Entitlement and Compliance Management

Transitioning from a Hardware to a Solution-Centric (hardware + software +services) Business Model – Part 2

By Ram Visvanathan

In Part 1 of the blog, I talked about the imperatives that drive Intelligent Device Manufacturers (IDMs) to turn to software and services for their revenue growth and introduced 5 key challenges that these companies face, which were:

1. Business model differences
2. Inflexible operations
3. Non-compatible policies
4. Internal system capabilities
5. Organizational culture

I also detailed out in Part 1 the first two challenges. In this blog I will detail out the remaining three challenges and suggest a few ideas that can help IDMs in their transition.
  

3.   Non-compatible policies. Policies are framed to support the needs of a business model. Hence many of the policies of hardware companies fail to satisfy or even are at conflict with the needs of the software business. For example, as marginal cost of software is nearly zero, compensation and bonus structure in software companies are skewed to disproportionately reward top sales performance. A common policy for sales compensation between hardware and software would risk losing the software sales people by paying lower salaries. 

Besides managing existing policies, new policies that relate to software lifecycle events for e.g. software compliance enforcement policies (when would you deny software access, how would you respond to extra usage, do the policies vary across customer segments, geography etc.,) need to be developed. 

The diverse nature of the two businesses needs policies that can support them.  The organization should undertake a careful analysis of the combined businesses to identify the ones that can be standardized, those that need to be different and those that need be newly defined.

4.   Internal system capabilities. The ERP and CRM systems of hardware companies are designed neither to track software licenses and versionsat customer sites nor to manage entitlements for different software lifecycle events. Besides, the foundational capabilities required for supporting new software business models like managing bundled offerings, enterprise contracts, billing based on usage, recurring invoicing and sophisticated revenue recognition and allocation mechanisms are not well supported by traditional ERP systems.

I find that these poor system capabilities affect IDMs' top line and bottom line by inhibiting their ability to launch new products and business models, increasing operational costs and impacting customer satisfaction. While this is an issue for many software companies as well, I find that IDMs try to bend their internal systems a lot more until they break.


5.   Organizational culture. Software companies not only experience shorter product lifecycles but also experience rapid evolution of business models. Hence developing a viable software business is a continually moving target. To support this rapid change, the culture of software companies is more collaborative that enables them to co-exist in an ecosystem with other partners while at the same time they are also likely to have a more top down management approach to facilitate quick decisions.

The culture of many IDMs is at odds with that of software companies and poses significant challenges as they try to grow organically. This challenge is even more pronounced if they embark on an acquisition path. Even IDMs that have a successful track record of integrating acquisitions find these hurdles manifesting into longer lead times, significantly higher integration costs and less than expected benefits.

Companies embarking on a journey to become more solution-centric should be aware of these challenges. Although the path may be difficult and the waters rough, significant rewards exist for the one who traverse. A ship is safest at the harbor, but that is not where it is meant to be.

At Flexera Software, our products and services focus on helping IDMs from a strategic, operational and technological perspective as they navigate through the rough waters. For more information, read the related white papers: Ten steps to optimizing your software licensing revenue and How IDMs are using embedded software to grow revenue

Look forward to hearing your experiences and thoughts.

 

Top 10 Signs Your Homegrown Licensing is Broken

By Cris Wendt and Ram Visvanathan

If David Letterman did a "Top 10 Signs Your Homegrown Licensing is Broken" it might go something like this…

1. Your CTO says to his team, "run, Forrest run" when you ask him to make changes to the license key generator
2. Your celebrity CEO is asked to sign a pirate copy of your software on a trip to China
3. Your LinkedIn request to hire someone who knows Cobol gets 0 hits
4. Your CFO ends up in Brazil after appearing on the cover of the Wall Street Journal for missing quarter end revenue
5. You realize that the latest spam email from Nigeria has a master key for your software
6. You only sell one copy of the software to China and your sales team says that the market is saturated
7. Customers are completely happy with a non-expiring trial version of your software
8. Your business is in an HBR Story "The paradox of 100% of the customers having your new software, but the renewal rate is only 10%"
9. Your Oracle R12 migration costs exceed the GNP of most countries
10. No one in your organization has ever heard of Flexera Software

What is in your top 10 list?

All kidding aside, if any of the Top 10 ring a little too close to home – our proven and scalable software licensing, entitlement management and software delivery and update solutions can help.

Why the Pay-For-Use Licensing Model Was Dead On Launch

By Mathieu Baissac

In the early 90’s I had a cell phone. It was one of those old clunky things, at least 2 or 3 inches thick and it only knew how to call people (imagine that). Just like the cell phone, the cell plan that was tied to the phone included a clunky pricing model – I paid afixed amount for unlimited local calls and a per-minute charge for roaming.  As you can imagine, the fixed amount wasn’t the issue, the roaming charge was the issue, for lots of reasons:

1. It was hard to know if you were roaming or not unless you looked at the phone as you were talking (my android phone still has a feature where it beeps if I go into roaming)
2. It was hard to predict your monthly pay outs—my bill, month to month, swung by 50-300%
3. So I tried very hard to not use my cell phone, unless it was an emergency. Of course, when you travel 50% of your time, this really dampens your productivity.

