Entitlement and Compliance Management

Can you quickly and accurately determine your installed base?

By Michael Costa

That seems like a fairly easy and obvious question. Do you know who has which of your licensed software and/or hardware products, where they are located and to what each of your customers is entitled? With many companies responding to market demands for greater license flexibility and customer self-service, maintaining accurate installed base data is becoming a huge problem that must be addressed.

Accurate installed base data allows you to maintain and grow your software and/or intelligent hardware business. Revenue from compliance true-ups, maintenance, support, upgrades, up-selling and cross-selling all depend on accurate installed base data. Attempting to audit license compliance based on erroneous installed base data can severely damage your relationships and reputation. Maintenance and support renewal quoting always starts with an accurate installed base view and asking customers to tell you their installed base undermines customer confidence. An otherwise focused up-selling or cross-selling campaign is considered "spam" to targeted customers that do not meet the applicable installed base profile. And, requiring your channel partners to report installed base lifecycle data in an accurate and timely manner is often more than they can achieve.

Maintaining accurate installed base data is usually difficult because licenses tend to change during their lifecycle – sometimes frequently. Some of the common lifecycle stages include: initial sale, maintenance renewal, move, rehost, update, upgrade, downgrade, subscription extension, end-of-life and return. In addition, if you have an indirect sales channel, the initial sale can include two or more additional sub-stages. Inadequately integrating these transactions renders the installed base data for applicable licenses obsolete and useless. Workarounds require expensive, custom or manual integration with other transaction systems – and these workarounds are seldom scalable.

One of the most common misconceptions I've heard is that the "installed base" module in an ERP system is a viable system-of-record for storing all license lifecycle transactions. The problem is, as Mathieu Baissac pointed out, ERP systems were never architected to support the dynamic nature of today's flexible, self-served license transactions. ERP systems were designed to manage relatively static, physical assets – largely from an accounting perspective. They worked OK for software when license rights (i.e., entitlements) were relatively static – involving only initial sale, fixed period maintenance and end-of-life. But, as entitlements became more dynamic and hardware became field-expandable and networked, ERP systems became less and less viable. Many companies invested heavily to augment their EPR installed base modules to fill the functionality and performance gaps, but that has proven prohibitively expensive, slow and risky. At this point, ERP systems are only the system-of-record for the initial sale stage of the license lifecycle – primarily because they are often used to process orders. SalesForce.com is increasingly the primary or secondary order entry system for many companies because it is a natural, lower-cost environment for that purpose.

An Entitlement Management System is increasingly recognized as the "always-accurate" installed base data solution. An entitlement management system converts orders into entitlements consisting of license rights that customers can then consume, transform and manipulate – within the terms of the purchased license rights. Those rights can include all of the license lifecycle stages mentioned above and many others – overdraft, peak usage, draw-downs and term licenses. License rights are not only applicable to software. Many intelligent hardware products are also being developed with flexible use rights metrics like storage capacity, router channels, networking bandwidth, medical diagnostic tests and even surgical procedures.

Flexera Software's FlexNet Operations solution is an example of a mainstream entitlement management system that is specifically designed to manage the dynamic nature of current and future software and intelligent hardware lifecycles. It integrates with other on-premises, on-demand and mixed-environments like Oracle, SAP, Saleforce.com and many others using standard, configurable interfaces. Also, its tight integration with electronic software download, in-product license management and in-product messaging functionality to provide commercial, out-of-the-box best practices.

Webinar: 2011 Key Trends in Software Licensing and Pricing & 2012 Predictions

By Ann Reist

The 2011 Key Trends in Software Licensing and Pricing Survey, prepared jointly by Flexera Software and IDC, found that application producers are evolving their software licensing, monetization and compliance strategies to accommodate new technologies like virtualization and the Cloud. Enterprises are likewise growing more sophisticated in their use of complex IT environments, and understand the importance of optimizing their software licensing in traditional and virtual environments to reduce software spend and remain in license compliance. 

Join Flexera Software on Thursday, January 26, for a live review of the survey results with Amy Konary from IDC. Attendees will hear a summary of the key software licensing and pricing findings from the survey, including areas such as:

• Software Licensing Enforcement
• Audits
• Licensing Effectiveness
• Software Entitlements

Amy will also share her 2012 predictions.

