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Software licensing is getting more complex by the day

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May 9, 2013

On any given day, IT managers and system admins usually have they busy work schedules pretty well figured out, and when it comes to software licensing, that's when things get more complicated. And the trend has been getting worse lately.

Businesses and big companies today shouldn't be surprised to discover they're having issues understanding their enterprise licensing agreements.

While Microsoft, Oracle, SAP and other big players publicly claim that transparency and fairness is in their licensing and pricing agreements, customers often disagree when they get to the bargaining table or open the results of a software audit.

To that end, Oracle and SAP are in a unique position as the two biggest enterprise software companies in the world. Combined, they account for more than 40 percent of the global ERP market. No other enterprise software vendors offer software lineups that are as broad and deep as those of Oracle and SAP.

And with billions of dollars invested in R&D every year, customers of these two companies have come to expect a steady stream of technological innovations that give customers real competitive advantages, such as SAP's HANA database and Oracle's Exadata database appliance.

Customers of Oracle and SAP appear to be reasonably happy with the functionality delivered by the vendors' wares. But there is a darker side to working with the software giants. Depending on which vendor you're dealing with, you may find the licensing agreements to be extremely complex, rife with vague terminology, inflexible to various changes in business structure, or subject to capricious levels of enforcement.

Take SAP for example. Its basic licensing model is quite simple. The company lays out the basics in a 26-page white paper, "Licensing SAP Software," which is available on its website. The company says the customer is able to pay for only the SAP software that they use. But the reality is usually something different. And in some cases, it can be very different.

At a higher level, SAP sells its flagship Business Suite in two ways-- packaged licences and named-user licences. It's all perpetual licensing with SAP, which offers subscriptions only for two solutions: the SMB-targeted SAP Business ByDesign suite, and CRM OnDemand.

A SAP customer will start by licensing the "enterprise foundation" package, which includes the core SAP ERP software (ERP Financials, ERP HCM, and ERP Operations), at a pre-determined price. On top of that, customers select various "enterprise extension" packages (generic business functions like payroll), industry portfolio packages, and line-of-business portfolio packages.

Each of these packages is priced based on a business metric, which could be anything from the customer's revenue, the number of employees, the number of processor cores the software runs on, or the number of invoices sent out daily. Analytics, mobile, and database products are separately priced, and have their own restrictions.

For instance, SAP HANA is priced on the amount of memory it can use. Every user that needs access to the SAP package is required to have a named user licence. SAP sells three main types of named user licences-- professional, developer, and employee. The differences in that the licences depend on the level of access required and the amount of time they're going to spend working in the SAP software.

Chris Hughes is a SAP licensing expert with Flexera Software, a software licence management tool vendor. In his position, Hughes has an in-depth understanding of the different licence types that SAP uses across its products, and helps customers to minimise their SAP licensing expenditures.

"One of the bigger challenges in SAP licensing is that the licence models are very vague and open to interpretation," Hughes says. "For instance, a professional user licence would be defined as somebody who performs operational duty on the SAP system, whereas the limited professional licence is really defined as someone with limited operational actions," he added.

That definition of 'limited' is very open to different interpretations and different customers will look on that in different ways.

"The vagueness is definitely a challenge," Hughes says. "In fact, I sometimes feel that it's done on purpose. We're starting to see a trend of SAP being more specific in their contracts but still, they have a long way to go before the vagueness goes away."

The other big issue facing SAP customers is something called indirect access. SAP defines indirect access as occurring when a user or product accesses data stored in the customer's SAP system through a third-party interface. Examples of this could be an Oracle Hyperion BI application taking data out of the customer's production SAP database, or serving data through a Microsoft Web portal.

And in the end, while the data still belongs to the customer, it is being "processed" by SAP software, and therefore SAP demands compensation any time it is used outside of the SAP environment. It may surprise enterprise customers to find that they don't have the freedom to use their data in any way they like without paying SAP for the privilege, but that's likely because they didn't carefully read their licencing agreement when they should.

Legal and licensing experts claim SAP used to look the other way when its audits found customers violating the indirect access provisions of their licence agreements, although SAP disputes this. While customers own their own data, it can be difficult to determine how many licences would be required for all downstream consumers of that data.

But in recent years, according to the licensing experts and users we spoke to, SAP has started to crack down on indirect access, by charging customers for additional licence fees for indirect access. This has angered SAP customers who have been asked to pay millions of dollars to buy additional named user licences as a result of indirect access discovered during audits.

"SAP customers can get some surprises in an audit situation, where they thought they were following the process, they thought they had a very accurate understanding of their licencing position, and suddenly they're being charged for thousands of users that run on this other system that is loosely connected to SAP," Hughes says.

"This is a clear area of focus for SAP, and for customers going forwards, it's an area of fear and uncertainty," Hughes added.

The fear and uncertainty over SAP's licensing practices was on full display last fall, when the U.K. & Ireland SAP User Group conducted a survey that revealed 95 percent of all SAP customers found the company's software licensing policy "overly complicated".

In response, the head of SAP's U.K. division pledged at last fall's TechEd 2012 conference that it would clarify and simplify its licensing models. Almost eight months later, the IT community is still waiting.

SAP defends its licensing and pricing schemes as fair, and says it's taking steps to make its licensing policies simpler and more transparent. Generalisations about weaknesses in its licensing scheme are not possible, SAP says, because each customer's situation is unique.

