CA chairman warns that a licence upheaval is essential to support on-demand IT

Computer Associates, whose software is used by many of the UK’s leading companies, is calling for an industry-wide upheaval in...

Computer Associates, whose software is used by many of the UK’s leading companies, is calling for an industry-wide upheaval in software licensing.

Sanjay Kumar, CA’s chairman and chief executive, used the CA World conference in Las Vegas to launch the company’s grand new vision of on-demand computing. The idea is that businesses will be able to switch IT resources between business processes and reduce the overall cost of IT.

Although this many seem fanciful, CA does have considerable industry influence. Its UK customers include WH Smith, BT Group, Halifax, Bank of Scotland, Debenhams and public sector bodies such as the Inland Revenue.

As the industry begins pushing on-demand computing, Kumar believed there would need to be major changes to the business models within software and hardware companies.

“To support on-demand computing, the IT industry will have to reform its business models and licensing models in many areas to continue to grow,” he told Computer Weekly.

Kumar said it would be a difficult change for the IT industry to undertake, analogous to the change in the car industry from manufacturers simply selling cars to the selling and leasing business model. “We will have to go through such a change during the next three to five years,” he said.

Kumar warned that the competitive nature of the IT industry would create far more types of licensing options than users would want. In addition, users today are asking for shorter timeframes for their licences. “In some cases customers are asking for licence metrics that are not tied to computing capacity,” he said.

In other words, users are not looking for licences based on seats or servers. Instead they want licences that tie into the business value of IT. “They want flexible pricing where they only pay for IT they consume,” he said.

The industry is not yet ready to offer this type of licensing, but Kumar said there is no excuse for not trying to move forward. “We have to do more as an industry. But our customers also have to do more. They need to realise that business models [of the IT industry] will have to change in a broad way - the industry will go for some lowest-common-denominator system.”

Kumar said CA has begun to address this change with a business model called Flexselect licensing, which allows users to purchase small chunks of IT at a time, rather than buying a complete system up front.

“Users need more choice, more flexibility and a better basis for relevant economic tie-in between computing and licensing,” he said. “Users want to be able to pay for the relevant economic benefit they are getting from their IT purchase.”

Kumar stressed that CA had gone through the pain of changing its own licensing policy during the past two years, both inside CA and for its customers. “I do believe that there will be some pricing turmoil in the future,” he said.

CA’s new approach to licensing has its roots in the company’s history. It has had a reputation in the past for growing through acquisition. “Charles Wang [founder of CA] built a business that started at zero and grew up. What I am dealing with are not the same problems,” Kumar said.

Kumar admitted that the company has had a poor track record in supporting its customers in the past. The problem lay with the way the CA field organisation was run. Historically, the turnover of customer relationships among field staff was high. “I am very confident that this criticism of CA has now been addressed,” he said.

Three years ago, between 40% and 44% of CA customers saw different people year on year, said Kumar. To address this, CA has changed the way field staff operate to deliver a more long-term view of the user. “There has been an intense effort within CA to improve field customer service to produce much more stable relationships with customers,” said Kumar. Today, less than a tenth of CA customers have to deal with different field staff each year.

CA’s change in policy towards its customers has been driven by a need within CA to improve corporate governance. Kumar has made significant changes to the way licence revenue is reported at CA to make financial reporting more transparent.

“Almost all large software companies recognise software licence fees up front. A much better approach is to recognise revenue over the life of the contract,” he said. “This is much more even and transparent, and it allows CA to focus on the customer and have a longer view of the relationship with the customer.”

In practice, Kumar said a three-year contract costing £100 a year would previously have cost £300 in terms of licence revenue booked up front for the three-year term.

“We potentially go from reporting £300 in revenue during a financial quarter to £8,” he said. “It is a massive change to the business and means we have to take a much longer-term view of the customer.”

However, ultimately it will be CA’s customers who will decide whether on-demand computing takes off and how fast the licensing revolution this requires will gather pace.

Read more on Business applications