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Coming to Grips with Software Licenses: Avoid Pitfalls and Optimize Costs

by Lucy Hermann-Taylor

Software expenditure is one of the highest costs for IT departments of large international firms, frequently reaching between 30 to 40 percent of the total IT production budget. Because of the dynamic nature of IT (most recently including virtualization, pay-as-you-go models and cloud computing), these costs are not always managed as precisely as they should be.

In the 1960s, the cost of software included in the first IBM mainframes (IBM 360) was minimal when compared to hardware. In the 1980s, IBM introduced invoicing that was associated with product category, charging the client for every change made. Since then, software companies have begun to invoice their software products according to hardware power.

Due to a number of recent model changes related to virtualization and cloud computing, large software companies have been creative in ensuring that their income remains inexhaustible. Published data from IBM illustrates this shift well: in nine years, its software revenue multiplied four-fold, from US $2.6 billion in 2000 to US $8.3 billion in 2009.

As software expenses continue to increase, it pays to consider the following Top 5 ideas to help get your software licenses under control.

1. Limit the number of licenses. Problems often stem from a lack of control over the various licenses in use. Missed coordination between the purchasing department and operational staff who deal with licenses means that the number of licenses in use is different than the number purchased. If software companies launch a software compliance audit and find that contractual conditions are not met, high penalties can apply. In addition, contract renegotiation often results in the client re-committing for too lengthy a period.

2. Monitor your maintenance costs. Contract models are increasingly complex with less room for negotiation, particularly around software maintenance. As one of the highest costs in the contract, software maintenance can represent up to 50 percent of total IT expenditure for CIOs. In 90 percent of cases, software maintenance is purchased at the same time as the initial license, which requires the utmost attention from day one.

3. Determine your exact software requirements. Be wary of all-inclusive offers proposing unlimited use of software portfolios for a fixed price. Even if they seem convenient, these solutions can be less profitable over the long term than buying individual software packages from a price catalogue.

4. Don’t be fooled by complex licensing models. In the past, companies had one “on-premise” software model that could be used to deploy and activate software on all hardware (servers, mainframe, desktops, network equipment, etc.). Today, this model coexists with other virtualized models and “as a service” models that are hosted by third parties, making it increasingly difficult to effectively monitor inventories of deployed software.

5. Implement Software Access Management (SAM). Experience shows that “the devil is in the details” for software management. The details are contained in lengthy and complex license agreements, and if the terms and conditions are not sufficiently shared within the organization, the consequences can be both awkward and costly. A Software Access Management (SAM) process ensures efficiency at all stages of the software lifecycle, from the initial expression of a requirement to decommissioning. This last step is often overlooked, but it can represent an important savings opportunity when you want to stop paying for what is no longer in use.

To discuss software licensing further, please contact Lucy Hermann-Taylor.