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Subscription-Based Software: Many Benefits - But Simpler License Management Isn't One of Them

Change is a constant in the software industry. But the recent trend towards subscription licensing is transforming the very manner in which enterprises value their software assets – and the way vendors make money from them. While subscription-based software licensing has many merits – it’s not the panacea many enterprises assume. Indeed, many of the vexing challenges associated with managing the software estate remain with subscription-based software. So, enterprises beware.

The Allure of Renting Software

The idea of subscription licensing is appealing. Rather than paying a steep upfront fee for a ‘perpetual’ license – the traditional licensing model that enterprise software grew up around - companies can simply rent the software. The rental model works for both cloud-based, Software as a Service (SaaS) software, and on-premises applications that reside on the organization’s internal servers. In many cases, the subscription payments are treated as an Operating expense (OPEX) rather than a Capital expense (CAPEX), which can be easier to obtain budget approval for. So what are the myths? And what are the realities?

Lower Upfront Costs

Subscription licensing is appealing to enterprises for several reasons. First, it requires less up-front cost than the perpetual license, as the subscription fees spread payment out across the term of the agreement. For SaaS-based solutions, the up-front costs diminish further due to reduced set up time and expense—organizations don’t need to make the investment in infrastructure to host the application on-site or personnel to configure the system. However – it’s important to note this benefit stems from the hosted delivery model, and not the subscription-based fee structure, itself.

But the notion that organizations will ultimately pay less in software fees is a myth. After a certain amount of time – usually three to four years, the subscription costs to enterprises actually begin to exceed those associated with the perpetual model, even taking the ongoing annual maintenance costs for perpetual licenses into account. So organizations that do not eventually swap out the rental agreement for a traditional license could end up paying more in the long run – a long-term cost for the flexibility built into the subscription model. This may be a very good trade-off for the organization, but in any case, should be considered early on.

Familiarity

Technology has evolved to increasingly favor subscription over perpetual models. Mobile device plans, for example, are generally subscription based. Intelligent devices – everything from car infotainment systems to expensive medical devices – are consumed via subscription licensing models versus traditional purchase models. And the success of certain virtualized and Cloud-based software, such as Salesforce.com, has made renting software more familiar to enterprises.

Because many software vendors like the predictable, “smoother”, long-term revenue streams they also favor the trend towards subscription-based licensing. This will further increase the exposure to such models for buyers.

Software License Management

Perhaps the greatest confusion around subscription-based licenses is in the area of software license management. Many incorrectly believe that issues of shelfware (buying too much software) and non-compliant software use (and the resulting software audit penalties) disappear by moving to a subscription model.

A subscription license is essentially just a payment plan for access to the software, not to be confused with the delivery model for the software—for instance SaaS versus on-premises. If the software is licensed under a subscription model, organizations must still understand and keep track of the license metric, which could be named user or some usage-based metric like CPU seconds or number of transactions processed. In the usage-based metric case, if usage exceeds the agreed upon metric – the means of enforcement may vary depending on the contract – penalties range from denial of service, to a bill for overage. So organizations still need processes and tools in place to keep track of installations and/or usage and compare that to their license entitlements to understand whether they are under, over or ‘just right’ in terms of licensing.

Moreover, most organizations will not move exclusively to subscription-based software – but they will continue to have a mix of subscription and perpetual licenses, depending on what makes sense for the organization. Accordingly, organizations will need systems and technology in place to manage and optimize the use of this increasingly complicated software mix to ensure they continue to buy (or rent) only what they need, and use what they have.

By the same token, Software License Optimization tools need to evolve to accommodate the new usage-based license metrics that may be contained in the subscription licensing agreements. This involves new licensing model variants linked to metrics beyond just number and time – such as how the software is being used. This requires new definitions of entitlements and usage. The Software License Optimization solution will also need to understand patterns of usage on an ongoing basis – and not just a snapshot in time.

Ultimately, both application producers and enterprises benefit from more sophisticated Software License Optimization solutions that accommodate subscription models and more unique usage-based models. It ensures a common definition of the “truth” and a mechanism for reporting on usage that both enterprises and vendors can agree upon. It helps ensure compliance and eliminate shelfware – so that maximum benefit is being received by the customer and appropriate compensation paid to the producer. And these tools ensure better planning and analysis so that enterprises have a more confident picture of the software they need – and negotiations for the optimum rate plans can proceed based on better data.

 

Steve Schmidt is Vice President of Corporate Development at Flexera Software

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Steve Schmidt

Steve Schmidt is VP of Corporate Development at Flexera Software

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