In-Depth

IBM License Manager a No Go

Is sub-capacity pricing from ISVs dead, too?

• By Stephen Swoyer
• 02/06/2003

The irony is that ILM could actually have provided the impetus for a large-scale transformation among mainframe ISVs away from expensive capacity pricing and toward sub-capacity pricing schemes.

Although conceived as a tool to monitor and report back to IBM about capacity usage, ILM was also rumored to include murky enforcement provisions.

By and large, many mainframe managers simply seemed confused about it: “[M]aybe I could use ILM … and save some dollars. But without doing the analysis, I really don’t know,” said a mainframe administrator with a large financial institution in an interview last year.

Sub-capacity Pricing

Traditionally, mainframe users have paid ISVs according to the overall capacities of their systems, even if an ISV’s product was running on only a single LPAR with a fractional allocation of total MIPs. Sub-capacity pricing schemes, such as that first introduced by IBM with z/OS in 2001, allow users to pay only for the percentage of overall capacity that they’re actually using to power their applications. BMC Software Inc. and Candle Corp., among others, had expressed a willingness to support ILM.

The upshot, says Sherry Irwin, president and general manager of Technology Asset Management Inc. (TAM), located in Ontario, Canada, is that many ISVs no longer have a reason to support sub-capacity pricing. “Customers wanted ISVs to buy into this, and now that [ILM is] not going to be available … it gives the ISVs even more of an excuse not to offer sub-capacity pricing, even though they could do it through the reporting that IBM has in place, but they will choose not to.”

IBM currently uses the Sub-Capacity Reporting Tool (SCRT) to collect and report on information about capacity usage. In contrast to the ILM—which proposed deep integration with MVS and which, rightly or wrongly, was feared as a tool with enforcement capabilities—IBM gets to look at SCRT data on a monthly basis, after the fact.

The effect, says Al Sherkow, president of Sherkow I/S Management Strategies, is for the most part non-intrusive. “Instead of having the license manager there actively, the [SCRT] at the end of the month, and after the fact, reports on the information. So if something was run that shouldn’t have been run, IBM can find out about it and you can negotiate with them.”

He estimates that IBM software accounts for anywhere between 40 and 70 percent of the software in most Big Iron shops.

Little Enthusiasm Among ISVs

The fact of the matter is that third-party ISVs have little or no incentive to support sub-capacity pricing, however, since most haven’t yet figured out how they’re going to make money from it. After all, capacity pricing is a known quantity, it’s lucrative, and in a climate in which revenue growth is at best flat, nobody wants to take a chance on a pricing scheme that could further diminish earnings.

And then there are the hidden easter eggs associated with capacity-pricing. Robert Schafer, a director with research firm Meta Group, cites the practice of some mainframe ISVs that tie lightly used applications—such as those that are commonly hosted on one or two LPARs—into capacity-based pricing agreements. The result, he notes, is anywhere from a 300 to 500 percent price boost for products that simply don’t merit the capacity requirements. The pain, he adds, is that such deals are usually inked for between three and five years.

The lesson, then, is that some of the vendors who signed on to support ILM at an early date probably weren’t altogether enthusiastic about it. Even big players such as BMC and Candle, which both announced early support for sub-capacity pricing, never actually explained how they would support it, Sherkow points out.

Contrast the uncertainty of mainframe ISVs with the methodical behavior of IBM, which, prior to the introduction of its sub-capacity licensing scheme, is said to have collected data from several hundred customers in an effort to build accurate sub-capacity pricing models. The result, Sherkow says, is that even though the cost of z/OS now is about 10 percent lower relative to OS/390, customers end up paying about 10 percent more for CICS, IMS and DB2, among others.

In this case, he points out, IBM was able to maintain its existing revenue levels. ISVs, on the other hand, don’t have even that luxury: “Most [ISVs] haven’t done any models, so they don’t necessarily have the data in advance to see how they can change the prices so that maybe they would level off a little bit, too.”

Nevertheless, says TAM’s Irwin, some ISVs—such as BMC, which has implemented a form of capacity- or usage-based licensing for several years—do support their own license management or capacity reporting tools. Where these are in place, she suggests, customers certainly have more bargaining power during enterprise licensing agreement (ELA) re-negotiations. And in some cases, she suggests, a customer may be able to use the historical data that it’s collected with the SCRT to make its case to an ISV that doesn’t provide its own capacity reporting or monitoring facilities. “If they’re using [SCRT] with IBM for the reporting, that gives them the leverage to say, ‘Hey, we’re already doing it with a major vendor and it works. Why can’t we do it with you?’”

Perhaps, says Pat Cicala, President of Cicala & Associates, an IT procurement and SAM consulting practice based in Hoboken, N.J., but customers should bear in mind that ISVs are under no obligation to consider the data collected by the SCRT during ELA negotiations. After all, she points out, software vendors have a few trump cards of their own to play when they sit down with you to renegotiate the terms of your ELAs: They can point to the relative paucity of competitive solutions; the costs associated with migrating from one application to another; and the simple fact that—in some cases—you’ve been using their software for at least a couple of decades. “Where are you going to move? There aren’t too many other places to move. You’re still going to have that variety [of competitive offerings], but your variety is very limited. If they don’t want to re-negotiate, there’s not a lot that you can do.”

Most analysts anticipate that capacity-pricing will eventually be eliminated completely. Even though ILM probably won’t be resurrected, Meta Group’s Schafer believes that IBM could implement the breadth of its functionality in a tool such as the Tivoli Identity Manager, where, he argues, it belongs in the first place. The result, he expects, will be a capacity monitoring and reporting infrastructure that most ISVs will respect.

When this happens, says a vice-president with a major financial institution based in North America, it could be a welcome development. “The original concept [ILM] had merit,” he admits, noting that the solution that IBM has promised to deliver will not be mainframe-based and will also lack some of the enforcement capabilities of the now-defunct ILM. “I am looking forward to what actually becomes of this.”