Will virtualisation bend or break licensing rules?

• Tags:
• Negotiation,
• Contracts,
• Licensing,
• Virtualisation

Stewart Buchanan

Published: 26 Jun 2009 09:00 BST

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Virtualisation can produce some nasty surprises in licensing costs, so it repays to study the small print, says Stewart Buchanan.

Whatever people may imagine, the fact is that application virtualisation can create higher than expected licensing costs. It is important that customers understand that some software vendors earn more by not changing their licences to accommodate new uses of virtualisation, and that licensing in this area is a matter for negotiation.

As customers look for greater flexibility in the way they deliver applications to employees and external partners, some cost increases seem inevitable. However, these costs could be extreme for customers who do not understand the implications for licensing.

So, before investing, user organisations need to calculate the impact of virtualisation on the life cycle total cost of ownership of all existing software. It may be unrealistic to expect all new and more flexible ways of using software to cost less.

Organisations should also check vendor licensing rules and get independent advice. It is worth having licensing examples in writing with illustrations and including them in your contract. Where vendor rules continue to be inflexible, IT managers can look at external service offerings that include software costs.

Application virtualisation is generating interest as a way of providing access to desktop software in more efficient and flexible ways. However, customers are frequently disappointed by the implications for licensing costs, because the ways in which they want to use the software are not always covered in application licence agreements.

Instead, organisations want software licences to follow the software. Many would prefer their software rights to be assigned to them as a user rather than to the device they are using. Some customers risk being bought off with higher discounts to offset higher licensing costs when what they really need are better terms.

Vendor account managers are not generally empowered to change their company's licensing model. In the present economic climate, vendor salespeople may only be able to use short-term discounts to clear your objections.

The more outrageous the cost of their licences, the more they can afford to discount. Discounts are being used to encourage customers to overlook compliance issues.

Here is a table containing examples of preferred software discount levels.

List price	Discount	Maintenance fee
$100,000	59%	20.5%
$100,000	69%	23%
$100,000	79%	25.5%
$100,000	89%	28%
$100,000	100%	30.75%

Source: Gartner, April 2009

First reactions can be deceptive. Whatever level of discount is charged, even when licences fees are waived altogether, it costs the same amount over four years at $123,000.

The lowest discount also has the lowest maintenance fee at 20.5 percent of list price, so it will work out to be the least expensive after the four-year break-even point. Vendors can then add another column of processor and core multiplier costs, against which they can discount more deeply.

Overcoming these licensing problems will use up a customer's bargaining power, which might otherwise have been used to obtain a better deal.

Market competition
Ultimately, vendors will only change their licensing models in response to market competition. Software as a service has traditionally been focused on applications where collaboration with external third parties is more common, such as CRM, sales, procurement, logistics, project management, HR and even ERP.

More traditional desktop and client-server applications such as email are now starting to follow, but application streaming and application virtualisation remain underexploited as enabling technologies.

Vendor licensing inflexibility could drive more customers to outsource in the cloud, which could even be the software strategy of some vendors.

One thing is certain, external services are a powerful catalyst for change in desktop software licensing, and vendors will be measured by how well they respond to that change.

Stewart Buchanan is a research director in analyst firm Gartner's IT Asset Management and Procurement group, focusing on the economics and procurement of enterprise software, information storage, servers and services. His specialisations include licensing for virtualisation, software asset management, and supply-chain and demand management.

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