InformationWeek.com

Welcome Guest. | Log In| Register | Membership Benefits

December 14, 1998

A License To Deal

Falling prices and rising competition among software vendors are giving companies more leverage when negotiating deals for enterprise software

By Stuart J. Johnston with Jeff Sweat

Related stories:

Windows NT: Sticker Shock

License To Bill Is About To Expire

And From Our Sister Publications:

InternetWeek Lotus Introduces New Server Structure, Slashes Prices

Computer Reseller News Software Licensing Growing Fast

growing number of companies are taking charge of the complex and painstaking process of buying software. Helped by falling prices and growing competition among vendors, savvy negotiators at companies from General Motors to Internet startups are striking deals that lower up-front costs, exact more flexible terms, and reduce administrative headaches. But it's not easy.

One of the few things more complex than enterprise software is the fine print on licensing it. "Licensing complexity is a monumental problem," says Bob Quick, director of internal IT at Government Computer Sales Inc., a software reseller in Issaquah, Wash. "It consumes an exorbitant amount of time, and the licenses are so complex that I can never be certain I'm in compliance." Dennis Walsh, GM's chief technology information officer, compares managing the automaker's many software deals to "managing a country."

The multifaceted nature of software purchasing will be slow to change, but new developments offer hope for IT managers looking for simpler terms. Next month, IBM will offer its System/390 mainframe software in two standard price packages, compared with nine today. SAP has begun charging select customers an annual fee, rather than large one-time sums that carry additional charges as modules and users are added. Computer Associates and Sybase are among the vendors dabbling with deals that match a customer's payments to its business growth. And outsourcers are increasingly offering applications on a pay-as-you-go basis over the Internet.

But even with these user-friendlier deals, let the buyer beware. There are pros and cons to all software-licensing options, and easy-to-follow terms may not be the best for a given situation. Indeed, they may provide "a false sense of assurance," says Gartner Group Inc. analyst Mary Welch.

Under IBM's simplified program for the S/390, four IBM products-the DB2 and IMS databases, CICS transaction monitor, and MQSeries middleware-will be priced on either a usage or system-capacity basis. In addition to being simpler, the plans can save customers money: IBM estimates half of its mainframe accounts can realize savings with the usage option.

In September, IBM introduced a licensing package intended to drive down the cost of running applications on the S/390. IBM says its so-called New Application Growth Environment can reduce IBM software costs by up to 75% when running E-commerce, data mining, and enterprise resource planning applications on an S/390.

Another concept catching on is the "annuity" model, which involves an umbrella contract covering many of a software company's products. It's an approach with roots in the world of high-end systems, and some ERP vendors see it as a way to simplify license administration for both themselves and their customers. "If they could come up with a good price, it takes an awful lot of complexity out of a historically complicated process," says Gartner Group's Welch.

More Than Price
GM prefers annuity pricing and other kinds of "enterprise" software arrangements that involve annual or per-user pricing, says Walsh. The automaker, already an SAP financials customer, is shopping for a global ERP package. "We go into a deal with an aggressive approach toward pricing, but it's not just good pricing we look for," says Walsh. "We encourage vendors to be very innovative in the way they present their proposals."

SAP has quietly begun offering annuity pricing to a few customers. Company officials won't go into detail, but Kevin McKay, president of SAP America, says "several key customers" now pay an annual subscription fee for the vendor's products. The deals, running five years or longer, also give the customers more input into SAP's product direction, he says.

J.D. Edwards, which now charges by concurrent users, is weighing the same approach. CEO Doug Massingill says potential benefits for customers include spreading the cost of a software purchase over the period of use and making it easier to track return on investment. It might also make business more predictable for J.D. Edwards. "All of us would like to have respectable, predictable, reliable revenue," says Massingill.

FTD Inc., a J.D. Edwards customer, is interested in the annual-fee idea. "One of the things about software that's difficult is the huge expenditure up front," says Linda George, CIO of the Chicago florist chain. "For us, one of the challenges is that we need the sophistication of an enterprise application, but we can't afford the price."

But not everyone is as enthusiastic. Rob Enderle, an analyst with Giga Information Group, says the model "pretty much locks you hip- to-hip to the vendor," because of the ongoing nature of the contracts.

Vendors face some obstacles as well, says Massingill. For example, they still must decide how much of an annual fee to charge. They also must learn to monitor annuity licensing and adjust their businesses to this new model. There are also regulatory issues, he says, since a company can't offer radically different pricing to different groups of customers. "The movement is all or nothing," he says. "What we're talking about is fundamentally changing the model of the ERP company."

Microsoft CEO Bill Gates floated his concept for software annuity pricing two years ago. Gates envisions business customers eventually paying a flat fee for a maximum number of users and receiving all software updates that come out during the life of a contract. Updates and patches would be automatically installed on users' computers.