As soon as an operator provided a “some roaming is included” plan – I switched.

Now imagine the same with software and pay-for-use. If it’s highly predictable or a small amount, then I can see someone signing up for it. In fact, today as consumers we subscribe to $1.99 apps, $4.00 books and even $50.00 electrical bills, but would a CIO sign up for pure pay-for-use model, i.e. “every time your users run the French dictionary, you owe $1.00” or “for every KB stored by your users, you owe $0.50.” I just can’t imagine budgeting this way. The only exception is # of users – because new hires are budgeted.

Bottom line, in my opinion: Pure pay-for-use won’t work for most enterprises (some exceptions noted). The answer, in my opinion, is hybrid software licensing models:

1. Pay up front for some amount – for predictability
2. Pay in arrears for any over-use – for flexibility

With those types of pricing models, CIOs will start playing some very interesting “WHAT IF” analysis, such as “budget for 10% overage, how low can my upfront be.” CIOs will then have truly gotten rid of shelf-ware and Publishers will be fairly rewarded for their IP.

Check out these related pay-per-use and usage-based software licensing, pricing models and metrics blogs:

• Usage-Based Software Licensing Examples and Patterns
• Usage-Based Licensing without Usage Data – Is it Possible?
• The Next Evolution of Software Licensing: Monetization of Usage Data
• True Pay-As-You-Go Software Licensing Model – Myth or Reality?

Concurrent Software Licensing Models Losing Favor

By Mathieu Baissac

In the 80s and 90s, the most common software licensing model was the concurrent/floating license model. What's not to love?

• Install software on any # of devices
• License server will prevent more than <purchased quantity> from using at any time

The theoretical advantage is that enterprises don't have to buy licenses for every user, only for peak # of users (most at any one time).

Seems like the perfect solution…right?

• Always in compliance
• Easy to administer

That may have been the case in the 80s and 90s, but for the last few years, we've seen a large decline in this preference. From 2010 to 2012 in the enterprise version of the Software Licensing and Pricing Survey that Flexera Software holds annually with IDC, when asked what licensing models enterprises preferred, the preference for concurrent licensing declined significantly year over year.

• 2010: 60% preferred
• 2011: 40% preferred
• 2012: 24% preferred

I believe there are several drivers for this:

• Enterprises are prioritizing availability over costs (and getting shelf-ware in the process)
• Determining "peak # of users" sounds easy, but:
  • Enterprises need to budget a year in advance, so they have to determine peak use way ahead of knowing new hires and new projects
  • If they are wrong, they might prevent some expensive resource (i.e. electrical engineer) from accomplishing a task and possibly missing deadlines etc.)
• Based on our review of many of our customer's log, they tend to over-buy, often quite significantly.  Our guess is 25-30% on average.
  • Some enterprises will want to reserve the licenses for particular projects or departments, because they are paying for those licenses This means that the story around "peak # of users" gets far more complex. It's "peak #" except that "Department #1" gets 10 of them and "Project #37" gets 30%.  This can be managed locally –but it's often a nightmare. We've seen "options" files (the mechanism for controlling allocation of licenses) with 100s if not 1000s of entries.
• Publishers are not providing good licenses – making analysis almost impossible. Examples of "bad behavior" includes:
  • Using same license version # from one product release to another
  • Often enterprises need to keep older versions of software for specific projects. By not providing version #s on their licenses, enterprises have to purchase "peak #" across all versions, making analysis quite difficult.
  • Using the same license feature across different products
  • Enterprises then have to guess which users will use which products and then estimate peak use of the feature

So what's better? According to the enterprises that completed the survey from 2010 to 2012 is a shift towards:

• Device/named user based (+20%)
• "Larger" meters –site, financial metrics, enterprise, etc.  (~10% - the question was not asked consistently  year over year)

What licensing models do you think will gain favor in 2013 and beyond?

Related articles

Application Producers Are From Mars - Enterprises Are From Venus?