Start your year with the critical information to help you drive your business forward. Register today for the 2011 Key Trends in Software Licensing and Pricing & 2012 Predictions Webinar.

Date: Thursday, January 26, 2012
Time: 9:30 am PT | 11:30 am CT | 12:30 pm ET

Resolving SaaS Usage and Billing Disputes: Case Study and Best Practices

By Bashyam Anant

As a SaaS provider, on occasion, we run into situations where our customers question their usage and bill related to our SaaS offerings. One of the SaaS products I manage helps software publishers and intelligent device manufacturers electronically deliver software updates automatically to end user machines. Our customers are able to lower support calls and costs as a result and also gain valuable insights about their installed base.

Pricing for this product is based on the number of distinct end user machines ("endpoints" for short) that receive software update notifications from the software publisher during a given subscription term; one year, in most cases.

Recently, one of our customers felt that they were overpaying for the service because they did not believe that the number of endpoints reported by our product was accurate. The customer felt they only had 20,000 endpoints whereas our system was reporting 30,000 endpoints which had resulted in a significantly higher bill than what they were expecting. (Note: their actual data is not being used but this illustrates the problem the customer was facing). While such discrepancies are very rare, it can happen.

To resolve such situations, we have developed the following best practices.

Best Practice 1: Easily-understood Usage Metric

Definition of usage metrics should ideally be self-evident to customers. While the notion of endpoints for our product is relatively clear to most of our customers, it still stumps a few. As a result, we take pains to explain it in terms that the customer can relate to. For example, if the publisher's software runs on a server machine, the number of endpoints correlates to the number of servers on which the software in installed. Nonetheless, a few such publishers tell us that they sold far fewer copies of their software during a year compared to what our product was telling them. The explanation could be as simple as customers deploying the software on multiple servers to enable development, test and production environments to something more serious such as software piracy.

Best Practice 2: Self-service Usage Reporting

It is important to avoid surprises at the time of invoicing. As a result, our product features a simple dial that shows the current consumption against purchased quota of endpoints each time our customer logs into the system. Should customers feel things are not aligned with their usage pattern, they can flag it right away to our support organization. It's not only important to provide customers with self-service but to also be completely transparent at all times.

Best Practice 3: Capture Detailed Reporting Data

While customers may never ask for it, we have found it a worthwhile practice to capture and store detailed usage information for each customer. For example, our system captures details such as daily endpoint count, how long a given endpoint was active, the most recent date when a given endpoint called home and so on. An example of such a detailed report is below. This figure shows the number of distinct endpoints that were active for less than 30 days, bucketed by the final month in which the endpoint was active, for the customer mentioned in this article (Note: numbers have been purged to protect privacy). In simple terms, such endpoints represent software that was used for 30 days or less.

Figure 1: Endpoints active for less than 30 days by final month of use

Such a trend has no particular relevance to us but it made complete sense to the customer, and helped them correlate software usage with ebbs and flows in their business, as we point out below.

Best practice 4: Understand the Customer's Story

More than anything else, we have found it useful to engage customers in a discussion of what might explain their usage trends based on the detailed report we provide them. This customer, as it turns out, is a leading manufacturer of farm equipment. Like auto and engine manufacturers, they provide software that helps dealers and repair shops diagnose problems with their engines and equipment. Our software update solution is embedded in the manufacturer's software. According to our customer, the trend displayed in the figure fits well with when they would expect farmers to service their equipment based on the planting and harvest cycles in North America. As farmers get their machines ready for the planting/harvest season starting in April-May, equipment repair activity starts trending upwards in the prior months. Towards September-October, repair activity peaks again because the machines have been used intensely during the summer months and are worse for the wear and tear. In addition, the customer is experiencing strong growth (and hence, software sales) in emerging economies, which as it happens, are also north of the equator (for the most part) and have similar crop cycles as North America. Having this level of detail convinced our customer that their usage level (and resulting bill) was quite consistent with their business.

