Those of you who are in IT many years remember how the way of business process automation started. That was even before Windows 95, when computers entered in our usual life. At that time big companies started building their IT infrastructure. That was a long journey that led us to modern enterprise level software – operation systems, databases, application servers, ERPs, CRMs, and other software that all the companies use to support and develop their business.
In nowadays companies across the globe spent about one trillion US dollars per year for the enterprise software. This huge amount of money goes to top world IT companies that produce this software, like IBM, Oracle, Microsoft, and others. If we try to remember how happened that these companies have a major part of this market, we will see that they passed a hard way of merges, acquisitions with companies that were leaders in their software. And, for sure, they have strong technical, commercial, marketing divisions. Now it is difficult to find an enterprise-class company which is not a customer of these IT-giants and pay them multimillion US dollars annually. And this is not a surprise that high management of the customer companies raise a question – how to reduce these payments?
In my experience of working with many different customers, almost all IT managers had a task to reduce software payments. I wonder, what they do for this, and is this really efficient? Let us try to find the answer.
Structure of software payments
Let us start from the structure of the payments. According to my opinion it looks like this:
1. Software licenses payment – payment for permanent or term licenses, that give you rights to use the software according to the rules defined by software vendor. This payment is being paid once.
2. Software support - additionally to software licenses payment the customer has to pay for software support, usually it is a percentage from the software licenses payment, which is to be paid annually.
3. Software subscription – payment for the right to use software on a regular basis.
4. Software subscription support – that same as p.2 but for the software subscription.
Next is a combination of the points above that can be bundled in one contract, which, from one hand, gives you ability to have higher discount, but, from another hand, provides with restrictions caused by impossibility to separate such a bundle.
Ultimately, there are contracts, called Enterprise License Agreement or Unlimited License Agreement, depending on the software vendor’s fantasy. These contracts give you rights to exceed the usual software vendor license rules and use his software more freely, but within the limitations written in the contract. Details about this EULA see in my previous article – “Oracle ULA – is it beneficial?”.
Regarding the software support, it is important to know, that every renewal of the EULA contract increases software support payments, adding new payments to the old ones. Thus, after the 4th or 5th EULA you pay annually full cost of licenses.
What about clouds?
On top of these payments, there can be also subscriptions and support for them. This can be beneficial since it provides rights to use software for period of the subscription, but, from another hand, it is out of the customer control and optimization of the usage becomes a difficult task.
In the modern environments on-premise and cloud software are being used together (let me call this hybrid IT-infrastructure) and IT-managers have already learnt benefits from the both licensing models and successfully apply them in their IT-infrastructure.
What is the outcome?
Now most of the companies came to a situation when they pay enormous money for enterprise software and, especially, for its technical support. They passed through the way of multiple conclusions of EULAs for different vendors and have contractual obligations of annual payments starting from tens and finishing hundreds million USD. Budgets become bigger and bigger and highest IT managers are thinking how to stop this growth, reduce payments to vendors and allocate the budgets to other important parts.
What can be alternatives? The most of IT managers are coming to conclusion that now it is better to develop its own solutions based on open-source software, seeking alternatives to commercial solutions. For instance, instead of Oracle Database, there are teams that develop own editions of PostgreSQL, instead of commercial application servers – open-source, like OpenShift, Kubernetes. Running the open-source projects in a production in sectors, where cost is more important than reliability, allows to test and debug these solutions to use them in business-critical environments as well.
This is a menace for vendors that causes them to find other ways to keep their hegemony at IT-market. Some of my customers publicly announced that they are going to transform their production environment to open-source solutions. They built roadmaps to stop using vendor’s software for several years, aiming to dramatically reduce their payments to vendors. Let us keep out of this discussion the realism of this scenarios.
Conclusions
Let us make some practical conclusions:
1. It is important to be aware about how the current contracts grow in future. This allows to avoid the enormous growth of the contracts renewal and support payment.
2. Contract management and vendor management are the parts of license management and IT people need to be ready to use this in practice in order to manage the contracts with vendors to reduce the payments.
3. In a hybrid IT-infrastructure it is wise to manage the balance of payments for cloud and on-premise software in order to benefit from the complex contracts.
Sincerely yours,
Andrey
*the image for the article is generated by Midjourney