Why Producers Need a Proven Commercial License and Entitlement Management System to Support the Full Software Lifecycle Process

By Bashyam Anant

Last time we discussed Why Salesforce.com Isn't Suited for Complex License and Entitlement Management Processes. In this post we will share why in our experience, mature software producers need several product, entitlement, license, machine and software delivery lifecycle processes – well beyond what can be reasonably built in Salesforce.com. While not exhaustive, these processes include (note that these processes apply to producer users, end customers and channel partners, which adds additional complexity):

Product lifecycle workflows

• Defining and managing product versions, with release and end-of-life (EOL) dates
• Managing "feature-clipped" editions of products
• Maintaining relationships between products (e.g. licensed product related to maintenance product)
• Defining and maintaining license models (e.g. trial, perpetual, term license/subscription)

 

Entitlement lifecycle workflows

• Supporting "try-before-you-buy" flows
• Renewal of maintenance entitlements
• Update notifications for software updates available for customers current on maintenance
• Partial renewals (e.g. Acme renews maintenance for 400 units out of 1000)
• Entitlement transfers within an enterprise (e.g. transferring 30 units from Acme San Jose to Acme Chicago)
• Identifying upsell (e.g. "Base" to "Premium") and cross-sell opportunities

 

License lifecycle workflows

• Fulfilling licenses from an entitlement. For example, Acme could fulfill 50 licenses initially and install them on a license server 1, 100 licenses on a different day on install them on license server 2 and so on, but can never exceed the 1000 units they bought
• Fulfilling licenses for online, offline and occasionally connected users
• Renewal of subscription licenses
• Enforcing licensing rules for version upgrades (e.g. do not allow more than 1000 units of EZ-Calculator to be fulfilled across all version)
• Auto-fulfill licenses for product versions that are available to customers on maintenance
• License transfers from one machine to another
• License returns

 

Machine lifecycle workflows

• Registering machines that contain licensed apps or license servers
• Displaying the application stack with associated licenses on a machine
• Viewing the licenses available on a license server machine
• Moving machines from one business unit to another
• Returning defective machines back to the manufacturer and processing credit for associated licenses

 

Electronic software delivery workflows

• Electronic software delivery based on entitlements (e.g. allow software downloads only for customers on maintenance)
• Managing files associated with a downloadable product
• Archiving EOL products and files
• Automated export compliance checks
• Reporting on software download activity

 

Entitlement management systems deliver on these processes. Ideally, they should co-exist with Salesforce.com; each system serving business processes they are good at and with appropriate data sharing between them. Salesforce.com is ideal for managing customers and sales opportunities, sales forecasting, support contracts and support entitlements. Entitlement management systems complement Salesforce.com by taking care of product, entitlement, license, machine and software delivery lifecycle workflows as defined above.

What do you think?

Optimizing Software Revenue and Customer Satisfaction with Software License Compliance Management: Part 2 – Pros and Cons of Traditional Compliance Management Approaches

By Randy Littleson

Previously we discussed, Why Software License Compliance Management Matters, in this post I'll take a look at the pros and cons of traditional compliance management approaches.

Compliance management (many times part of a company's software licensing policy) approaches vary greatly from producer to producer and, frequently, from product to product within the same producer. While the industry has gravitated to some common approaches there are diverse options available.

• Strict Enforcement
  • Producer choses to enforce software license use and  entitlements by implementing a  licensing mechanisms that completely disallows access to software when usage exceeds licenses or only allows some limited amount of "overdraft" leeway
  • Provides a high degree of confidence for the producer
  • May inconvenience the customer if there is an immediate and legitimate business need for exceeding the license
    
• Software Audit Only
  • Producer chooses not to use any enforcement mechanisms in their products, removing the barriers to software use by making it easy for customers to broadly use the software throughout their business
  • Producer examines of the customer's use, usually accomplished by dispatching a third-party to the customer's site to retrieve usage data and/or to observe usage in real time over a period of time
  • Advantages of this approach – allows both the producer and customer to discover any overuse of the software, so that fair additional compensation can be paid to the producer, if appropriate
  • Disadvantages to this approach, include: 1)high cost of maintaining and dispatching audit teams, 2) difficulty auditing the entire organization, 3) audits get settled for pennies on the dollar 4) most producers only audit 1-2% of their customers  5) customers perceive an audit as invasive and adversarial
    
• Enterprise (All-You-Can-Eat) License Agreement
  • Producer provides software to the customer without stipulating specific restrictions on use (may include very limited or no enforced licensing)
  • Advantage of this approach is that it eliminates the need to monitor specific use parameters and address unanticipated fluctuations in those parameters
  • Disadvantage of this approach is that it may not reflect fair value, meaning potential revenue. For the customer, it may mean investing time in completing a true up and possibly paying for more software than is actually being

There are pros and cons to most traditional compliance management approach. Some approaches are appropriate under specific conditions but none of them are really perfect for all situations. In some cases, an audit may be too costly and/or intrusive. In other cases – such as when spikes in business activity give customers a legitimate reason for temporarily exceeding software license parameters – rigid enforcement mechanisms may be counter-productive and disruptive. As a result, we are seeing a growing trend towards compliance management solutions that offer trust but verify approaches.