Maintenance Deserves the Same Respect as Your Software License

By Cris Wendt and Anna Connell

IDC conducted a survey a few years ago that illustrated the importance of software maintenance to the overall revenue stream of an enterprise software company (generally offering a perpetual software license model). The result of the analysis was a simple, compelling graph. One line was the license revenue growing at an annual compounded rate of 7% (healthy, but not spectacular), and the other line showed the growth of maintenance revenue, priced at 20% (annually) of the associated perpetual license with an 85% renewal rate. It showed that within 10 years, the maintenance revenue was a greater portion of overall revenue than license revenue (and continues to grow). This illustrates the power of maintenance revenue over an ever-increasing software installed base.

However, in the spirit of a marketing perception audit, if maintenance were a person, it would be Rodney Dangerfield, and would be quipping, "Hey, I get no respect". While software companies generate substantial amounts of money from maintenance, maintenance is often treated as an appendage to the primary software products, with a surprising inattention to optimization of the offering. Here are signs that you may be neglecting your maintenance business and leaving millions of dollars of (mostly bottom line) revenue off of the table:

• Lack of a maintenance offering. Sometimes software companies seem overwhelmed or new to software and declare that they "provide updates and bug fixes for free for as long as the customer owns the product. Maybe someday, we'll have an offering".
  
  
• Maintenance is not treated like a product, where it is assigned a product manager, whose responsibility is define the product, price it, and communicate its salient features to customers and channel partners.
  
  
• Maintenance renewals are not handled by a separate and dedicated team whose role is to generate high renewals rates and protect/grow the existing maintenance revenue stream. Without this level of focus, maintenance revenue is frequently cannibalized in preference of new license revenue.
  
  
• The maintenance offering is often ill-defined other than "phone support and updates". Little consideration is given to what is included in an "update" and what might the value be to the customer. Are there boundaries to what functionality defines an "update" you receive on maintenance as opposed to an option that is paid as an "upgrade"?
  
  
• Software companies often have poor discipline accurately keeping accurate records of their customers – either by company name or by key contacts at their customers. This means that the maintenance renewal process cannot be effectively performed, if it can be performed at all. The problem becomes worse if sales are made through an indirect sales channel. Keeping accurate customer and sales records allows companies to track maintenance revenue and renewal rates which can gauge the health of their business long term.
  
  
• Pricing for maintenance is very ad-hoc, over-simplified, and pays little attention to the product lifecycle. Maintenance may have 1 or 2 price points that reflect an annual price that is a simple percentage of the purchase price of the original software license. Little value is given to the fact some products may provide tremendous value with their updates and may reflect a different price than maintenance on another product. Also, phone support is rarely separated from software updates (although often for good reason).
  
  
• Maintenance and renewal are typically overlooked when an event occurs on the product associated with the maintenance. A price change to the list license price of the product has the same result to maintenance and must be explained at renewal. When products are re-packaged and re-bundled, entire customer configurations often have to be adjusted to reflect the new packaging and pricing, leading to many manual steps to align current product offerings with what the customer originally purchased.

While many of the problems above are related to "entitlement management" business processes and systems where Flexera Software can help you, a good first step is to honestly evaluate your maintenance business and to make it a priority with good leadership.

Will the Perpetual Software License Model Ever Go Away? That Depends Upon Who You Ask…

By Cris Wendt

The perpetual software license model won't seem to go away, as much as the press and various surveys seem to indicate.

The perpetual license model has been the predominant method for selling the software license for most software for the past 30 years. With this approach, software is purchased with the right to use software into perpetuity. Of course, most software only has a useful lifetime of anywhere from 3 – 10 years. The software will eventually become obsolete due to a number of factors including the obsolescence of the underlying hardware, the changing nature of the problem that is being solved, or the availability of better software. To remedy this situation, a maintenance plan is offered whereby a combination of phone support and software updates or "refreshes" are provided. For better or worse, companies know how to sell this software and manage all of the associated business and accounting practices, and, end-customers know how to deploy this license model.

The alternative, broadly speaking, is the subscription or time-based license model. With this license model the right to use the software expires after some amount of time, and the license must be purchased again if it is to continue being used. In some cases (the subscription model), the right to install software updates is included. As described in previous blogs, there are different financial reasons why some markets, or some specific customers prefer one license model over another.

