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Wednesday, Dec 11th

Software licencing should be getting simpler, but it's not

Software licencing is one of an organisation's largest – and most complicated – costs. While most licencing works on a per-user basis, some vendors have started offering different options in order to simplify the process.

One of these is SAP, which now allows customers to pay for its software per record created when they access it indirectly through third-party apps and services, and not per named user. According to SAP, the billing change is an answer to the fact that customers have started using its software "in a new way".

With more companies using cloud services than ever before, and with the growth of distributed user networks through the cloud and IoT, businesses are finding themselves and their suppliers interacting with SAP systems in ways where it is challenging, if not impossible, to predict who will be using the software in advance. This was highlighted in a recent court case, where a company called Diageo allowed staff and customers to indirectly access data held in an SAP system through a Salesforce.com interface. Diageo maintained that its existing SAP license covered such indirect access, while a U.K. court ruled in favour of SAP, which argued the license required a fee be paid for named users even if they only accessed the system indirectly.

SAP is offering existing ERP customers three options in its new indirect-access licensing model. Customers can elect to stay with their existing agreement, they can exchange per-user for per-record licensing with a contract addendum, or convert to an entirely new contract with simplified licensing terms. However, there are currently no tools to help companies establish exactly how much indirect access they will be paying for, and no way for them to plan their expenditure.

"If a company has 100 000 sales orders coming in from outside this month, they will have to pay for each order that goes through the SAP system. Next month, they may only have 50 000 orders, and the following, they could have 500 000. The indirect licencing model will therefore create more complexity rather than simplifying the licencing regime," says Richard Firth, CEO of MIP Holdings.

"A company cannot move to the cloud before they understand how much they are going to pay for everything, and a licencing solution like this one makes that impossible. In 2008, a report from Forrester Research found that software licensing and pricing was marred by complexity, soaring maintenance costs, and a lack of flexibility and alignment with business goals. 11 years later, we are still in the same boat – if not worse off."

He adds that MIP has found immense success with a completely different approach, which the company calls risk-based billing. The risk-based billing model ties the software vendor to the success of the customer's business. Payment is not simply a set fee that is paid irrespective of the performance of the software, but is based on one or more of the client company's key performance indicators (KPIs). The better the customer's business performs, the more it pays in accordance with the growth in a measured KPI. Conversely, if IT does not play its role in improving and streamlining the business resulting in lower revenues, the client pays less.

"Risk-based billing has also been implemented by Nasdaq-listed Progress Software Corporation, which has seen phenomenal growth using this model. Through our risk-based billing model, Progress receives a disproportionate percentage of its global SaaS revenues from South Africa – a relatively small IT market in comparison to the US or Europe," Firth says.

"To arrive at an arrangement based on risk requires more than selling a CD with some software on it. The vendor needs to get close to its customer and to understand its business and processes well enough to be able to make a difference. It is only by knowing what makes the business tick that risk-based billing can work and the customer can be charged according to KPIs. An important factor is that the IT outsource partner is measured and paid using the same metrics that the Board of a company uses to measure its executives' performance."

Firth says that providing software-as-a-service on a risk-based contract means that the vendor is in partnership with each client. If the client succeeds, the vendor makes more money; if not, the vendor shares the pain. A key component of the MIP risk-based billing model is that all services are included in the "fee". If the customer or partner wants a different report or a system code change these are all included in the single risk fee linked to the KPI. This ensures that the IT partner has done their homework in terms of total solution required to run the customer's environment, he explains.

"In simple terms, the vendor invests in its customer's revenue generation instead of only trying to move product and collect revenue from the client. This ensures for the first time that the vendor is pushing in the same direction as the business, and not only provides an easier way to predict monthly expenditure, but this type of partnership also opens up new avenues for business growth," he concludes.

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