An Offer You Can't Refuse

The quasi-monopolistic licensing practices of some software vendors have angered enterprise managers. But there's hope on the horizon and strategies you can use to fight back today.

The rising cost of enterprise software has long troubled IT managers, but lately the pain has turned to anger and confusion. Long-standing and generally despised policies that allow mainframe software vendors to charge more for the same programs when customers simply upgrade their hardware have begun to spill onto distributed platforms. Meanwhile, vendors of PC and server software are pushing shorter-term licenses and subscription-based models that complicate purchasing and seem like a bad deal to buyers accustomed to perpetual licenses.

"Sometimes you just feel you're the vessel with the wallet instead of a thinking, rational human being," jokes Dan Kaberon, manager of computer resource management at Hewitt Associates LLC, a human-resource outsourcing firm in Lincolnshire, Ill., that runs eight IBM z900 mainframes.

Although customer complaints garner the most attention, some observers say the main causes of skyrocketing software costs lie elsewhere, often in the buying practices of IT departments. Still, the virtual monopoly positions of mainframe independent software vendors (ISVs) such as Computer Associates International Inc. and Compuware Corp. may seem to allow them to raise prices without providing additional value for the dollar.

To cope, customers hire consultants to crunch the numbers, provide training in contract negotiations, and even handle the awkward negotiations themselves. Automated tools help track inventory down to some products' license status and contract compliance, but there's no universal, standardized way to computerize the entire process.

There is optimism, however, that vendors and customers will eventually find common ground on pricing based on actual use. That is, if they can agree on the definition of use, and if monitoring tools and policies can rise to the task.

Where Does It Hurt?
In a nutshell, users are increasingly resentful that the steady historical reduction in price per MIP (millions of instructions per second) is not being matched in software. "Software costs are growing 17 to 18 percent a year," says Frank De Salvo, a Gartner Inc. research director. "The decline in hardware price per unit has masked the increase in software over the years."

On the non-mainframe side of the enterprise, database vendor Oracle Corp. raised hackles by taking a page from the mainframe book, saying it would charge by total CPU power rather than by named or concurrent users. Microsoft Corp. aroused ire by dropping its traditional upgrade program and adding subscription-based models. Its Software Assurance program requires some customers to pay an annual fee for product upgrades they might not want. The largest enterprises weren't as hard hit by the changes because Microsoft made fewer changes to its 500-license multi-year terms and perpetual licenses.

The pricing schemes feel like extortion to some, and though vendors usually don't admit it, they're the result of a conscious attempt to pump up and smooth revenues in a difficult period of long-term stagnation and short-term recession, according to analysts, including De Salvo. "They're literally trying to optimize their revenue streams," says Rob Enderle, research fellow at Giga Information Group Inc. ISVs examine their pricing so money isn't left on the table.

Progress Toward a Cure
A breakthrough of sorts came in April when IBM Corp. drastically changed its sub-capacity pricing for zSeries mainframes to allow charging for IBM software based on mainframe partitions actually in use. Its pricing, a refinement of IBM's Workload License Charges (WLC) introduced in October 2000, penalized customers having numerous mainframe partitions by effectively charging them for nearly the entire machine. Major ISVs such as BMC Software Inc., Candle Corp. and Compuware signed on, but only for zSeries installations. (Kaberon points out that the changes will do no good until each ISV's contract expires.) CA was conspicuously absent.

As both a hardware and software vendor, IBM has different motives than ISVs. "A lot of IBM's success is in the telecom industry," observes Charles King, senior industry analyst at the Sageza Group Inc. (formerly Zona Research) in Mountain View, Calif. It couldn't very well convince users of large Sun or Hewlett-Packard servers running at 15 to 20 percent capacity to consolidate, King says, if zSeries suffered the same inefficiencies.

Peter McCaffrey, IBM's director of zSeries product marketing, admits the company's goal of attracting business onto its mainframes provides strong incentive not to alienate customers with draconian pricing: "Not enough customers were benefiting from sub-capacity as we would have liked."