For the past several years, Flexera Software and IDC have been conducting an annual survey asking a variety of software producers in various markets which license model generates the most revenue, and, how they expect that mix to change. While there is some variance among different markets and in the actual numbers, the general answer seems to remain the same every year – almost like the recurring day in the movie "Groundhog Day" – About 66% of the revenue comes from perpetual licenses, 34% of the revenue come from subscription licenses or some other variant. Furthermore, respondents say that they expect the mix to change about 10% toward offering more subscription licenses and away from the perpetual license. However, the results of this perceived migration toward more revenue being generated by time-based licenses hasn't occurred.

Perhaps we've reached an aggregated plateau where the license models have stabilized based upon the various forces and value propositions in different markets. My guess is that this situation won't change, ever………..with one caveat – this will be the case for on-premises software – that is, the case where software runs on machines at the customer environment. In these situations, the hardware and software form a system unit that is more physical than virtual, so a license model that matches to a machine lifecycle makes sense.

However, as we enable our customers to take advantage of mobile computing and elastic compute models built upon virtualization and the cloud, then perpetual licenses will be non-existent and pay-per-use or time-based models will be the norm.

So is the perpetual software license model going away? Well, that depends upon who you ask.

Cut Through Cloud Clutter: Insights from Visible Ops Private Cloud

By Ann Reist

Last week Jeanne Morain, Flexera Software and Andi Mann, CA Technologies presented at the webinar: Cut Through Cloud Clutter: Insights from Visible Ops Private Cloud hosted by TMCnet.com.

Mann and Morain provided prescriptive guidance for ISVs and Intelligent Device Manufacturers for cutting through the Cloud clutter. They discussed some of the key Cloud challenges and shared best practices for software licensing and porting applications to the Cloud (Private or Public). They provided insights from key customer and consultant interviews (conducted for their recent book, Visible Ops Private Cloud) on Cloud bursting, licensing implications and regulation hurdles facing ISVs and their customers.

View the recorded webinar here

Tamper Resistant Code Helps Thwart Software Piracy

By Ann Reist

With $59 billion dollars of software stolen globally in 2010 and the struggling economy, many software vendors take piracy (whether it is intentional or unintentional overuse) very seriously. In this video, Maureen Polte, Sr. Director of Product Management for InstallShield shares thoughts on the value of utilizing tamper resistant code with InstallShield's implementation of FlexNet software licensing technology to protect valuable IP against piracy.

Preventing Software Piracy Video

 

Implementing tamper resistant code helps prevent cracked versions of InstallShield.

Software License Management: Process Improvement Using Automatic Renewal

By Flexera Global Consulting Services EMEA

I have recently engaged with a software publisher who needed to deliver licenses to customers worldwide. For some countries, customers are allowed to divide payments into multiple chunks over time. The publisher, on the other hand, must ensure the customer performs the payments at the times expected. For this reason, the process of delivering software licenses depends on the ongoing status of their contractual agreement with the publisher: customer receives a new time-limited license with extended validity period every time the publisher receives the payment in advance for that period.
 
The key to making this work is to use the renewal functionality of your software license and entitlement management solution. By doing this, the software order will now generate only one entitlement line item in your entitlement and license management system and the duration will be set to the initial number of weeks that depends on the order. Using an interface program to the entitlement and license management system handles the renewal process automatically on a scheduled basis, queries the entitlement and license management system fulfillments to identify the expiring licenses and it creates renewal line items with an extended duration. The new activation IDs will be sent in one email with a link to a self-service portal to the license administrator, who will create new licenses with extended expiration date after validation of the contractual agreement with the customer. All interface operations are performed via web services.
 
This is a simple process improvement example and it served the purpose of increasing confidence in the adoption of FlexNet Operations entitlement management solution to handle license management moving forward.
 
The picture below shows process flows and comparisons in graphical format:
 

 
Lines in black outline previous delivery process (multiple orders with same start date and different durations) while lines in green outline new delivery process (one order with automatic renewal at expiration).
 
The software license and fulfillment process could be improved by automatically verifying the payment status. The publisher’s subsidiary is currently responsible for verifying the payments and generating the license on behalf of the customer.
 
How have you solved software license and entitlement management challenges?

