For Business Process & Applications Professionals

Includes Forrester user interview data and Forrester research panel data

January 23, 2008

Trends 2008: Applications Licensing And Pricing
by R “Ray” Wang and Elisse Gaynor
with Sharyn C. Leaver and Meghan Donnelly

EXECUT I V E S U M MA RY
Forrester interviewed 25 clients of leading enterprise applications providers and surveyed 215
business process and applications professionals about their software licensing and pricing experiences.
According to these users, software licensing and pricing continues to be marred by complexity, soaring
maintenance costs, and a lack of flexibility and alignment with business goals. While vendors work to
find the balance that works for them and their clients, a number have made progress by simplifying the
process, offering customer-focused management, and empowering clients. Forrester believes future
application innovation trends like service-oriented architecture (SOA) and software-as-a-service (SaaS)
will be the impetus behind a shift in how firms view apps licensing and pricing and what they demand
from apps providers. In the meantime, business process and applications professionals must arm their
firms to mitigate licensing pain points.

TODAY’S APPS SOFTWARE USERS REMAIN DISSATISFIED WITH THE STATE OF LICENSING
Following on the heels of “The Forrester Wave™: Enterprise Apps Software Licensing And Pricing,
Q4 2007,” Forrester interviewed the clients of leading enterprise application software providers and
surveyed business process and applications professionals to better understand the state of software
licensing and pricing models today. Vendors faced with the challenges of structuring agreements
that are mutually beneficial and in line with the tenets of a licensee’s bill of rights (LBoR) have made
improvements, but licensing and pricing still generate negative reactions among users because:1

· License agreements remain too complex. Some have concluded that licensing and pricing
complexity is a necessary evil to combat misuse of applications and to accommodate a
heterogeneous community. Still, 11 of 25 respondents indicated that licensing structures and
language are still too complex and are among the biggest problems that persist with licensing
today (see Figure 1). Users felt there was often a lack of clarity regarding the exact value they were
receiving for the pricing and often did not understand the rationale behind expenses, discounts, or
provisions for changes to their licensing.

· Imposed maintenance costs continue to lack value. Firms also believe that maintenance costs are
much too high. Surveyed firms reported paying an average of 26% of their total cost of ownership,
while approximately 87% of these respondents believe a fair price for maintenance is 24% or below
(see Figure 2). Striking a particularly strident chord for licensees, many clients Forrester spoke with
indicated they paid maintenance fees but never used the services.

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Figure 1 Customers Still Find Licensing Overly Complex

“What would you say are the biggest challenges with licensing models today?”

Too complex 11
Maintenance costs too high 11
Metrics don’t match value 6
Too rigid 6
Not in line with business goals 3
Other 1

Base: 25 clients of leading enterprise software providers with software licensing and pricing experience
(multiple responses accepted)
44266 Source: Forrester Research, Inc.

Figure 2 Clients Believe Maintenance Costs Remain Too High

“What do you feel is a fair percentage of your software’s total

cost of ownership to pay for maintenance?”

*Actual mean percentage paid:

26%

Below 10% 14%

10% to 12% 21%
12% to 14% 8%
14% to 16% 14%
16% to 18% 10%
18% to 20% 7%
20% to 22% 10%
22% to 24% 3%
More than 24% 3%
Don’t know 10%

Base: 215 business process and applications professionals

*Base: 124 business process and applications professionals
Source: October 2007 North American Business Process And Applications Online Survey
44266 Source: Forrester Research, Inc.

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· Rigidity and misalignment of metrics persists. Interviewed users also expressed dissatisfaction
with the inability of vendors to accommodate needs specific to their business. Specifically,
they want vendors to understand how their companies actually operate and acknowledge the
structures that are most in line with these operations, instead of force fitting existing structures
to each client.

· Mergers and acquisitions (M&A) create a hodgepodge of licensing and pricing models.
M&A activity brings its share of renegotiation issues. In the cases of rapid employee change
from acquisition or from divestiture, customers want the freedom and agility to change models
to match their new circumstances. Firms often request to transition off of a current agreement
onto something that makes more sense. According to one client, it’s “always a problem in
licensing, and vendors either agree or never respond — leading clients to run illegally until
completely off the system.”

Specific Vendor Offenses Perpetuate Licensing And Pricing Disappointment

Interviewees also cited vendor activities that exacerbate and contribute to overall shortcomings,
including:

· Treating existing customers like second class citizens. Despite significant discounting for new
customers, some vendors have adopted tactics of closing off negotiations for existing customers.
In some cases these treatments are consistent across the board irrespective of client size and
spending. Many small and midmarket enterprises cited little to no influence during negotiations
and that off-the-shelf pricing appears to be the norm. One interviewee commented:

“With a mammoth organization, there is no influence. . . . It just doesn’t happen” (executive

of a maintenance services firm).

