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Software licensing grows complex

Jul 26, 20044 mins
Enterprise Applications

If it doesn’t exist already, we might soon see a certification created for enterprise software license management. This certification would combine technical knowledge of software usage with financial knowledge of the software value. The process of figuring out what kinds of licenses are best for your organization, and tracking them, gets more complicated every day. The whole IT industry is ready for a shake up in the way that customers pay for software use. And for once, customers are driving this paradigm shift.

The primary pricing model today for enterprise software is perpetual licensing – you pay for the software upfront and use it as long as you want. In addition, your organization probably pays a monthly maintenance fee that’s a percentage of the purchase cost. However, coming on strong as an alternative is subscription-based pricing,with which you pay monthly for the software you use. You might license the software for a year or two at a time and have the right to use it only during the subscription duration. Upgrades and support services are factored into the monthly payments.

Sun grabbed headlines recently by announcing it is developing a subscription pricing plan that includes pre-integrated hardware, software and services. I wouldn’t call Sun’s plan revolutionary, but it certainly is an evolutionary step in the IT industry.

According to a recent IDC study, we are in for dramatic shifts in software business models. Citing a “complexity crisis,” IDC says that less than 30% of software customers believe vendors’ licensing practices are fundamentally fair, favoring (surprise!) the vendors over the customers. One of this study’s surveys indicates that 61% of software vendors and 60% of customers expect the software industry to move to subscription licensing in the next year. Only one-quarter of all software sales today are tied to subscription licenses.

Subscription licensing has its benefits. First, you get to spread out the payments, rather than writing one big check upfront. This might let you account for software use as a business expense rather than as a depreciating capital investment. What’s more, payments for software are more predictable, helping you manage a budget.

In addition, subscriptions offer a low-risk opportunity to try new software, perhaps for a 60- or 90-day trial period.

Theoretically, a subscription pricing model should make a vendor more accountable to you. If a vendor knows it easily can be displaced at the end of a subscription run, one would expect that vendor to fight to keep you as a customer. I hope this will mean better products and better service in the long run.

A brother to the subscription pricing model is the pay-as-you-go plan. Under this type of program, software is treated like a utility and you pay for only as much as you use. This is practical for customers that have occasional spikes in their demand for software use.

The application service provider model is making a comeback after suffering disastrous blows a few years ago. Once again, companies are willing to let someone else host their applications for a regular monthly fee. has been especially successful at deploying this model, stealing market share from other CRM companies such as Siebel Systems.

Despite all the emerging options for software licensing, perpetual licensing still has a place in this changing world. If you have a strategic application that you intend to use for many years, it might be worthwhile to partner closely with your software vendor to get the most value from the software.

While customers clamor for software licensing simplicity, the vast array of choices will make your head swim. It looks like it’s time to get certified in software license management.