Tech & Work

Changing software agreements could give CIOs more choices

Improving network capabilities are demanding new types of agreements from software vendors. Tim Landgrave examines this new breed of agreements and suggests that it might not yet be time to leave traditional licensing behind.


With ubiquitous, high-speed network access comes new service delivery models and new classes of service providers. Forward-thinking software companies have already begun wrestling with the impact that different software delivery and support models will have on their existing and future licensing agreements.

Application service providers (ASPs), data centers, and outsourcing companies are taking advantage of these license changes today. In this article, we’ll look at the terms and conditions that you should take into account before signing your next software license agreement.

The future of software license revenues
Most companies don’t begrudge software vendors for the revenues they generate on software licenses. In fact, I believe that most CIOs want to pay for the software they use because they understand that without a profitable revenue stream their vendors couldn’t continue to maintain and enhance their products.

Most of the corporate piracy problem is the result of unintelligible license agreements on the part of manufacturers, not the result of corporate stealing. These agreements change regularly in an attempt to stay current with the way that companies use and purchase software.

The disconnect between vendors and customers occurs when they try to define “software use.” If given the choice, most CIOs would choose to purchase software licenses on a concurrent use basis; that is, the CIOs want to pay only for the software in use at any one time inside their organizations. Software vendors, on the other hand, would prefer that everyone in the customers’ organization who uses a license at any time should purchase a license for the software.

The future of software purchasing
Over time, vendors will offer some combination of three different software payment types:
  1. Licenses. This is defined as the perpetual right to use a specific version of a product granted by the software manufacturer to the customer. This is the most common purchase method today.
    When your company buys Office 97, you have the right to allow one person or CPU in the company to use Office 97 forever. The software manufacturer may also allow you to pay a one-time fee or an annual fee to upgrade that copy of software to the latest version.
    Now you may use that latest version (but not the previous version) for one person or CPU.
  2. Subscriptions. A software subscription is a non-perpetual right to use a specific software product. Typically, a subscription service offers the latest version of the product to a customer for the current monthly subscription fee. Subscriptions may be monthly, quarterly, annual, or biannual.
    The important issue to remember with subscriptions is that if you stop paying the fee, you must stop using the software as well. This is where ASPs or outsourcing companies come in. Under these scenarios, the software provider can deny access or “turn off” the service at the end of the subscription period. For example, an Office subscription sold to a customer would allow use of the most current version of Office by a specific individual for the length of the subscription contract.
  3. Transactions. Other than a few commerce systems and some very narrow verticals (like trading management desks for financial service organizations), this kind of software use and purchase arrangement is not very common. Under a transaction arrangement, a software vendor charges for a pre-defined use of the software.
    This use could be defined as a specific activation of a function in the software or could also be the use of all the features of a particular piece of software for a specified, measurable period of time (per minute, per hour, and so on).
    In this scenario, you might pay a specific fee for each minute or hour of use for a product like Microsoft Office. This model won’t achieve broad acceptance until systems are in place to accurately track and bill the utilization. However, these systems are only six to 18 months away.

Inhibitors to new purchasing models
Interestingly, the size of a software vendor’s installed base is the biggest single inhibitor to its ability to offer more innovative purchasing and delivery mechanisms going forward. For example, suppose a company has a 50 percent market share for a particular product, and all of those customers were sold a perpetual use license.

Those who haven’t made a purchase can consider newer licensing mechanisms like the subscription or transaction model. What about the customers who already own the product? What motivates this customer to move to a non-perpetual subscription or transactional model?

It’s generally going to be either access to new features or a lower total cost of ownership. But in the absence of indisputable value in one of these areas, the choice will be to leave well enough alone. Vendors in this situation will find it challenging to motivate their users to purchase software under a different model.
Have you hammered out a special deal with a software vendor? Do you negotiate with vendors over licensing agreements? Post a comment below or send us an e-mail.

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