· Hiding discount rationales. While a number of vendors now provide public price lists, many
interviewees indicated that they often were not supplied with a discount rationale if they were
credited one. Several respondents echoed that in later negotiations, they are then unable to
point to previous rationale to justify any future discounts.

“There was discount based on the number (volume agreement bought), but they do not let
you know what the discount is. They run numbers but don’t really document the discount”
(IT executive of a global supplier).

· Favoring a one-size-fits-all approach. Vendors may prefer the internal ease of offering limited
and standardized metrics and pricing. However this one-size-fits-all approach often does not
meet a customer’s changing business needs and goals. Even in instances where vendors have
offered more flexibility in the short term, some firms lack leverage to preserve this flexibility

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over a long-term relationship. Meanwhile, others feel pressure from their apps providers to
transition into licensing models that are more beneficial for the vendor’s bottom line but not in
line with the user’s business goals.

“Their product order form was a big struggle. Going back and forth about charges and the
rationale made it clear that they didn’t have a feel for how government operates” (auditor
for county government).

“We are very small . . . wanted to extend licenses by 20 to 30, but the vendor wanted us to
go to unlimited licensing. They did not know the account well enough to know we are too
small” (executive of a manufacturing firm).

· Placing limitations on value to clients. Interviewees worry that over time they will slowly lose
previously negotiated terms and benefits. The longer the relationship continues with their apps
provider, they also fear vendor lock-in when it becomes too costly to change horses. As one
respondent put it, its vendor:

“Eliminated a lot of the value benefits over time. In the agreements we used to have things
like unlimited support calling, but we can’t do this anymore. Based on the number of
licenses, we get x amount of credits to call with. This is a problem; we must pick and choose
and use them only for emergencies now” (IT executive of a global supplier).

Another client noted:

“We’re paying maintenance but no one is really supporting our configuration. We should be
able to get our maintenance money back, but the vendor won’t do it and it feels like we have
no leverage” (executive of a manufacturing firm).

· Resolving multiple licensing and pricing models post integration. Following vendor
mergers and acquisitions, often vendors leave newly acquired clients in the lurch with regard
to reconciling future models and negotiations. Firms whose previous structures will be
honored still complain that direction for future support and enhancements is not always well
communicated. Should renegotiation be necessary, they are left unsure about their options.

“Aside from service — development of the original product would be nice. . . . We never hear
back about ideas. Communication about the releases is bad, and then bugs are mysteriously
found” (director of a healthcare facility).

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SOME VENDORS IMPLEMENT MECHANISMS OF CHANGE IN RESPONSE TO CLIENT PAINS

The good news is that some vendors have made key improvements, as they embrace tenets of
Forrester’s licensee’s bill of rights. Interviewees applaud their apps providers that:

· Limit sales cycle and complexity. Among the more onerous aspects to licensing are the lengthy
(on a magnitude of months) and resource-heavy negotiations that are necessary to grasp the
full scope of complex models. Vendors have worked to shorten these sales cycles by assigning
dedicated relationship-building account managers who understand the client’s business and can
streamline some of the process, rather than just top performers. Others have come to the table
more open giving way to immediate discounting to license fees.

“One [account manager] dedicated from start to finish . . . not just the top sales guys selling;
they form a relationship from sale throughout the client relationship” (director of global
applications at a bio-tech firm).

· Reward and offer incentives. More vendors have begun to offer rationalized discounts for
loyalty, large account values, and early adopter status. One interviewee noted that Microsoft
honored renegotiation upon an acquisition, credited them for the last year of their original
license, and offered further incentive credits toward training and partner services.

Another interviewee commented of its vendor’s discounting:

“They start with a discount structure from day one. A client may see additional discounts for
specific partnering. They are more consistent on giving more discount by spending volume”
(CIO of a home and commercial building materials manufacturer).

· Tailor service and licensing models to the clients’ specific business needs. Vendors faring
best in the midmarket offer more focused attention to customers with simplistic models that
place an emphasis on user-based metrics like concurrent user. For example, a QAD client
credits the vendor for being easy to negotiate with and as one of few that entertained an upfront
maintenance discount as well as fixed pricing and a reasonable 3% escalation clause for the
client. Those faring best with large enterprises key in on flexibility and catering to the complex
needs of larger clients. Oracle was cited as offering a highly flexible custom bundle that allowed
users to access all products in the suite and to easily reapply pricing based on user increases.

One client Forrester spoke with added:

“We have a good relationship especially in support and development. The response when
things don’t work is to try to understand the business situation to solve problems with their
products. They are open to actual business operations . . . and try to solve the problem in
future releases. This is a huge strength” (group controller of a home materials manufacturer).

