It used to be a simpler world. Back in the days of mainframe-centric systems or the early days of client-server computing, you paid according to the size of the CPU or the number of seats that you needed to deploy.

“As a general principle, CPU pricing is dead,” argues Rorie Devine, IS director at BetFair. “What all the hardware and software vendors need to do is be more flexible. At the moment, the more you buy, the more you have to pay. Frankly that is a disincentive to success. What I try to do with our partners is to set up pricing so we pay according to our success. We are seeing changes in vendors’ approaches. A lot of the relationship managers within suppliers are more empowered now and have become easier to deal with.”

Money down the drain

Traditional licensing practises have led to expensive waste. Licences based on seats or processor size tend to be sold in batches or groupings. Find yourself at the wrong end of a grouping and you will end up paying for seats that you just do not need and probably will not use.

CRM licences are a good case in point. Research firm Gartner Group surveyed 700 companies worldwide and found that nearly 42 per cent of Siebel licences purchased were basically shelfware. The situation is made worse by the aggressive discounting practises in the software industry.

While officially most software firms insist that there is a list price from which they will not deviate, the reality is that towards the end of the sales quarter, when the quotas and targets remain unmet, most vendors will cut a deal to close a sale regardless of the price. Such practises can encourage customers to buy more licences than they may initially need by offering large volume discounts.

Even if companies never use all the software they purchase, they may feel that, with the discount, it was still worth it. But this in turn is a false economy as those companies often fail to factor in the higher maintenance fees, which can add up to nearly a fourth of the licence cost per seat.

Indeed, under some contracts, companies are required to continue paying maintenance fees annually for several years, whether they use the software or not.

So the rule of thumb is simple: always read the small print. Essentially licence costs are comprised of an entry fee, plus a multiple based on the number of seats that you’re buying plus annual maintenance and support charges. For the maintenance aspect, users need to ascertain whether this includes upgrades and technical changes.

Ultimately, of course, the licensing procedure that you end up with will be heavily influenced by your own negotiating skills. How far are you prepared to play hard ball and – equally important – how flexible is your vendor prepared to be in order to win or hang on to your business?

Turning tide

The scales seem to have tipped in favour of the user community, with vendors becoming more accommodating in their willingness to be flexible. A good case in point is Computer Associates. During the 1990s, CA would regularly be slated by its users for its tough stance on licensing. Today the firm appears far more open to different forms of licensing.

“We are historically a CA customer,” says Gareth Bridges, head of IT systems at Wakefield Health Trust. “When we were coming to the time of year when a lot of our licences were due to expire and be renewed we began talking to them about the process and the number of pieces of paper that we had flying around. We asked if there was a better way of doing it,” he says.

“We had actually considered leaving CA because we had been unhappy with certain aspects of the product and one of the problems had been the licensing. In 2002, when I joined the Trust, the company been a CA customer for some time. It was a bit of a mess. The technology at the time was not particularly good and they were very inflexible about how we paid for it.”

“We had been buying individual licences for individual components from CA so we had several hundred pieces of paper flying around. We had about 50 or 60 Intel servers with separate disks. Each server would have three different bits of paper related to it,” says Bridges.

“We had taken out a three year agreement with a capacity licence model whereby we paid for the capacity managed by the software. You have to determine the raw capacity that you have. We were under the 10Tb limit. It’s done on a certain degree of trust. Part of the agreement with CA is that you do an audit of your capacity.”

Bridges agrees that the balance of power has shifted. “It used to be that once the technology was in, then it was in and that gave the supplier an upper hand,” he recalls. “But things have changed for the better. We have seen the most improvement in our relationships with CA and Microsoft, especially on the software and services side. We are now happy with the way that we’re paying for our licences.”

The pace of change

One problem that both users and suppliers wrestle with is that changes in technology or the way that technology is deployed can frequently outstrip the way that licences are charged for. The emergence of grid computing into the commercial mainstream, for example, will inevitably change the way that processing power is licensed.

There is a good example already obvious to us in the shape of the Software as a Service (SaaS) model offered by the likes of, NetSuite and RightNow.

