Trends 2008 Applications Licensing And Pricing

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Forrester Research, Inc., 400 Technology Square, Cambridge, MA 02139 USA Tel: +1 617.613.6000 • Fax: +1 617.613.5000 • www.forrester.com

For Business Process & Applications Professionals

Includes Forrester user interview data and Forrester research panel data

EXECUTIVE SUMMARY

Forrester interviewed 25 clients of leading enterprise applications providers and surveyed 215

business process and applications professionals about their soware licensing and pricing experiences.

According to these users, soware licensing and pricing continues to be marred by complexity, soaring

maintenance costs, and a lack of flexibility and alignment with business goals. While vendors work to

find the balance that works for them and their clients, a number have made progress by simplifying the

process, offering customer-focused management, and empowering clients. Forrester believes future

application innovation trends like service-oriented architecture (SOA) and soware-as-a-service (SaaS)

will be the impetus behind a shi in how firms view apps licensing and pricing and what they demandfrom apps providers. In the meantime, business process and applications professionals must arm their

firms to mitigate licensing pain points.

TODAY’S APPS SOFTWARE USERS REMAIN DISSATISFIED WITH THE STATE OF LICENSING

Following on the heels of “e Forrester Wave™: Enterprise Apps Soware Licensing And Pricing,

Q4 2007,” Forrester interviewed the clients of leading enterprise application soware providers and

surveyed business process and applications professionals to better understand the state of soware

licensing and pricing models today. Vendors faced with the challenges of structuring agreements

that are mutually beneficial and in line with the tenets of a licensee’s bill of rights (LBoR) have made

improvements, but licensing and pricing still generate negative reactions among users because:1

· License agreements remain too complex. Some have concluded that licensing and pricing

complexity is a necessary evil to combat misuse of applications and to accommodate a

heterogeneous community. Still, 11 of 25 respondents indicated that licensing structures and

language are still too complex and are among the biggest problems that persist with licensing

today (see Figure 1). Users felt there was oen a lack of clarity regarding the exact value they were

receiving for the pricing and oen did not understand the rationale behind expenses, discounts, or

provisions for changes to their licensing.

· Imposed maintenance costs continue to lack value.Firms also believe that maintenance costs are

much too high. Surveyed firms reported paying an average of 26% of their total cost of ownership,

while approximately 87% of these respondents believe a fair price for maintenance is 24% or below

(see Figure 2). Striking a particularly strident chord for licensees, many clients Forrester spoke with

indicated they paid maintenance fees but never used the services.

January 23, 2008

Trends 2008: Applications Licensing And Pricingby R “Ray” Wang and Elisse Gaynor

with Sharyn C. Leaver and Meghan Donnelly

http://www.forrester.com/



© 2008, Forrester Research, Inc. Reproduction ProhibitedJanuary 23, 2008

2 Trends 2008: Applications Licensing And Pricing


Figure 1 Customers Still Find Licensing Overly Complex

Figure 2 Clients Believe Maintenance Costs Remain Too High

Source: Forrester Research, Inc.44266

“What would you say are the biggest challenges with licensing models today?”

Base: 25 clients of leading enterprise software providers with software licensing and pricing experience(multiple responses accepted)

11

11

6

6

3

1Other

Not in line with business goals

Too rigid

Metrics don’t match value

Maintenance costs too high

Too complex

Source: Forrester Research, Inc.44266

“What do you feel is a fair percentage of your software’s totalcost of ownership to pay for maintenance?”

Base: 215 business process and applications professionals*Base: 124 business process and applications professionals

More than 24%

Don’t know

22% to 24%

20% to 22%

18% to 20%

16% to 18%

14% to 16%12% to 14%

10% to 12%

Below 10%

*Actual mean percentage paid:

14%

21%

8% 14%

7%

10%

10%

10%

3%

3%

26%

Source: October 2007 North American Business Process And Applications Online Survey






· Rigidity and misalignment of metrics persists. Interviewed users also expressed dissatisfaction

with the inability of vendors to accommodate needs specific to their business. Specifically,

they want vendors to understand how their companies actually operate and acknowledge the

structures that are most in line with these operations, instead of force fitting existing structures

to each client.

· Mergers and acquisitions (M&A) create a hodgepodge of licensing and pricing models.

M&A activity brings its share of renegotiation issues. In the cases of rapid employee change

from acquisition or from divestiture, customers want the freedom and agility to change models

to match their new circumstances. Firms oen request to transition off of a current agreement

onto something that makes more sense. According to one client, it’s “always a problem in

licensing, and vendors either agree or never respond — leading clients to run illegally until

completely off the system.”

Specific Vendor Offenses Perpetuate Licensing And Pricing Disappointment

Interviewees also cited vendor activities that exacerbate and contribute to overall shortcomings,

including:

· Treating existing customers like second class citizens.Despite significant discounting for new

customers, some vendors have adopted tactics of closing off negotiations for existing customers.

