Are you paying too much for software licences?

There's an abyss waiting for unwary IT managers; it's populated with traps and snags and there are no soft landings. Dan Tynan eases the way

You say software licences give you migraines? Talk to David Fenrich. The senior asset manager at Cingular Wireless oversees more than 700 software licences for 42,000 desktops, workstations, and servers. Just doing the annual "true-up" -- inventorying apps and making sure Cingular has the right number of licences for its users -- was largely a manual task requiring more than 200 people.

Today, Fenrich does the job with Peregrine Systems' Desktop Inventory and Network Discovery appliances, using a single administrator and just seven machines. Fenrich says that Cingular has saved millions of dollars on unneeded licences and has reduced potential liability for unintentionally using more licences than the company has bought.

Cingular's experience illustrates the benefit of getting software licences in line. Although apps such as Peregrine Systems' AssetCenter, Altiris's Compliance Suite, and Sassafras Software's KeyServer, among others, make it easier to manage existing licences, they can't keep you from agreeing to a bad deal.

Software licensing agreements are rife with pitfalls. The wrong pricing model, usurious maintenance fees, vague language, limited warranties, and failure to plan for change can cost you big over the long haul. Here's how to avoid the most common licensing mistakes.

Shelfware: Use it or lose it

The biggest licensing "gotcha" is well-known but hard to avoid: Companies are often paying for software that just gathers dust on a shelf, and many aren't even aware they're doing it.

"Most customers aren't taking full advantage of the software they've purchased," says IDC analyst Amy Mizoras Konary. In a recent IDC survey, only 14 percent of executives of large companies said they were getting full use of the software they had licensed.

Unfortunately, many enterprises have so many different applications, each with its own licensing policies and terms, that it's hard to keep track of what they have and who is using it.

"This is an area where people don't know what they don't know," agrees Mark Gamis, executive consultant at Compass Consultants. "If everything isn't managed under one financial umbrella, you can't see duplication, so you don't know whether you're paying for two different products that do the same thing."

The first step is to carefully inventory the apps you've licensed and track how they're being used. But don't expect vendors to give you any refunds on shelfware, says Frank DeSalvo, a research director at Gartner. "Why should a vendor give up revenue because you made a mistake? We advise clients to never buy more than they can implement within a 12-month period."

It's not always a total loss. You might be able to trade unused licences for new software from the same vendor or reduce annual maintenance fees, which can run as high as 30 percent of the original purchase price. More than a third of Cingular's $US230 million IT budget goes to maintenance agreements, Fenrich says. When Cingular discovered that many of its licences were going unused, they renegotiated the maintenance deals, trimming costs by $2.4 million since November 2003.

Just don't expect to get as good a deal when you downsize your agreement, says Jacqueline Woods, vice president of licensing and pricing strategies at Oracle. "If you have 10,000 named-user licences and you go down to 5000 users, your support fees won't reduce by 50 percent. The original discount you received was predicated on a 10,000 named-user licence. While licence and support discounts are based on the total dollar volume per transaction, the discounts aren't linear."

Software audits: watch your back office

Just as buying software that you don't use costs you money, so might using software you haven't bought. If a vendor audit determines you've exceeded the limits of your licence, the Business Software Alliance of Australia may hold your company liable on a per-application basis.

Most violations stem from a lack of oversight or misinterpretation of the terms of the licence, says Ed Chopskie, a vice president at Peregrine Systems. "Many organizations mistakenly believe that if they have an enterprise licence agreement they can install anything they want, anywhere they want to," he says. "They're confusing an enterprise agreement with a site licence."

Another common mistake is to assume that a licence allows software to be installed on a home machine as well as in the office. Some licences support home use, but others do not. For example, Microsoft's Select, Open, and Enterprise Agreements allow licensed users to install Office apps on a home PC.

If you've procured software for evaluation, keep tight control over it so that no one can start using it for production purposes. Vendors come down hard on customers who deploy developer or evaluation versions willy-nilly.

Chopskie advises clients to set clear policies about software distribution, educate users about licence terms, and perform regular in-house audits to ensure compliance. He added that enterprises should look carefully at the audit language in the licence agreement and make sure it spells out what can trigger an audit, who will conduct it, how much time they'll have to do it, and what types of proof are required to meet the standards set out in the licence.

Payment: define your terms

There are almost as many ways to pay for software as there are applications. You can pay a set amount per seat, concurrent user, CPU cycle, logical partitions of a CPU, or any combination of the above. You might pay a single price up front, spread payments over time, or pay an annual subscription fee for the use of the apps. If you pick the wrong payment method, you could be leaving money on the table.

For instance, Microsoft sells licences per machine for productivity tools, and per device or per user for server software, says Cori Hartje, director of marketing and readiness at Microsoft's worldwide licensing and pricing group.

"If you're in the financial services industry and you have more machines than users, you might want to pay per user for access to the server software," Hartje explains. "But if you're in health care and you've got three shifts using the same machine, you want to pay by device."

However, unless you carefully define terms such as "user" or "employee", you could unintentionally violate your licence, Gartner's DeSalvo warns. "Let's say your licence has you pay per concurrent user," he says. "You turn the computer on, the software loads, but you never click on it. Are you an active user? Or maybe you buy an HR package based on the number of employees. What about part-time employees -- do they count? What if you hire seasonal help or bring in college interns over the summer?"

Definitions even vary by application type. Open five instances of Word or Excel on a desktop and you're covered by a single-user licence, notes David Ertl, interactive solution manager at IBM's Tivoli Software. But if you're a CAD user, you may need a separate licence for every open copy on your machine.

Things get even trickier as Microsoft, Sun Microsystems, and Computer Associates push a subscription model to guarantee steady revenue.