Now, when customers use the reporting tools that come with the z/OS to e-mail a monthly report to IBM, "we look at the peak utilization over a particular month and then the customer's bill is actually based on that utilization," he explains. Kaberon says the change will shave about one-quarter off his monthly license charge.

McCaffrey says IBM changed its volume pricing to benefit large enterprises, reduced entry-level license costs by 30 percent, and began offering the z/OS at one-fifteenth the usual price for certain e-commerce applications.

Key to IBM's strategy will be the release of its License Manager software for the z/OS, which purportedly will simplify and standardize monthly compliance reporting. It's rumored to be coming by year's end, but IBM won't say. In the meantime, the company offers the less-powerful Sub- Capacity Reporting Tool (SCRT) that Kaberon says is nonetheless adequate for managing the new pricing.

With License Manager, IBM will also boost a faltering Open Group standard for license compliance monitoring called X-Open Software License use Management (XSLM). Debuting in 1999, so far only IBM and Isogon Corp. (New York, N.Y.), maker of the SoftAudit asset-management tool for IBM mainframes and Unix servers, are implementing it. XSLM could take off if more customers demand it, says Dave Thewlis, chief standards officer of Chicago-based SHARE, an influential group of mostly IBM mainframe users. "There was some hope that SHARE members will push vendors."

Compuware, a major force in tools for managing legacy software, admits its old pricing was unpopular. Its problem was tiered MIPS-based pricing which sharply penalized buyers when they bumped even slightly into higher tiers. Now, the company has a single tier for its zSeries software and is considering changes for distributed platforms later this year.

"The customer is only having to pay for the MIPS he uses," asserts Donna Ventimiglia, the company's director of sales administration support. "The more MIPS you're purchasing, the lower the price you pay." Compuware instituted capacity caps on maintenance fees to minimize price shocks, she says. "In the past, you could be subject to a 25 to 70 percent increase in maintenance, and that will not happen today."

Microsoft claims its new pricing addresses strong user demand for more predictable upgrade costs, though it admits it rolled out the programs too fast. "Customers have been telling us for some time that our previous licensing program was just too confusing to manage and left them unsure of how many licenses they owned," says Rebecca LaBrunerie, a Microsoft program manager. "Software Assurance [SA] is a good deal for those customers whose software strategy is to upgrade frequently. Customers pay for the license once—and many customers already have the license—and just keep renewing SA after that. SA provides a fixed, predictable cost, and decisions around when to upgrade are based on technological need, not finances. That being said, not all customers will benefit from SA, and they should do a thorough business analysis to determine if they do or not."

Pie ChartNegotiations Key
While some consultants warn against the typical temptation (and frequent advice from experts) to get the best deal by "going out and beating up the vendor," savvy negotiating remains a key tactic.

Enderle advises looking for balance in each negotiation. "You have to find something the other people want," he says, but concedes that with mainframe ISVs holding near-monopoly power, the only thing they want that IT buyers can threaten to withhold is their continued patronage. "They certainly don't want you to go to other vendors," he concludes.

Art Louise, assistant vice president at Group Health Inc. in New York, N.Y. and manager of SHARE's systems-management program, resorted to the threat when "we were basically forced to pay an upgrade fee" to CA during a hardware upgrade last year. "We basically told them we're not buying anything else," Louise says.

Compuware claims to have also changed its negotiating procedures, in part by giving field representatives more authority to close deals instead of automatically deferring to upper management. "It's changed," says Ventimiglia. "We know that we were thought of as being inflexible. Gartner told us that, we knew that, so we fixed it."

Coping Mechanisms
Consulting firms such as Gartner and Giga have made hay over the license confusion. They have been vocal and visible in criticizing the old mainframe and new PC pricing while selling related analysis and negotiation services. Louise, for example, visits a private Gartner Web site to learn about other companies' strategies. "They can't necessarily give you the answer, but they can give you some answers that you can't get on your own," he says.