In some cases these treatments are consistent across the board irrespective of client size and

spending. Many small and midmarket enterprises cited little to no influence during negotiations

and that off-the-shelf pricing appears to be the norm. One interviewee commented:

“With a mammoth organization, there is no influence. . . . It just doesn’t happen” (executive

of a maintenance services firm).

· Hiding discount rationales. While a number of vendors now provide public price lists, many

interviewees indicated that they oen were not supplied with a discount rationale if they were

credited one. Several respondents echoed that in later negotiations, they are then unable to

point to previous rationale to justify any future discounts.

“ere was discount based on the number (volume agreement bought), but they do not let

you know what the discount is. ey run numbers but don’t really document the discount”

(IT executive of a global supplier).

· Favoring a one-size-fits-all approach. Vendors may prefer the internal ease of offering limited

and standardized metrics and pricing. However this one-size-fits-all approach oen does not

meet a customer’s changing business needs and goals. Even in instances where vendors have

offered more flexibility in the short term, some firms lack leverage to preserve this flexibility






over a long-term relationship. Meanwhile, others feel pressure from their apps providers to

transition into licensing models that are more beneficial for the vendor’s bottom line but not in

line with the user’s business goals.

“eir product order form was a big struggle. Going back and forth about charges and the

rationale made it clear that they didn’t have a feel for how government operates” (auditor

for county government).

“We are very small . . . wanted to extend licenses by 20 to 30, but the vendor wanted us to

go to unlimited licensing. ey did not know the account well enough to know we are too

small” (executive of a manufacturing firm).

· Placing limitations on value to clients. Interviewees worry that over time they will slowly lose

previously negotiated terms and benefits. e longer the relationship continues with their apps

provider, they also fear vendor lock-in when it becomes too costly to change horses. As one

respondent put it, its vendor:

“Eliminated a lot of the value benefits over time. In the agreements we used to have things

like unlimited support calling, but we can’t do this anymore. Based on the number of

licenses, we get x amount of credits to call with. is is a problem; we must pick and choose

and use them only for emergencies now” (IT executive of a global supplier).

Another client noted:

“We’re paying maintenance but no one is really supporting our configuration. We should beable to get our maintenance money back, but the vendor won’t do it and it feels like we have

no leverage” (executive of a manufacturing firm).

· Resolving multiple licensing and pricing models post integration.Following vendor

mergers and acquisitions, oen vendors leave newly acquired clients in the lurch with regard

to reconciling future models and negotiations. Firms whose previous structures will be

honored still complain that direction for future support and enhancements is not always well

communicated. Should renegotiation be necessary, they are le unsure about their options.

“Aside from service — development of the original product would be nice. . . . We never hear

back about ideas. Communication about the releases is bad, and then bugs are mysteriously found” (director of a healthcare facility).






SOME VENDORS IMPLEMENT MECHANISMS OF CHANGE IN RESPONSE TO CLIENT PAINS

e good news is that some vendors have made key improvements, as they embrace tenets of

Forrester’s licensee’s bill of rights. Interviewees applaud their apps providers that:

· Limit sales cycle and complexity. Among the more onerous aspects to licensing are the lengthy

(on a magnitude of months) and resource-heavy negotiations that are necessary to grasp the

full scope of complex models. Vendors have worked to shorten these sales cycles by assigning

dedicated relationship-building account managers who understand the client’s business and can

streamline some of the process, rather than just top performers. Others have come to the table

more open giving way to immediate discounting to license fees.

“One [account manager] dedicated from start to finish . . . not just the top sales guys selling;

they form a relationship from sale throughout the client relationship” (director of global

applications at a bio-tech firm).

· Reward and offer incentives. More vendors have begun to offer rationalized discounts for

loyalty, large account values, and early adopter status. One interviewee noted that Microso

honored renegotiation upon an acquisition, credited them for the last year of their original

license, and offered further incentive credits toward training and partner services.

Another interviewee commented of its vendor’s discounting:

“ey start with a discount structure from day one. A client may see additional discounts for

specific partnering. ey are more consistent on giving more discount by spending volume”

(CIO of a home and commercial building materials manufacturer).

· Tailor service and licensing models to the clients’ specific business needs. Vendors faring

best in the midmarket offer more focused attention to customers with simplistic models that

place an emphasis on user-based metrics like concurrent user. For example, a QAD client

credits the vendor for being easy to negotiate with and as one of few that entertained an upfront

maintenance discount as well as fixed pricing and a reasonable 3% escalation clause for the

client. ose faring best with large enterprises key in on flexibility and catering to the complex

needs of larger clients. Oracle was cited as offering a highly flexible custom bundle that allowed

users to access all products in the suite and to easily reapply pricing based on user increases.

One client Forrester spoke with added:

“We have a good relationship especially in support and development. e response when

things don’t work is to try to understand the business situation to solve problems with their

products. ey are open to actual business operations . . . and try to solve the problem in

future releases. is is a huge strength” (group controller of a home materials manufacturer).