Microsoft isn't there yet-partly because its own technology can't fully support the auto-distribution process and partly because the network bandwidth needed to ship loads of software is often inadequate. But Microsoft is making progress. Last year, the company instituted its first enterprise agreements, which run for three years plus a one-year option. Customers pay for a minimum number of users and can use any version of a product during the life of the contract. "It helps customers reduce the overhead, so when users need software they don't have to go through a budgeting cycle," says Peter Boit, Microsoft's general manager of worldwide volume licensing.

That may be a step toward simplicity, but how does Microsoft rate when it comes to lowering software prices? Some analysts say Microsoft is one of the few companies moving against the trend and actually increasing prices. Gartner Group predicts business customers could pay 50% more per year through 2002 to use Microsoft's software, the result of changes in the terms of usage, such as its elimination of concurrent licensing for some products.

Microsoft hasn't disclosed pricing for Windows 2000, the upgrade to Windows NT 4.0 scheduled to ship next year. The company has said it will ship three editions of the server products instead of the two that exist today, and that its midtier server, called Advanced Server, is likely to be priced lower than today's Windows NT Enterprise Edition. But it's possible, even likely, that Microsoft's new high-end NT server package, called Windows 2000 DataCenter Server, will represent a new high in NT server pricing.

Many companies already pay more for Microsoft's desktop operating system when they move from Windows 95 to Windows NT 4.0-Microsoft's recommended upgrade path for businesses. Windows 95 costs about $200 per user, compared with about $300 per user for NT 4.0. It's an expense other companies will face in moving from Win95 to Windows 2000.

ERP Price Wars
It's a different story in the ERP market, where competition is spurring price wars and flexible contracts. "Customers can choose terms and conditions that better match the way they want to do business," says Giga Group's Enderle.

Office furniture manufacturer Herman Miller Inc. in Zeeland, Mich., gained favorable terms on its Baan implementation, which is under way now. "We have seen the vendors be more willing to negotiate if you press them on it," says Rex Kiekintveld, the company's director of transaction-based systems. Herman Miller didn't have to start paying maintenance until it went live on the system, significantly reducing its upfront costs.

Baan unveiled an easy-to-understand, low-priced pricing program in October. For a monthly fee of $99 per desktop, users will get Baan's ERP applications bundled with Microsoft server software. The three-year deal applies to licenses of more than 5,000 desktops. Smaller deployments cost more.

Computer Associates is also breaking out of old licensing molds. For example, Exodus Communications didn't pay anything up front when it bought Unicenter TNG and other CA software. Instead, the 4-year-old provider of Internet server hosting and enterprise-management services pays CA 1% of its annual gross revenue, which through the third quarter has totaled $31.7 million.

This type of licensing tied to a company's revenue is now standard practice at PeopleSoft. "We like that system because it is easier to evaluate and determine our own cost benefits," says Steve Cooper, director of strategic IT at Corning Inc. "Once we agree on the price, we don't have to worry about how many users are using this thing."

A handful of CA customers also pay an up-front, flat fee for software. Allstate Insurance Co., for example, paid a one-time price for a multiyear contract that covers Unicenter TNG and other CA products. Factored into the deal are allowances for using more CA software over time. When Allstate first bought Unicenter, it had only about 50 servers, but that number is now in the hundreds and growing. "I don't have to worry that every time we get new servers, we'll have to wonder how much they are going to cost to manage," says Mike Jaslowski, a director at Northbrook Services, an Allstate spin-off that handles a number of IT projects for the insurance company and other customers. "All I have to worry about now is getting the job done."

IBM does some creative "shared risk" kinds of licensing deals with startups, says Steve Mills, general manager of IBM Software Solutions. Under these arrangements, the customer pays a low upfront price, with the understanding that fees will go up as the company grows. But IBM is selective with these kinds of arrangements, Mills says, because the revenue streams are unpredictable and IBM must define the terms precisely with the customer.

Excite Inc., a Redwood City, Calif., Internet portal company, is among those using an applications-outsourcing arrangement to manage cost and complexity. In October, Excite went live on PeopleSoft's financial applications, which are managed by Corio, an applications-hosting company. Under the deal, Excite's payments to Corio increase as its revenue grows. "This was much preferable to making a huge up-front investment," says Excite CFO Bob Hood.

To implement the financials apps otherwise would have meant a multimillion-dollar investment for Excite. The deal with Corio resulted in considerable savings, though Hood declined to be specific. "The price was so prohibitive that we wouldn't have chosen PeopleSoft had we had to do it the traditional way," he says. In software deals, tradition is fast becoming a thing of the past.

--With additional reporting by Beth Davis, Martin J. Garvey, Marianne Kolbasuk McGee, and Tom Stein

Back to This Week's Issue

Send Us Your Feedback

Top of the Page