Consultant Michael Swanson, president and founder of Information Systems Asset Management (ISAM) in St. Paul, Minn., offers a benchmarking service, based on 300-plus vendor price books, that lets companies compare their purchasing to that of others that meet ISAM's best practices. The company also negotiates contracts.

Swanson claims ISAM's objective research leads it to different conclusions from the major consulting firms. He says less than 15 percent of potential savings are related to price, with 35 percent, at most, attributable to product placement within organizations. Rather, Swanson asserts, up to 60 percent of cost inefficiencies arise from the sheer number of software products.

ISAM's benchmarks also indicate that best-in-class companies are 89 percent better than average companies at reducing the number of products they maintain. He advocates eliminating all licenses that aren't for a core of applications that are used 90 percent of the time. Swanson observes that successful companies also manage costs by major software category.

He warns managers to mind how hardware upgrade plans affect software contracts, especially capacity-based ones. He relates, with incredulity, how one buyer negotiated a software contract priced for a certain capacity, only to buy excess hardware the very next day. De Salvo agrees with Swanson's analysis: "Software is running four to five times the price of hardware."

Keeping Track
Whether XSLM succeeds or not, existing asset-management tools from Peregrine Systems Inc., Tally Systems Corp., and others can bring a measure of sanity to the onerous task of tracking software and optimizing its licensing and use.

The job is more necessity than nicety, unlicensed copies have legal ramifications. By providing a detailed view of inventory, asset tools help companies avoid not only illegal under-licensing, but the over-licensing often done in reaction to that fear, says Ron Nabors, senior vice president of Tangram Enterprise Solutions Inc. in Cary, N.C. Nabors claims Asset Insight will tell you what software is actually being used at each workstation.

A second Tangram tool, Enterprise Insight, maintains a repository of contract information, though Nabors admits it requires users fill out on-screen forms. Procurement and leasing modules provide further controls; the latter is especially important because, says Nabors, "Gartner says that if you don't have a tool to track and manage your leasing, it wipes out all the financial advantages that leasing provides."

Nabors is highly skeptical that standardization will ever come to software auto-discovery. The industry has many times more vendors than the hardware side, which itself has seen several asset-reporting standards fail to live up to their promise. "I don't think it will ever happen," he predicts.

Commiserating with fellow enterprise managers—but in an educational way—is an increasingly popular response, say several interviewees who point to increased attendance at SHARE conferences and its Software Asset Management project. Another influential user group is the Software Asset Management Special Interest Group sponsored by Gartner.

The Price Is Right
When asked, these analysts, vendors, and customers have little trouble sketching the outline of a long-range solution that is likely to be the most equitable for everyone: usage-based pricing. Enderle says today's concurrent-user model is close to an ideal, especially for purchasers, but he adds vendors aren't crazy about it because it makes it hard to increase revenue when customer head counts go up. Louise points out that concurrent user isn't usually helpful with mainframes, where use is typically gauged by capacity, though this is now becoming finer-tuned with IBM's sub-capacity model.

"It has to be usable, measurable and accountable," De Salvo says. "The vendors have to be able to track it." But tracking technology has been controversial: Groups including SHARE helped put the kibosh on the Uniform Computer Information Transactions Act (UCITA), a state standard for software contract administration, because of security concerns over a "self-help" provision that lets vendors deactivate software in response to contract violations.

Microsoft doubts that usage-based pricing is a good fit for its products. "We currently license our application products per device, and we have found this to be very convenient for our customers," says LaBrunerie.

Like Kaberon, many customers may ultimately prefer to see usage-based pricing evolve toward a so-called utility or services model. "There should be something like a garden basket of hardware and software," he says, that lets managers budget a fixed amount annually and have a reasonable expectation that they won't exceed it.

Until fairer pricing becomes widespread, vendors of mission-critical software are likely to continue having the advantage in negotiations. "There's been a very significant disregard for the customers," Nabors says. "Their attitude has been that they need to get additional revenue out of customers regardless of what they think about it."