Software Licensing in the Cloud Era: Leveraging Your Negotiating Power

Every time I think about renewing my software license, I conjure up a vision of an old man in a rocking chair.  “When I was your age, we just picked what we wanted, figured how long we wanted to use it, negotiated the deal, and paid the man at the cash register.” Ah yes… the good old days.

But with so many organizations moving to the cloud and adopting virtual infrastructure models, it can seem like software licensing has gone from fairly straightforward to downright confusing. We talked to Jonathan Butz, a VertitechIT Executive Project Officer and Healthcare Strategist, to get some insights that can help companies sort out the complexity of software licensing in the cloud era.

Why has software licensing in the cloud era gotten so complicated?

Butz: It’s not always. There are two common scenarios when it comes to licensing in the cloud:

1)      If we’re transitioning from on-premises infrastructure and moving applications to a SaaS model, it’s easy. It’s a license we no longer need that is now part of the service offering.

2)      On the other hand, if we’re transitioning to IaaS or PaaS – if we’re going to buy access to infrastructure that we’re then going to consume and install our own apps on (middleware suites, etc.) with licensing we are going to own, then we have to go through the options for acquiring the licensing.

Companies need to have good visibility into their existing licensing and understand ownership, flexibility, consumption, and other details. Some offerings, such as Cisco’s Smart Software Licensing, are making it easier to keep track of the many licenses you own and how you’re using them, which in turn makes it easier to make informed buying and licensing decisions.

But can’t companies just get licensing from the hosting provider?

Butz: Instead of buying access to units of compute and memory and installing Oracle or MS SQL Server, for example, maybe we should buy Database as a Service, which would include the licensing.

Now we’re not building and maintaining database infrastructure, just getting access to databases by volume. That’s sort of halfway between IaaS and SaaS, just buying database functionality.

The other end of the spectrum is: we’re not going to change anything about what we do, we’re just going to buy access to runtime and continue to do everything the way we always have. Maybe we buy three virtual machines somewhere else. In this case, we need to make sure whatever license agreement we have or are negotiating permits us to do that. The thing is, most existing licensing probably isn’t going to let you do that.

What do companies need to do if their existing licensing doesn’t permit them to run an app on Infrastructure as a Service?

Butz: At this point, it comes down to individual terms and conditions for individual software licenses. If you’re purchasing it upfront, you’re in a better position – you can say here’s what we’re going to do with it, and here’s what we think is reasonable. For existing licensing, it’s going to vary by vendor. Some will be flexible; others may be impossible.

For some organizations in the midst of renegotiating an enterprise agreement, there may be room for discussion. Researching an EA with companies like Microsoft can provide an opportunity for savings.

So how would a company go about determining what their existing licenses will permit?

Butz: That’s something that companies have to review solution by solution. First, determine whether you can take your existing licensing with you. Some IaaS solutions will have options with some licensing included with the service offering. VMware, for instance, is launching an AWS offering, in which you’ll pay per month, per ESX host – and licensing will be included for the VMware stack. But as far as what you’re running on it – copies of Windows, etc. – you have to make sure the licenses for those individual solutions are compliant with operating that way. Some will cause no problems, and others will simply not permit it.

This is where negotiating power comes in. If you’re negotiating an agreement from scratch, you’ll absolutely have an easier time.

What tips do you have for companies who want to negotiate a software licensing agreement?

Butz: It really depends on the situation. Negotiating power comes from pricing their competition and getting their competition to agree to do it. Software is an interesting business. It’s not like capital where they can only discount it so much. With software, if they can’t sell another copy because they’re inflexible about how they’ll let you use it, that breaks their business model. If they can make a dollar with an app that can be replicated at no cost, they have an incentive to make it work. So, they’re incentivized to make their software work with these new models, which puts companies in a better negotiating position. When they go in with that knowledge (particularly if they’ve done the legwork to get a competitor to agree to the model), they’re not going to want to lose a customer to their competition.

At the end of the day, most software companies should be mature enough to understand that there’s a great deal of value — in fact a necessity — to adapt their licensing models to be flexible about where they’re operated; else they’ll lose market share to competition.

Negotiating agreements and making deals in the cloud era isn’t all that different than it was in the good old days. Peel away the terminology and it still comes down to what do I have and how am I going to use it.  In today’s competitive software marketplace, the wise old man in the rocking chair should still be able to find a few bargains out there.