"Vendors would like to go to subscription licensing, but many users aren't happy about it," notes Meta Group analyst Corey Ferengul. "They want to see if it's cheaper to go with a subscription than with buying the licence outright, but the different models don't compare easily." Most subscription schemes -- including Microsoft's notorious subscription program introduced two years ago -- roll in maintenance and upgrades that would normally be offered at extra cost.

Typically, frequent upgraders pay less under subscription plans, but for many other customers, the cost goes up. Measuring usage will become far more complicated as enterprises move toward on-demand computing, where apps are employed ad hoc for limited periods by different users, as well as in enterprise portals that pull various functions from a wide range of vendors and applications.

"If I'm calling an SAP Business Application Programming Interface from an IBM WebSphere portlet, does that count as an SAP user? Yeah, it does," says analyst Gene Phifer, a vice president and distinguished analyst at Gartner. "And the licensing impact of that is something the vendors are, wrestling with."

Maintenance: mind your wallet

Even customers that play tough on licensing costs often pay too little attention to annual fees for support and upgrades. As software vendors try to squeeze more revenues from their existing customer base, maintenance fees have become a far bigger money pit.

"Maintenance costs are probably [our] biggest issue," says Jack Stewart, information technology administrator at Tyson Foods. "Many vendors require the maintenance, or you can't upgrade the product. It can be a very expensive add-on that is usually not discussed until the final price is already negotiated."

Jim Shepherd, senior vice president of AMR Research, says maintenance agreements are a huge pain point for many enterprises. "People tend to focus more on the licence price than on maintenance fees," he says. "They end up spending far more on maintenance over the life of the software than they ever did on the licence price."

They might also be getting less than they bargained for. "In some cases, companies are paying maintenance to get product enhancements, only to find the enhancements they want have been repackaged as a new product the vendor wants to sell them," Shepherd says.

Maintenance agreements also vary widely, Meta Group's Ferengul warns. "With some vendors, all maintenance fees buy you is the ability to call their help desk," he says. "Other vendors let you get their point releases -- 2.1, 2.2 -- but not the full 3.0 release. And some give you all of the above, plus the full releases."

Attorney Michael Overly, a partner at law firm Foley & Lardner and author of the digital book Software Agreements Line By Line, advises clients to look carefully at the licence's support and upgrade provisions and to lock in a renewal price ahead of time.

"I spoke with a business that signed a multimillion-dollar deal, with licensing fees fixed during the first year," says Overly. "They got the ever-popular 'this is one of the lowest fees we've ever charged' speech from the licensor. The next year their support bill went up 38 percent. They had no protection."

Warranties: trust but verify

Virtually every software licence contains a warranty that says the software works as described in its documentation. But warranties often expire after 90 days, and the documentation can change at any time. Unless you specify it in writing, licences may not actually guarantee the software will do what you really need it to do.

Overly suggests adding a page to the contract outlining everything the software must do and making acceptance testing part of the contract. By withholding full payment until you've had a chance to deploy the software, you can make sure it works as advertised.

"If all you have is a warranty, then you have to sue the vendor for breach," Overly says. "You'll spend three years in court trying to get your money back. With acceptance testing, if the software doesn't work in your environment, the vendor must hand back your money."

Many vendors baulk at putting contingencies on contracts that can keep them from receiving immediate payment. In such cases, Overly says, you can usually work out a deal. Microsoft, for example, provides customers with a certain number of licences for testing and training purposes in their Select and Enterprise Agreements, says Hartje. The company also offers a one-year warranty that guarantees each version of a commercial product will perform in accordance with its user documentation.

Assignments: anticipate change

The economic downturn kicked everyone in the assets, especially enterprises that had planned for expansion and got stuck with more licences than they needed. Yet other, more predictable business upheavals such as mergers, acquisitions, and spin-offs may not be covered by your licence agreements.

"Say you own 10,000 licences and you spin off a company," says Gartner's DeSalvo. "Does the new company have to buy its own licences? In some cases, yes, even though the hardware and software haven't changed. It all depends on your definition of 'enterprise,' and who's allowed to use the software. We recommend including the right to transfer licences in case of a merger, acquisition, or divestiture."

At Navigant, a large, corporate travel agency, acquisitions are frequent, so the company negotiates the ability to assign existing licences to new entities up front.

"We make sure it's as easy as possible to roll acquisitions under our standard software licence agreement," says Mitch Fillmore, director of central IT operations. "For example, if Navigant acquires 50 percent or more of a company, we make sure our licence agreement allows us to run our antivirus tools on the new systems."

With its recent acquisition of AT&T Wireless Services, Cingular will need to renegotiate each enterprise software agreement on a case-by-case basis, Fenrich says.

Failure to plan for business change can be costly. "I spend part of every day in merger discussions where companies discover that not a single one of their contracts is assignable," Overly says. "They have to go to their software vendor and likely write a very large cheque to transfer that piece of software."

Money talks

The good news is that most software companies are hungry for business, so they're willing to be flexible. The bigger the deal, the more flexible they get.

"Every deal is different, especially big deals with large enterprises," says Oracle's Woods. "We may have $5 million deals that look totally different, depending on how the customer wants to deploy the software. We try to work with the customer to negotiate something that works for both companies."

If you're unhappy with your current licences, you'll have a better chance to fix them when there's new money on the table, says AMR's Shepherd. "We tell our clients that each time they go back to buy more seats or services, or add more products, to think about renegotiating their licence agreements because that's when you have leverage."

But there's no substitute for doing your homework. The most successful companies know exactly what their software needs to do -- now and in the future -- and are deeply versed in all their licensing options. Those are things you'll need to know before signing on the dotted line.

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