Furthermore, SAP questions the comments made by licence optimisation vendors, saying they're trying to "drum up" business for themselves.

Particularly, SAP says named user definitions must be broad in scope because they cover user activities that are role-based, and not function-based.

"The concept that indirect usage is somehow new or a change in practice is simply not true," the SAP spokesman says. "Indirect access isn't a new topic at SAP, nor is charging for it a new practice either. These terms have been in our contracts for many years."

There's also growing pressure for SAP to publish its full price list. Oracle does, and makes no bones about it. While SAP doesn't publish its prices, the company seldom varies from its internal price list when its salespeople close contracts, according to Upper Edge Consulting, a licence optimization consulting company that SAP hired to validate its pricing practices.

The same cannot be said of Oracle, Upper Edge experts say, although not everyone agrees with that statement. Oracle's licensing model is similar to SAP's in several ways. Users of Oracle applications, such as E-Business Suite, must pay a fee based on various business metrics, and also must have the appropriate number of named user licences, what Oracle calls "End User Plus," for most people who work with Oracle software.

Oracle's technology products, such as the database and Fusion middleware, are priced differently. With these products, Oracle mandates processor-based pricing models. Virtualization further complicates Oracle's processor-based licensing model, especially considering the differences that Oracle recognises between "hard" partitioning and "soft" partitioning.

Only servers virtualized with Xen-based Oracle Virtual Machine can get the discount of "hard" partitioning. According to Oracle, every other hypervisor - including other Xen-based hypervisors - can deliver only "soft" partitioning.

But here's the catch-- "soft" partitioning customers must license the Oracle product for all of the cores on the server, regardless of how many are actually used to run the Oracle application...

Oracle's software licensing model is "one of the most convoluted and complex" models in enterprise software, says Dave Blake, president and CEO of UpperEdge Consulting, which advises clients in enterprise software licensing issues. Some of that complexity stems from the acquisitions that Oracle has made over the years.

Those models haven't been shifted to a company-wide standard, he says. "Where their level of complexity comes in is how they tend to stray from their public list prices and metric pricing," Blake says. "I think Oracle has done a pretty smart thing outwardly facing, as far as declaring that they're fully transparent to the IT industry by posting their list prices for their applications as well as their technology products to their website.

"However, where complexity comes in on the transaction side, is when they tend not to present or propose standard template transactions that are based on those list prices," he says. "It's a little bit of a shell game in the sense that they publish their list prices, but 90 percent of the transactions that we see tend to have custom bundles, custom quotes.

"They develop custom bundles or custom enterprise suites for their respective pricing which then allows them basically to throw out the price book," Blake added.

The business practices of Oracle's sales team also raise other concerns for Oracle enterprise customers. For instance, Oracle is known to price entire custom bundles according to a single business metric, says Jeff Lazarto, an UpperEdge principal. "The challenge for companies is that, as their revenue increases, whether that's related to the value they receive from the Oracle products or not, they're now subjected to additional licence fees as their revenues grows," Lazarto claims.

"Not only that, but their maintenance fees increase as well," Lazarto assessed. Nevertheless, Oracle products such as Exadata are driving real value into businesses, but what causes fear and uncertainty among customers are the licensing agreements, said Lazarto.

Additionally, the inability to modify some of the existing licence agreements, ie to terminate licences or maintenance for individual products in a bundle is another serious concern for Oracle customers, Lazarto added. "It's an all-or-nothing scenario. They do grant you the licence to terminate per their agreement and their policy. But then they have the right to go back and re-price all of the remaining products, because in essence, you broke up the bundle. So they need to re-price what's left of the bundle, and then re-price maintenance as well. It's almost endless," added Lazarto.

Oracle sales people have also been known to encourage customers to change their licence metric when renewing maintenance, Lazarto added. For example, the Upper Edge consultant shared the story of a long-time Oracle database customer who licensed the product on a per-user basis (a very favorable licensing method), but said they were convinced to change their licence model to per-core pricing - Oracle's current method of pricing its database - during maintenance renewal negotiations.

"Oracle uses a very heavy-handed negotiation to get people to change their licence models," Lazarto claims. "I'd say one of the common complaints from customers is they just feel they're locked into Oracle at times. It's very difficult to break out of it."

That lock-in phase is a source of enormous revenue for the $37 billion software giant. Oracle famously charges new application customers an annual maintenance fee equal to 22 percent of the initial licence value. These maintenance fees are recorded in the "software license updates and product support" accounting bucket, which brought Oracle $4.2 billion in its third quarter of fiscal year 2012, or 47 percent of its total revenue.

Oracle executives have sometimes referred to the maintenance revenue as its "birth right." Blake recommends that Oracle and SAP customers read their licence agreements closely, make careful note of access rights, and do not be afraid to demand better terms from the vendors. And they should ask questions-- plenty of them, when things aren't crystal clear.

In many cases, getting input from licensing experts, or even using software, may reduce licence expenditures significantly, and reduce the risk of unbudgeted increases and unpleasant surprises down the road.

To be sure, SAP and Oracle do have compelling software and they work for big business, but it comes at a cost that may not be apparent at first.

"If you simply listen to the press from Oracle and SAP, what they're touting is that they're being more open, they're providing more information to their clients and then they say that the complexity of their models and their pricing are decreasing and simplifying," Blake says.

"But what we're seeing in fact is the exact opposite. Their models are getting a lot more complex, and they're getting further complicated by various deployment models," Blake added.

Source: Upper Edge Consultants.

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