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Enterprise software contracts stifle digital business initiatives

Two software licensing groups have joined forces to put pressure on the European Commission to investigate leading software companies

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Free ICT Europe (FIE) and the Campaign for Clear Licensing visited representatives of the European Parliament in September 2015 to begin the long journey of raising awareness among European Union (EU) policy makers of the aggressive sales tactics used by software firms.

Businesses that have signed multi-year enterprise contracts often find the licence terms and conditions restrictive. Organisations that wish to benefit from connecting to such enterprise systems as part of their digitisation efforts risk incurring huge hikes in software licence fees or face software piracy fines as their use of the product changes from that stipulated in the original contract.

Martin Thompson, chair of the Campaign for Clear Licensing, said: “Due to pressures they are under, we believe traditional IT players are putting pressure on their clients, resulting in changes to terms and conditions leading to forced asset replacement. Clients are also being forced to spend a huge amount of time validating how much software they use. We believe these practices are not good for business and they waste a lot of time.”

“The big suppliers are trying to change the rules of engagement, forcing customers to pay for much longer,” said Tomás O’Leary, co-founder of FIE and CEO of Origina Software.

According to a recent post by O’Leary, whose company helps customers get the most out of their IBM software licences, IT audits are on the rise, yet 28% of software remains unused.

The terms and conditions stipulated in original software contracts can curb businesses’ ability to use the software in digital initiatives. For instance, if a back-end database is charged per user – and this database is later connected to a front-end website – the supplier of the database could argue that every website visitor is, in fact, a user of the database.

As companies start on digitisation journeys, some are looking to open up application programming interfaces (APIs) from their enterprise system to unlock data, enabling third parties or non-IT departments in the business to create joined-up customer experiences. APIs are among the licensing gotchas that can put a large tariff on such projects, as suppliers look to maximise the short-term revenue that can be gained by targeting such use.

Legacy inertia

Being tied into software contracts that no longer reflect the way the business runs can be a barrier to innovation. A survey from IT services company Trustmarque reported that the majority of CIOs (79%) rated simplifying IT as a priority for their organisation, with 89% saying that simplifying legacy IT while driving innovation was a challenge.

Unfortunately, much of this legacy technology is the enterprise software that runs the business.

Greg Schott, CEO of API management company Mulesoft, said some software companies have moved from being innovators to being revenue generators.

“They did not learn to innovate at scale,” he said, adding that they acquired companies and focused on extracting revenue instead. “Old companies won deals on golf courses and did top-down selling.”

This type of selling led to enterprise software mega deals – a sales tactic that dates back to a pre-internet era.

“You couldn’t just download software. The way software was introduced was through sales deals and having software deployed,” said Schott. 

Acquiring software is now more a self-service model. Developers often download free trials of tools, which erodes the influence of the power selling used by the enterprise software suppliers’ sales teams.

“People will be minimising expenditure with these companies in most IT organisations. Look at WorkDay – when someone thinks about a new human capital management system they don’t say let’s double down on PeopleSoft,” said Schott.

At the same time, Schott sees consumer app use influencing enterprise software. “Consumers have high expectations from their smartphone. They expect things to be easier, so there is a much higher bar for an enterprise system.”

This means people tend to avoid buying new applications from the major IT suppliers, according to Schott. He feels that the adage of not being fired for buying IBM is finally going away.

Freeing up legacy

Most organisations are not fortunate enough to be able to start with a blank sheet when building and acquiring enterprise IT, but some are certainly looking at ways to reduce spending with the big suppliers.

In 2014, when two of its Oracle systems needed replacing, the Met Office switched them to the open-source PostgreSQL database, for example. At the time, James Tomkins, data services portfolio technical lead at the Met Office, said one of the big benefits from moving to PostgreSQL was that the cost of support was not related to the power of the hardware.

“There is no direct hardware impact. Oracle licenses on a per-processor basis, so if you put the database on superior hardware you pay a greater licence fee. With PostgreSQL at the Met Office, we only pay for support,” he said.

Businesses can pay as much as 25% of the cost of the original software in annual maintenance costs. Third-party software support provider Rimini Street claims it is able to deliver premium support to clients at 50% of the fees they are currently spending with Oracle or SAP.

“Our clients also realise significant savings on related support costs, including no required upgrades and support for customer code included at no additional charge, adding up to 90% savings in total support costs,” said Jill Harrison, managing director for Europe, the Middle-East and Africa at Rimini Street.

According to Ritu Mahandru, vice-president for systems sales at CA Technologies, the effective use of software is closely linked with digital transformation. “It becomes a key enabler of efficiency, competitiveness and ultimate success,” she said.

However, almost a third of IT decision makers surveyed recently by analyst Freeform Dynamics for CA Technologies said simplifying legacy IT was among their main priorities.

For CIOs who face balancing executive pressure to deliver IT for a digitisation strategy with the reality of dealing with legacy enterprise software contracts, dropping suppliers that are not willing to negotiate pricing in a manner that reflects modern software use may be the best option available.

Read more about software licensing

Read more on Software licensing