This model is predicated on the basis of buying – or renting – the amount of application functionality needed at any given time. Equally important is the ability to scale up and down the number of subscribers according to demand at any given time, thus basically eliminating the threat of having to buy ‘redundant’ seats, as is typically the case with the traditional on premises licensing approach.

One user that has moved from the on premise model to the on demand approach is Esker, which was a user of Siebel, but has made the move to “They specialised in putting up roadblocks,” recalls Bob McMahon, head of worldwide CRM. “We had one incident when we had to contact Siebel to get some tools for a repair but they wouldn’t do it because our maintenance agreement was about to expire. Our contacting them simply started a barrage of phone calls about renewing the maintenance contract.

“By the time Siebel made its own on demand announcement, the bridges were well and truly burned. The bottom line for us was all about cost. Siebel could be fine as long as you threw money at them. We are a very cost conscious company. Siebel had million dollar signs all over it. The move to and the on demand model made financial and licensing sense.”

But not all efforts to overhaul licensing practise to mirror new technologies are necessarily as helpful as they might initially seem. Oracle announced new tariffs for servers using multicore processors. The alterations reflect the fact that some chip makers have packed in more cores than others and offer different levels of value. Oracle will charge a factor of just 0.25 of a single-core CPU fee per core for UltraSparc T1 processors that squeeze in eight cores per CPU.

In practice this means that Oracle software running on eight cores would require only two software licences. AMD and Intel chips that pack two cores will be charged at 0.5 per core so a four-CPU, eight-core system would need four processor licences. IBM and other processors will be pegged at 0.75 so an eight-core tariff would require six licences. Oracle had previously charged 75 per cent of the per-processor cost for each core in a multicore system, rounded up to the nearest whole number. It is an important shift in policy. Intel has predicted that by the end of this year, 85 per cent of Intel-based servers will ship with dual-core processors so an evolution in licensing practice is clearly necessary.

Increased complexity

But some analysts are unconvinced of Oracle’s motives. “If newer hardware is needed to make software scale, why should the user then pay more money for the software?” asked David Mitchell, software practise leader at Ovum.

“We think that this is a step in the wrong direction – it adds a layer of complexity to Oracle’s multicore policy, and with a pricing model this detailed it can only get more complex.”

So what is really needed to make licensing practice reflective of business needs? BetFair’s Devine concludes: “What is really needed is for vendors to approach licensing more strategically.

“They need to invest time and effort in relationships. I am irritated by vendors who take a quarter by quarter view of relationships. We should all be in this for the long haul and licensing practice needs to reflect that.

“Vendors are always more flexible in their deal making in the last week of the sales quarter. They need to take a longer term view in their own interests.”

The ability of vendors to use licensing deals and contractual obligations as a tool to lock in customers has led to an awareness on the part of users that such arrangements need to be monitored regularly.

A good example will come later this year when British Educational Communications and Technology Agency (Becta) – the UK government’s agency leading the development and implementation of the Department for Education and Skills e-strategy – publishes the results of a value-for-money review of its licensing arrangements with Microsoft.

Becta signed a three-year Memorandum of Understanding with Microsoft in January 2004, which, it argues, did lead to significant price reductions and continues to provide useful cost savings for the many schools that use Microsoft software. But the agency is alert to the dangers of licensing lock-in. By way of something of a warning shot over the Redmond bows, the agency has already noted that there are acceptable open source alternatives. The latest review – due to be published in July – will look at the real cost of working with Microsoft.

The review’s remit has particular focus on Microsoft’s subscription licensing models and the risks associated with non-perpetual licences.

It will report on the total costs of exiting those licence agreements and the corresponding risks of ‘lock-in’. If, as seems likely, risks are identified, the report will outline some possible mechanisms whereby schools and colleges can mitigate risks such as unexpected price rises.

“In areas where a single supplier is dominant, particular vigilance is necessary to guarantee that this happens and that schools do not find themselves inadvertently ‘locked in’ to a particular supplier via, for example, a licensing mechanism,” commented Owen Lynch, chief executive of Becta. “I am particularly keen to ensure that where there are alternative products to those available from a dominant supplier, schools have easy access to them. We will explore with the industry whether, in the case of products which are ‘free’ to the education sector, it makes sense to reduce barriers to uptake by ‘preloading’ such offerings.”