and that uses standards to allow

you to connect all your internal systems quickly too so that

operations don’t slow down your delivery dates.

Finally, setting up the entire supporting infrastructure and

training on it can take months with issues around servers,

bandwidth, SLAs, databases and all the required connectivity.

A hosted solution can eliminate all of these issues and allow

you to simply skip three to four months of delays to your

project.

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Hosted licensing vs.home-grown in-house licensing

Automatically capture revenue leakageIncrease sales by tracking license infractions and automatically

marketing them using the Nalpeiron “overdraft” facility

The Overdraft facility presents an automated way to “catch”

users who will either deliberately or accidentally abuse your

software license terms – providing you with additional sales

opportunities!

The Overdraft facility is a great way to expose and capture

license abuse while offering users “softer” policing. Softer

policing is important, especially with business customers, as

it avoids many of the issues associated with software license

management and it shows a level of trust to your customers.

Use this unique tool to identify overuse and automatically

capture new revenues.

Using a Nalpeiron solution you will be able to instrument your

Software to allow you to capture, control and manage usage

data like never before. In addition, your staff will be able to

create and produce useful reports on the way your software is

consumed, how much piracy you are suffering, what your sales

cycles are, who your hottest clients are, when to have sales

focus on what part of the customer base and hundreds more

critical metrics.

The opportunities to effectively plan and build a strategy are

now all at your fingertips, all in the cloud when you need

them and all easy to set up and manage by finance, sales and

marketing staff.

Plus many more features and benefits.

Built-in automated marketing tools to drive revenuesUse the power of the Nalpeiron ActiveMarketing™ automated

tools to increase product marketing flexibility – now you will

have real-time data and reporting, automated email marketing

and the ability to push hot leads to sales - all built into the

Nalpeiron Licensing Service.

You probably have read about the value of adopting a modern supplier with a SaaS business model giving you all

these benefits over legacy software products offered by our competitors. In addition to all the SaaS benefits, here

are some of the reasons that customers have chosen Nalpeiron over our competitors:

• Nalpeiron is technically superiorIn many cases our customers simply find our platform offers a far superior technical solution to their needs.

The Nalpeiron Licensing Service covers all major platforms (Win/Mac & Linux), 8 languages, an extensive API to

connect everything and totally flexible way to sell and manage your software.

• Nalpeiron offers a fast ROISaving engineering, operational and capital costs over an in-house or competitive solution. Nalpeiron usually

shows ROI in months, not years. Our hosted solution also offers a transparent and cost-effective pricing plan.

• Nalpeiron drives revenueAs well as offering the obvious means to control licenses and boost revenue that way, Nalpeiron also offers a

complete range of marketing tools that focus sales on hot leads, offer product marketing useful reporting, and

allows marketing to create new sales from automated systems to tap revenue leakage and more.

• Nalpeiron offers a modern way to license your softwareNalpeiron offers you the choice to outsource all of the difficult and expensive infrastructure associated with

licensing. This is the modern way to run a Software ISV, allowing you to focus on your core business while

Nalpeiron hosts the licensing.

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Nalpeiron is a very flexible software platform (SaaS) that addresses our customers requirements in a simple and easy to implement way.It also adds value in many ways over an old style licensing system.

Hosted licensing vs.other types of solution

Meeting customer demand for more flexible sales models

We all know about SaaS and other business models that are growing rapidly in the software space but they are simply another business model with the same basic innovations and customer base traditional ISVs serve. In other words, not everyone has to switch to the new SaaS trend to satisfy their customers - they can still happily deploy their software as an on-premise server or an installed application but they can change the basis upon which they charge for it.

Switching business models from the older style perpetual model to usage or subscription based charging has nothing to do with the delivery mechanism. With a powerful and flexible licensing system you can quickly switch your business model and entitlements basis without changing the rest of your operations and back end infrastructure.

The IDC licensing survey also reveals an increasing demand for more flexible licensing models, which in turn is going to fuel the demand for more sophisticated application usage tracking tools. 22 percent of publishers currently offer usage-based pricing (up from 15 percent in 2009), and over the next two years it is expected to rise to 41 percent).

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Why use a commercial Licensing Solution?Implementing a commercial solution can deliver a number of important fiscal as well as technological advantages over a homegrown license management solution.

A commercial solution may also offer additional, qualitative advantages over a homegrown solution such as greater levels of security and robustness than comparable homegrown solutions.

Most homegrown solutions are very simple and lack the tools, features and options that contribute to greater operational efficiency.

Modern hosted solutions are also set to scale, allowing vendors to grow the solution without slowing the growth of the business – with a pay as you go model.

Software publishers should also

consider ongoing trends in

pricing and packaging that call

for additional flexibility as well as

support for new usage scenarios

and more granular packaging.

Source: IDC

Subscription-based pricing Pay as you go, on an annual basis, unlike conventional

systems where you have to make a major up-front

investment in licenses, hardware and software. You benefit

from better cash flow and far greater IT flexibility.

Ease of access at anytime, and from anywhere Cloud computing is “always on,” making it easy to grow

your business and support remote workers and locations,

or support a highly mobile sales or service team, because

people can access the cloud any time, day or night,

from any browser, desktop or mobile device. You, your

distribution channel and your end users can all access the

service 24x7, anywhere in the world.

High availability Cloud software architectures are designed from the

ground up for maximum network performance, so they

frequently deliver better application-level availability than

conventional, on-premise solutions.

Unlimited scalabilityThe Nalpeiron Licensing Service has been designed to scale

up or down and evolve according to your needs without

additional infrastructure. There are virtually no limits to how

many users you can have or the number of licenses that

can be activated. Nalpeiron has years of experience with

millions of end users managed by our technology.

Outsource No need to setup, deploy, manage or maintain licensing

servers.

Lower risk You can reduce the risks of licensing staff leaving or the

system stagnating

Focus on your competency No need to keep up with the crackers and hackers, or

the constant technology changes - let Nalpeiron take the

burden of software licensing, freeing you to focus on your

core business instead

Flexibility You remain much more flexible without fixed capital

costs and unnecessary staff. No need to keep expensive

resources in house for non-core functions.

Low overhead Upgrades, maintenance and system administration take

place in the cloud and are managed by Nalpeiron, so you

don’t have to spend nights or weekends supervising a new

version upgrade or a failed server.

Fast deployment You can be up and running within days, instead of months.

Use the Latest Product Version On-demand software allows you and your end users

to enjoy the benefits of Nalpeiron’s latest features and

benefits without requiring you to worry about handling the

complexity of software updates.

Measure and report license activation and usage Get a clear picture of the products and features actually

being activated and used. Use captured data to generate

competitive advantage and increase sales.

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Benefits of cloud-based license infrastructure

Want to know more?Don’t hesitate. Get in touch...

+1-888-800-8818 (US only)

www.nalpeiron.com

+1-408-938-5765 (Canada/World) +44-20-3286-6869 (EMEA) +1-650-352-9046 (Fax)

The Nalpeiron Licensing Service™ is a comprehensive platform that enables software publishers to create a range of flexible ways to sell and

market their software, with coverage for all the major platforms and the ability to choose whether to deploy software licensing infrastructure in

the cloud or on-premise. Nalpeiron is one of the strongest and most robust complete solutions on the market that supports millions of end users

with strong but friendly ways to monetize your software.

What is the Nalpeiron Licensing Service

Nalpeiron Inc560 S. Winchester Blvd. Suite 500, San Jose, CA 95128

USA

Nalpeiron Ltd 2nd Floor 145-157 St John Street London EC1V4PY UK

EMEA

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