Licensing can be a headache for the IT department. A survey by consultancy Morse revealed that 52% of IT decision-makers find it difficult to keep track of how much hardware - let alone software - is being bought and managed across their organisations.
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Trends in the IT market for distributed computing, developments in grid and utility computing, virtualisation, thin clients, multicore architectures, software as a service and open source are challenging traditional licensing models to keep up in demonstrating value.
David Roberts, chairman of blue chip IT user group the Corporate IT Forum (Tif), criticised current licensing methodology. "It is so counterproductive it is unreal," he said, adding that the commercially-sensitive nature of many enterprise supplier agreements made it hard for users to act collectively.
"It is a very sensitive subject - some key suppliers keep the business running."
Looking across a range of licensing models, the reasons current models fail is clear, said Ian Osborne of Intellect, the trade association for the UK high-tech industry.
Osborne, project manager of the Department of Trade and Industry-funded Grid Computing Now! project, said, "Licensing is an insidious issue that inhibits UK enterprises, and I have not yet met a user who does not want fairer pricing for software.
"Licence rules have to change to adapt to a new environment and there needs to be more consensus on a convergence of mechanisms for paying for IT."
For instance, changes made to Vista Enterprise edition licences allow Software Assurance users to run the latest operating system within a virtualised IT environment. This includes multiple virtual desktop instances at server level, or on thin-client discless desktop PCs where storage, software and processing power is delivered and managed from a central point.
Windows Vista Enterprise Centralised Desktop is a subscription-based licence model, which Microsoft says enables organisations to rationalise hardware and software costs.
Neil Macehiter, research director of IT advisory firm Macehiter Ward-Dutton, said the move shows a recognition of the changing market. In his experience, more organisations are starting to consider the ubiquitous connectivity of broadband internet robust enough to run the operating system from the server rather than the local hard drive. This delivers reduced maintenance on the basis of runtime instances.
"Organisations with remote capabilities like branch offices where the IT department may not have direct control of resources may find this kind of per-client access attractive," Macehiter said.
VMware, which has 80% of the virtual infrastructure software market, has criticised Microsoft for holding back competition in the market. VMware claims Microsoft is using its position as a leader in the operating system market and its added platform dominance with Exchange, SQL Server and Active Directory products, to drive customers to use its virtualisation products.
"Microsoft's tactics are focused on software licensing and distribution terms (for SQL Server, Exchange, Windows Server and Vista) and through the application programming interfaces and formats for virtualised Windows," said a VMware spokesperson.
Mike Neil, general manager, virtualisation strategy at Microsoft said, "We believe that we are being progressive and fair with our existing licensing and use policies and creating a level playing field for partners and customers."
The move towards server virtualisation from suppliers including VMware is challenging the more traditional "per-server" model of licensing. Again, Microsoft serves as a good case in point of how market forces are influencing changes to pricing and conditions of use.
Microsoft said Vista Enterprise Centralised Desktop is more cost-effective than its own thin-client Terminal Services offered with Windows Server 2003. A Windows Server Client Access Licence and an incremental Terminal Services Client Access Licence are required for each user or device using Terminal Services to remotely run hosted desktop applications, save files and use network and other resources as though they were installed locally.
Some smaller providers, such as NComputing, offer similar, multiple-user virtual access, and NComputing claims it can host 30 users through the same client by using surplus computing resources, saving on the need for multiple Windows Client Access Licences.
Windows Server 2003 itself is licensed per server and per seat. Microsoft advises choosing a model best suited to networking and user-based growth strategies. The maximum number of concurrent connections of the per-server model is the best choice for a small network of only one domain or when only part of your client base is connected to the server at any time.
But Serguei Beloussov, chief executive of server virtualisation supplier SWsoft, said hardware-based licensing models no longer accommodate trends in software use.
"Software environments are no longer attached to the physical hardware. It is no technical problem to move environments between boxes, it is just the licensing limitations.
"Some suppliers, like Oracle, for example, licence per execution environment as though this is somehow proportional to usage. But with virtualisation you could use eight central processing units at one time and half a central processing unit at another," Beloussov said.
"Microsoft, for example, is a strategic partner, so we tell our users to report environment changes to them in case of any licensing implications. But multicore or software as a service, for instance, makes the situation even more complex by sharing a single instance of software across multiple hardware cores or users."
Ollie Ross, head of research at Tif, said different methods of software delivery were proving to be disruptive to licensing models. "Suppliers cannot ignore what is happening with the infinite variety of software systems that are doing an infinite number of things with commodity computing technologies. The old-fashioned 'per-processor' models just do not fit any more," she said.
For instance, Salesforce.com, the software as a service market leader, uses its on-demand per-user model as a differentiator. Lindsey Armstrong, co-president for the EMEA region, said the value of charging per user with on-demand delivery is that the supplier is always accountable to its customers. "The supplier has to work hard every month to win your business," she said.
"Per-site licensing is an unnatural way of paying for software - how many years in advance do you have to know your capacity and usage to comply? And yet it has been accepted in the IT world. Now that most CIOs spend most of their IT budgets just keeping the lights on, they do not want to be committing to spending up front."
One organisation that found the Salesforce.com approach attractive is Carbon Trust. Steve Williams is in charge of customer relationship management systems for the government-sponsored Carbon Trust, and led the implementation of Salesforce.com CRM software for 300 remote and branch office users last August.
"We needed to get an enterprise-wide customer view and be able to track our engagement with organisations to reduce their carbon emissions throughout the end-to-end lifecycle process of their engagement with the trust - from looking to identify savings to measuring and recording reductions," Williams said.
He added, "For us, software as a service was not so much about being able to turn off licences, but more about the portability and flexibility of the web-based system. This meant we could do a large amount of customisation in-house and host remote workers without loads of extra servers."
Lawrence Buckler is global head of IT at operations management consultancy Celerant, which is also a Salesforce.com user. He believes it is possible to outsource all commodity IT infrastructure and retain only that which supports innovation or competitive differentiation.
"Getting rid of the assets makes the licensing conversation much easier, allowing you to focus on what is important in terms of delivering value," he said.
"Our selection criteria are based on whether every other consultancy out there needs the same IT function. If not, then I am willing to pay a premium price."
Value or revenue sharing based licensing models are also proving popular alternatives. For example, online travel operator easyJet last year outsourced 200 of its mission-critical servers for virtually its entire mission-critical website business on a per-transaction basis.
Andy Caddy, easyJet IT services director, said the five-year multimillion pound deal is key to making provider Savvis responsible for its own revenue by ensuring the infrastructure can support the travel company's continued profitability. easyJet's website, ticket reservation and flight operations systems and wide area network are supported by the managed service.
"For us, that means the cost per passenger comes down and the numbers of seats we sell goes up," he said. "When you consider 98% of our revenue comes through the website, the deal has freed up a lot of time for our team, where they might have been worrying about air conditioning, racking servers manually and other time-consuming activities."
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