Reflections on SoftSummit 2011 Software Licensing Conference

By Ann Reist

As I reflect back on SoftSummit 2011, the conference dedicated to addressing software licensing and entitlement management topics and trends, one of the highlights of the conference for me was the keynote address from Chris Gahagan, SVP of Products & Solutions for Avid.

Chris shared his journey of creating "One Avid." His story, not unlike most software vendors and intelligent device manufacturers that serve multiple market segments, began with the idea of the value that unified licensing could bring to his organization.  Chris shared this insight, "One licensing approach does not work for Avid's significantly varied users and market segments……however, a Unified Licensing Framework will."

During his presentation he shared why "unified licensing" mattered. And for Avid, what that boiled down to was—it is all about the customer and improving the customer experience.

Chris outlined Avid's licensing framework requirements and from there he took us through his journey of creating a Unified Licensing Framework, including:  Getting Started, Getting Smart, Getting Validation, Getting Committed, Getting Busy and finally Going Live.

He wrapped up the presentation with the following takeaways and thoughts:

• Requires real executive directive and on-going attention
• Significant effort far beyond my product organization
• Significant time required as lots of stuff needs to change
• Product owners will never choose to do this on their own
• Insights into the business have been invaluable
• Benefits are being realized already
• Need to have a strong, fearless, persistent, committed PM
• Yes, we would do it again!

 Next time…more reflections and takeaways from sessions at SoftSummit.

Characteristics of a Successful Entitlement Management Program

By Michael Smith

Last time I outlined the Characteristics of a Successful Software Licensing Program.  However a licensing program is only as good as its entitlement management program.  Dedicated entitlement management is described as follows:

"An Entitlement Management Program is the loosely coupled but highly cohesive partner to the Successful License Program. This dedicated system should be completely separate from any existing ERP or CRM system. These systems are dedicated to financial and customer driven responsibilities, respectively, and make poor substitutes. Entitlement Management for licensing should be a "hub" of all operational activities and license-based business process. "

Entitlement management should be operational model driven. Operation models are driven by means of several business drivers that encourage new revenue models, streamline operational costs and improve the customer experience. These drivers help define the corporate business goals, customer needs and competitive business practices required for a successful operational model. Once these goals are determined the business level process can be developed within but not limited to the following categories: revenue based entitlements, non-revenue entitlements, entitlement administration, license fulfillment process, license lifecycle, customer management and transition planning. Each of these categories will typically have several business specific use-cases that will need to be supported.

The operational model based entitlement management program is manifested through the ideology of an entitlement hub. The entitlement hub is the container in which one can pour their business hopes and dreams to maintain a competitive edge. The entitlement hub defines the business level interfaces for the operational model to function. The entitlement hub is service oriented architecture broken into several distinct modules that control the functionality required for each of the operational model categories.  For instance, the module responsible for the policy and management of revenue-based entitlements is the entitlement hub Order Manager. This module is loosely coupled but highly cohesive with the business level interface that will integrate with external financial systems that contain order data.

Once each of these modules and business level interfaces have been defined a premier entitlement management and license fulfillment engine such as FlexNet Operations should be leveraged to maintain a system of record of entitlement and license fulfillment data. This system of record should also have a template to easily define new license models and metrics. There should also be a mechanism to allow license fulfillment of legacy or homegrown license technologies. The ease of being able to add new license platforms and new integrations to external systems through well-defined business level data contract will result in a sophisticated merger and acquisition platform. This allows companies to grow both organically and in-organically (through acquisition) with minimal overhead to merge heterogeneous business process.   

Another characteristic of a successful entitlement management program is providing a self-service portal built on top of the entitlement hub ideology. This will provide customers with a place where they can self-manage their licenses and entitlements. Also it makes a great place for customer to manage their lifecycle operations for such things as entitlement moves/transfers, license returns and re-hosts of their entitled rights. The self-service portal should not be limited to just customers, internal users can also benefit from a dedicated self-service portal.  A sales and support team will gain much insight on their customer base from a self-service portal that provides visibility into their customer's entitlements. Affiliates and distributors can also benefit from a dedicated self-service portal for their needs providing visibility into complex organization hierarchies for their largest partners.

What characteristics are critical to your entitlement management program?