Organisations' preferred approach to software licensing
falls into three fairly evenly divided categories, although it
varies according to the type of application being
licensed.
In a survey of more than 300 IT and business executives
conducted by AMR Research 23% of respondents advocated the highly
variable "usage-based" or "on-demand" approach and 26% wanted "site
licensing", where they pay a flat fee, regardless of how many
workers use the product or how much they use it. Another large
segment (20%) preferred a middle road involving a one-off licence
fee based on the number of users.
The research found some correlation between licensing preference
and the stability of the business. Organisations that are highly
cyclical or growing rapidly tend to favour licensing that is tied
to usage, and more stable companies prefer site licences, where
there are no surprises.
In general, chief information officers prefer less variable
licensing approaches because it makes planning and budgeting
easier. They dread the idea of having to go to the chief financial
officer in the middle of the year for more money because some
business activity has triggered a software usage metric.
By contrast, departmental or divisional user executives prefer
the idea of only paying for what they use and are typically
unsympathetic about the IT department's budgeting problems.
The concept of paying for application software based on actual
usage is more than 30 years old, but it was largely replaced by
perpetual licences after computer "time-sharing" died out in the
1980s. Recently, large infrastructure suppliers such as IBM and
Oracle have thrown their marketing muscle behind the concept, and
Salesforce.com has signed up nearly 250,000 subscribers for its
customer relationship management products.
Now widely referred to as on-demand computing, this is an
approach where the user owns no rights to the software, but simply
pays a monthly or annual fee based on a formula that is usually
related to the number of people who use the application and how
much of it they use.
Although there has been a lot of press coverage about on-demand
computing, few major applications are offered this way. Many people
confuse "hosting" with on-demand, but in most hosting situations
the user must buy software licences before arranging for the
supplier or a third party to run the applications for them.
In the AMR survey, 9% of respondents were paying for some
applications on an on-demand or usage basis, although it
represented less than 3% of revenue for the enterprise application
market.
However, when users were questioned about how they wanted to
purchase applications in the future, a different pattern emerged.
Many companies that are currently licensing applications based on
user seats believe that in future they will be paying for
applications based on usage.
The fact that 23% of executives polled indicated that their
preferred method of buying enterprise applications was on-demand is
a wake-up call for software suppliers, who have mostly been taking
a wait-and-see approach.
The preference for on-demand varies considerably by type of
application, but in each segment the percentage of companies that
want to switch from user-based licensing to on-demand has increased
significantly. Even in enterprise resource planning, where
perpetual licensing based on user seats has been the accepted
standard for more than 20 years, 14% of executives surveyed said
they would like to switch to on-demand.
Application software providers have been flirting with schemes
that would allow users to pay for their applications based on
actual usage, but few are ready to offer a full on-demand option.
Even the high-profile success of Salesforce.com has not convinced
leading providers to move away from perpetual or term
licensing.
Part of the problem is that the software industry has grown up
with a business model based on collecting large licence fees at the
outset of a contract and then charging 15% to 20% per year for
maintenance and support. If a supplier suddenly switched to
usage-based fees it could see a dramatic fall in revenue. In the
long run these companies might generate the same total revenue per
customer with much better predictability, but that initial revenue
plummet frightens them.
Suppliers also struggle with the problem of compensating and
motivating their sales reps in an on-demand environment. The
typical enterprise application salesperson is used to getting huge
commissions from a small number of large licence transactions.
Gradual monthly payments based on a customer's usage fees just do
not excite them.
User companies expressing an interest in usage-based pricing
will probably not be sufficient to get the major application
providers to enthusiastically adopt a whole new model. Smaller
suppliers or new entrants are likely to offer on-demand pricing as
a way to differentiate their products and lower the barrier to
entry by eliminating the large, up-front expense for buyers.
In the CRM market, for instance, the rapid growth of
Salesforce.com, which offers only on-demand pricing, has forced
even a well-established player like Siebel to introduce an
on-demand product.
In the enterprise resource planning and supply chain markets,
none of the leading suppliers seems to be ready to take the plunge
yet. Oracle has a programme it calls Oracle On Demand, but it is
really a hosting service where customers still have to buy either
perpetual or term licences. Many suppliers are using value pricing
approaches where they tie licence fees to variables other than the
number of users, but these still require the customer to buy
licences and are not truly on-demand.
Jim Shepherd is vice-president at AMR Research