Most software sourcing and vendor managers have had a tough time in 2009, withstanding unprecedented pressure to cut costs but with few negotiation cards to play - in few cases they could credibly threaten to cancel maintenance, for example.

To make matters worse, they have also had to deal with archaic software licensing models that recent technology changes have made unmanageable.

However, it's not been all bad news. Some IT sourcing managers have had discretionary projects to commission and have found that these have provided unprecedented negotiation leverage in 2009 as vendors of all sizes struggled to win new deals. This leverage may continue into 2010, or fade away if business picks up, so buyers should use it now, to fix some dangerous gaps in their current agreement.

Many IT sourcing managers have found to their cost in 2009 that the most dangerous software licensing model is hardware-based pricing, including metrics such as ‘server' and ‘processor', because:

Rampant data inflation makes it a gravy train for vendors. IT managers used to accept that they had to buy more software capacity as they added processing power, but restricted budgets have driven buyers to question this assumption. Enterprises need more computing capacity each year, even if the number of users is flat or shrinking, and this has provided steady license revenue for software publishers. The latter have kept the ‘Processor' or ‘CPU' name but surreptitiously changed their policies to include multipliers based on the quantity and speed of each chip's cores, to ensure that they, not the customer, benefit most from improvements in processor technology.

It cannot be applied fairly to virtualised datacentres. IT sourcing managers cannot safely ignore this game changing technology. Forrester continues to see enterprises facing multi-million dollar bills because a compliance audit has found them to be significantly under-licensed. The software company enforces the letter of the contract, which still limits deployment in terms of physical assets. This can mean the customer having to buy licenses for all its servers, even if only a subset are supporting that vendors' products at any one point in time (see Figure 2, click on to enlarge).

Customers need licenses for all programmes they might allocate to that asset

What is the alternative? There are no perfect license metrics, but IT sourcing managers should be more open to innovative value-based pricing models. I've spoken with several vendors who would like to get away from a hardware-based model, but are fearful of buyer resistance.

Role-based user pricing is one simple solution. ERP companies such as Lawson and SAP have offered user categories for years - it allows them to match each user license's price to the owner's usage frequency, extent and duration. Database and middleware vendors have resisted it, so far, but this is unacceptable in today's world of interconnected systems in which, due to vendors' Indirect use rules, everyone uses everything. The single per user price that was set for the most frequent users is too high for most use cases, which pushes customers to the per processor option that, as we've already seen, is even worse.

Traditional software publishers will resist change, so software buyers need to drive it.
The result may be new models, or amelioration of the old ones, but either would be better than the current situation. Sourcing managers should push their software providers to address these issues and reward the ones that do with more business, while limiting purchases from those that stubbornly cling to discredited concepts. The laggards will soon reconsider, if they see their old-fashioned model adversely affecting sales.

About this article:
Forrester will be explaining where they should focus, at our Services and Sourcing Forum in London on October 22nd and 23rd. As a preview, this article highlights the most significant example.