· Provide clients with opportunities and forums to voice needs and suggestions.Across the

board interviewees who had the most positive feedback about their apps providers were early

adopters and/or active in user groups. ese vendors facilitate open forums for user groups

to meet and openly discuss soware issues and best practices and client advisory groups as a

mechanism for reporting soware issues and suggesting enhancements. Sterling Commerce

took this one step further with one prospective client by “not just selling — liing the veil . . .” as

the vendor invited an as yet uncommitted potential client to the results of its user forum.

“ey have a great user conference and great networking — instead of just selling”

(information services employee of a healthcare provider).

CUSTOMERS WILL DEMAND NEW APPROACHES TO PRICING

e transformational effects of apps trends like SaaS and SOA will bleed into future apps licensing.As firms’ overall displeasure with application licensing and pricing on the one hand is met on the

other hand with a growing interest in and adoption of SaaS and SOA, firms will begin to conceive of

licensing and pricing in new ways. ese new thoughts will give rise to new demands, and firms will

exercise alternative options.

· SaaS will force customers to think about cost per user per month. As a pay-as-you-go

subscription option to application licensing, SaaS will give business owners a taste of

streamlined, more easily consumed licensing. And a primary driver for SaaS will be its bundled

license, maintenance, and upgrade package. is trend will fly in the face of overly complex

licensing and pricing structures by more clearly and incrementally illustrating the cost and

value of their investments. As a result, firms will gain more interest in and grow more vocal forsimplistic and holistic approaches to usage-based pricing agreements.

· SOA will drive customers to think about business process pricing. Metrics remain a tough

egg to crack for firms navigating through licensing and pricing — they are oen either

confusing or not well aligned to the user’s business. As SOA eases integration pains and enables

business process execution, strategic users will begin to have an eye toward their business

processes when engaging with their apps provider for licensing and pricing. Firms will regard

business process-driven metrics and pricing as a natural complement to how companies actually

operate and will demand that vendors deliver or improvise flexibility for business process

pricing. As SOA matures, it may spell greater adoption of process-based metrics.

· Customers will demand third-party alternatives to vendor-controlled maintenance.Firms

will continue to complain about exorbitant maintenance fees, but with only moderate growth

expected over the next few years in the commercial soware market, vendors will show no signs

of letting up on this revenue artery. Customers will protect themselves by shopping around for

third-party support and safe-guarding against lock-in by avoiding engagement with vendors





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© 2008, Forrester Research, Inc. All rights reserved. Forrester, Forrester Wave, RoleView, Technographics, TechRadar, and Total Economic Impact are trademarks of Forrester Research, Inc. All other trademarks are the property of their respective companies. Forrester clients may make one attributed copy or slide of each figurecontained herein. Additional reproduction is strictly prohibited. For additional reproduction rights and usage information, go to www.forrester.com. Information

is based on best available resources. Opinions reflect judgment at the time and are subject to change. To purchase reprints of this document, please email [email protected]. 44266

who do not have healthy reseller channels and partner services. e market’s best hope will

lie with the emergence of new offshore entities in China — not yet beholden to the dominant

vendors — as third-party maintenance providers. ese providers will break through much like

business process outsourcing (BPO) to India before them and answer the growing demand foraffordable maintenance.

R C O M M E N D A T I O N S

TAKE THE LONG VIEW ON SOFTWARE LICENSING AND PRICING

In order for customers to proactively manage their vendor relationships and negotiate software

licensing and pricing conditions, business process and applications professionals should:

· Educate the organization before contracting with an apps provider. The smoothest

negotiations are a result of experience and knowledge on both sides of the table. Clients thatunderstand exactly what they want out of their licensing agreement, successfully articulate

their current and future business needs and goals, and are not too shy to ask for what they

want will walk away the most satisfied.

· Campaign for and insist on openness and negotiation. Too many firms initially met with

vendor resistance to negotiation resign themselves to sticker prices and relinquish any

power to the vendor. Over time this sets a bad precedent for future terms and negotiation

opportunities. Instead, firms that leverage active roles in user groups and advisory forums

or as early adopters find footholds to opening negotiations. While others willing to take the

time to question and rework terms especially around metrics will set a better tone for future

negotiation.

· Consider the total costs on a 10-year basis. Forrester advises many clients to compare

the cumulative cost of ownership over 10 years with a SaaS benchmark of $12,000 per

user per 10-year period. Cumulative cost drivers such as license fees, hardware, support,

implementation, and upgrade should not exceed the SaaS benchmark.

· Apply lessons learned from the enterprise software licensee’s bill of rights. As CIOs

and their IT procurement managers embark on a review of existing relationships and

renegotiation of licenses, consider enforcing ownership rights across the software ownership

life cycle. Put into place as many measures as possible.

ENDNOTES

1 Forrester outlines a soware licensee’s bill of rights (LBoR) that reflects Forrester’s clients’ best practices

in this new IT environment. Because leverage wanes aer the initial selection phase, CIOs and IT

procurement professionals should immediately incorporate these best practices into the management of

current vendor relationships and the wording of future vendor contracts. See the December 18, 2006, “An

Enterprise Soware Licensee’s Bill Of Rights” report.

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Trends 2008 Applications Licensing And Pricing