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How to avoid being chained to an enterprise software licence

CIOs will need to ringfence spending with their existing enterprise IT suppliers to liberate capital for other business initiatives

Gartner's so-called bimodal IT outlines how CIOs should divide IT into the work needed to keep the systems of records running – Mode 1 IT – and new projects, known as Mode 2 IT, that focus on areas to grow the business; the so-called systems of engagement

It is these systems of engagement that promise to deliver new value from IT investment. However if Gartner’s estimates are correct, IT budgets in Europe are set to grow by only 1.8%, leaving precious little room for new IT initiatives.

Worse still, major software providers have a stranglehold on enterprise IT. A large amount of the IT budget is spent on maintenance contracts for these systems, and the sales teams at enterprise software companies give their sales teams incentives to sell premium products and cloud services to existing customers.

The savings that IT departments negotiate with enterprise suppliers can can often be wiped out if the customer chooses to reduce the number of licences.

Sebastian Grady, president and COO of Rimini Street – which provides third-party maintenance for SAP and Oracle software – said: "You can’t fund Mode 2 projects if you are constantly on the upgrade treadmill. Too many vendors are taking advantage of customers. How much change is happening for the sake of change?"

He said software does not wear out. The average SAP and Oracle customer is running software that is over eight years old, two to three releases behind the current version. "I would say 75% of the change companies make is for the sake of change." The hardware suppliers, software companies and system integrators all rely on the customer upgrading, he said.

According to Grady, the leading suppliers push technology upgrades customers do not need. Grady questioned the wisdom of upgrading to SAP S/4 Hana, based on the ERP company's in-memory technology.

Grady argued that ECC 6.0, the core of the SAP ERP system, has 400 million lines of code. Moving all of this over to Hana would take years.

Yet SAP is promoting Hana upgrades. Grady argued that a customer who previously gave paid $2.2m on ERP software maintenance could end up paying $4m in annual subscription fees plus, as and when S/4 is ready, they would need to factor in the implementation costs, which would add another $10m.

According to Grady, for most people, Hana is an unnecessary upgrade, so CIOs should refrain from upgrading. "There are some applications where it is neat, but in most cases you do not need Hana," he added. "If you want in-memory computing and you are an SAP customer running on Oracle, Oracle’s 12c database is in-memory. Why would you want to retrain all your database administrators to learn Hana when you are already an Oracle shop?"

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Cloud equals more cost

The main suppliers are keen to push customers to buy cloud services. But moving to the cloud is not necessarily a cheaper option. As Computer Weekly previous reported, Oracle chairman Larry Ellison told financial analysts that the cloud was "stunningly profitable." A $1m perpetual software licence with annual maintenance would make Oracle $3m in total over 10 years, while a $1m subscription would make $1m a year for 10 years. Oracle, Microsoft SAP and IBM are all pushing cloud services over perpetual software.

Jo-Ann Rosenberger, a research vice-president at Gartner, warned that, compared to the big suppliers, there is an imbalance of negotiating powers in most companies. She recommended tailoring the negotiation process. This is particularly relevant when the supplier presents a CIO with a cloud offering to replace existing on-premise software. "If they had a bad first quarter, they will use that to catch up in the second quarter, and you can use this for bargaining power."

An IT department should have viable alternatives and consider building software over buying or using open source. Competitive tendering for the new deal can level the negotiation playing field. "Use RFP [request for proposals] as a leverage tool to give you a better deal," she said.

Use open source

The cost of supported open source software can be 80% lower that proprietary software. Speaking at a session during the Gartner Symosium, Andrew Meyer, who is responsible for the delivery of the Spine 2 database at the NHS’ Health and social care information centre, described how the organisation moved from Oracle to the NoSQL Basho Riak open source database and EnterpriseDB, saving over £20m in the first year since the switch. "The majority of our estate is open source running on commodity hardware. If we need to scale we buy another server." He said this is more cost effective than using Sun servers that previously ran the NHS Spine.

Marc Linster, senior vice-president of products and services at EnterpriseDB, urged CIOs to put all the proprietary databases that they want to replace under one set of negotiations. This limits the supplier’s opportunity to charge the non-discounted licence fee for remaining instances of the database, which can easily wipe off any savings that could be made by reducing the number of licences.

Businesses often swap out proprietay databases for open source alternatives when the licence is up for renewal. This helps the CIO reduce licence fees associated with the proprietary product. Third-party maintenace can work out significantly lower than maintenance contracts from the main software providers. This also reduced the contractural ties with the supplier and frees up valuable budget, which can be re-invested in Mode 2 IT.

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