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· Provide clients with opportunities and forums to voice needs and suggestions. Across the
board interviewees who had the most positive feedback about their apps providers were early
adopters and/or active in user groups. These vendors facilitate open forums for user groups
to meet and openly discuss software issues and best practices and client advisory groups as a
mechanism for reporting software issues and suggesting enhancements. Sterling Commerce
took this one step further with one prospective client by “not just selling — lifting the veil . . .” as
the vendor invited an as yet uncommitted potential client to the results of its user forum.

“They have a great user conference and great networking — instead of just selling”
(information services employee of a healthcare provider).

CUSTOMERS WILL DEMAND NEW APPROACHES TO PRICING

The transformational effects of apps trends like SaaS and SOA will bleed into future apps licensing.
As firms’ overall displeasure with application licensing and pricing on the one hand is met on the
other hand with a growing interest in and adoption of SaaS and SOA, firms will begin to conceive of
licensing and pricing in new ways. These new thoughts will give rise to new demands, and firms will
exercise alternative options.

· SaaS will force customers to think about cost per user per month. As a pay-as-you-go
subscription option to application licensing, SaaS will give business owners a taste of
streamlined, more easily consumed licensing. And a primary driver for SaaS will be its bundled
license, maintenance, and upgrade package. This trend will fly in the face of overly complex
licensing and pricing structures by more clearly and incrementally illustrating the cost and
value of their investments. As a result, firms will gain more interest in and grow more vocal for
simplistic and holistic approaches to usage-based pricing agreements.

· SOA will drive customers to think about business process pricing. Metrics remain a tough
egg to crack for firms navigating through licensing and pricing — they are often either
confusing or not well aligned to the user’s business. As SOA eases integration pains and enables
business process execution, strategic users will begin to have an eye toward their business
processes when engaging with their apps provider for licensing and pricing. Firms will regard
business process-driven metrics and pricing as a natural complement to how companies actually
operate and will demand that vendors deliver or improvise flexibility for business process
pricing. As SOA matures, it may spell greater adoption of process-based metrics.

· Customers will demand third-party alternatives to vendor-controlled maintenance. Firms

will continue to complain about exorbitant maintenance fees, but with only moderate growth
expected over the next few years in the commercial software market, vendors will show no signs
of letting up on this revenue artery. Customers will protect themselves by shopping around for
third-party support and safe-guarding against lock-in by avoiding engagement with vendors

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who do not have healthy reseller channels and partner services. The market’s best hope will
lie with the emergence of new offshore entities in China — not yet beholden to the dominant
vendors — as third-party maintenance providers. These providers will break through much like
business process outsourcing (BPO) to India before them and answer the growing demand for
affordable maintenance.

R C O M M E N D AT I O N S

TAKE THE LONG VIEW ON SOFTWARE LICENSING AND PRICING

In order for customers to proactively manage their vendor relationships and negotiate software
licensing and pricing conditions, business process and applications professionals should:

· Educate the organization before contracting with an apps provider. The smoothest
negotiations are a result of experience and knowledge on both sides of the table. Clients that
understand exactly what they want out of their licensing agreement, successfully articulate
their current and future business needs and goals, and are not too shy to ask for what they
want will walk away the most satisfied.
· Campaign for and insist on openness and negotiation. Too many firms initially met with
vendor resistance to negotiation resign themselves to sticker prices and relinquish any
power to the vendor. Over time this sets a bad precedent for future terms and negotiation
opportunities. Instead, firms that leverage active roles in user groups and advisory forums
or as early adopters find footholds to opening negotiations. While others willing to take the
time to question and rework terms especially around metrics will set a better tone for future
negotiation.
· Consider the total costs on a 10-year basis. Forrester advises many clients to compare
the cumulative cost of ownership over 10 years with a SaaS benchmark of $12,000 per
user per 10-year period. Cumulative cost drivers such as license fees, hardware, support,
implementation, and upgrade should not exceed the SaaS benchmark.
· Apply lessons learned from the enterprise software licensee’s bill of rights. As CIOs
and their IT procurement managers embark on a review of existing relationships and
renegotiation of licenses, consider enforcing ownership rights across the software ownership
life cycle. Put into place as many measures as possible.

ENDNOTES
1
Forrester outlines a software licensee’s bill of rights (LBoR) that reflects Forrester’s clients’ best practices
in this new IT environment. Because leverage wanes after the initial selection phase, CIOs and IT
procurement professionals should immediately incorporate these best practices into the management of
current vendor relationships and the wording of future vendor contracts. See the December 18, 2006, “An
Enterprise Software Licensee’s Bill Of Rights” report.

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