Next time: Part 3 – Impact of Technology on Compliance Management

Read related software compliance management blogs:

• Usage-Based Software Licensing Examples and Patterns
• An Approach for Addressing Software License Compliance in Virtual Environments
• Usage-Based Licensing without Usage Data – Is it Possible?
• What is the ISO-19770-3 Standard and How Will it Make Software License Compliance Easier?
• The Next Evolution of Software Licensing: Monetization of Usage Data



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Publishers MUST Provide Entitlement Data to their Customers before Holding them Accountable for Compliance

Optimizing Software Revenue and Customer Satisfaction with Software License Compliance Management - Part 1

Application Producers Are From Mars – Enterprises Are From Venus?

By John Lipsey

A value perception gap exists between software buyers and sellers that could explain, in part, the growing diversity of software licensing and pricing models being demanded by enterprises – and offered by application producers.  According to Flexera Software’s 2012 Software Licensing and Pricing Survey, prepared jointly with IDC, many producers believe they are not getting the full value of the software they’re delivering to customers – and many customers feel they’re not getting enough value for their money.

According to the survey, nearly one quarter (24%) of application producers believe their software licensing and pricing strategies are either ineffective or very ineffective in capturing the true value they deliver in their products.  Moreover, enterprises indicated most frequently they are either unsatisfied or very unsatisfied with the price-to-value of their ERP software (25%), database software (22%) and CRM software (20%).

The survey confirms a perception gap in the value of software that could explain some of the contentiousness between producers and their enterprise  Flexera Software has seen first-hand that the manner in which some software companies package, price and license their software products does not necessarily correspond with how organizations use or value them.

The survey also points to changes in software licensing and pricing occurring across the industry that could close the software value perception gap.  Application producers currently offer a wide variety of software pricing models, which reflects a corresponding diversity in demand for how enterprises want to consume software. Looking forward over the next 18-24 months, utility models (usage, time, number of transactions) are expected to be used by 23% of application producers (up from 9%), signaling increased interest in usage-based licensing and pricing.  Such models have the potential to reduce or eliminate the perception gap as the amount an enterprise pays for software is tied directly to its actual usage.

Application producers are changing their software licensing and pricing strategies in order to strike the difficult balance between maximizing revenue streams and increasing customer satisfaction. 42% of application producers report that over the past 18-24 months, their software licensing and pricing strategies have changed.  The most cited reason for the change was to generate more revenues (69%), up from 40% in 2011.  Other reasons cited for the changes were to improve customer relations (44%), to accelerate sales cycles (35%) and to enter new markets (28%). 

There is a wide spectrum of software licensing and pricing models that application producers can choose – from perpetual software licenses to usage-based licensing and pricing models.  By building pricing and licensing flexibility into their products, they can very easily package and price their software tailored to the changing needs of their customers – and as a result both increase revenues and customer satisfaction.  The survey shows that we are seeing this begin to happen – the result of which will ultimately narrow the software value perception gap that exists today.

Access the complete Software Licensing and Pricing survey results.

Related articles

Consider How Software is Deployed to Drive Adoption of New Licensing and Entitlement Models

Software license compliance - Who is responsible for it?

Car-as-a-Service – Part 1: Transformation of Business Models in the Automotive Industry

By Bashyam Anant

Google's driverless car, which was awarded a driving license in Nevada in May 2012, is a bellwether for the technology-driven transformation of the automobile industry.  Observers are dreaming up possibilities as exemplified by "if you give a car the abilities of race car drivers (instead of the average driver) and combine them with "conservative software" used for standard driving then you can develop a safer driving experience."  What if you were able to try out driverless features in your car for one month at no charge? If you liked it a lot, you could buy an annual subscription. When your subscription runs out, you could renew it through your smartphone. On a weekend, you might want to upgrade the driverless feature from "commuter style" to "race track style", and be driven at breakneck speeds on a racetrack.

Such possibilities are endless. At their core, they speak to the imminent transformation of business models in the automotive industry – from a business that is characterized by occasional vehicle sales today to the "car-as-a-service" future which creates an on-going relationship between auto manufacturers and consumers with recurring revenues from sales of apps and services. Note that Google's driverless features were retrofitted onto a Toyota Prius, and were enabled by a combination of hardware platform (e.g. laser radars), breakthrough software and Internet-enabled services, the essential ingredients of a "platform + apps + services" recipe driving the transformation of automotive manufacturers discussed below.

Until recently, comparing Apple to Ford would have been dismissed as a meaningless exercise. In this article's context, however, it serves as an indicator of the payoff that automotive manufacturers can expect should they succeed in replicating Apple's formula of "platform  + apps  + services"  exemplified by the iPhone platform + iPhone Apps  + iTunes content. The table below shows that Ford and Apple are roughly similar by revenue. But, Apple's market capitalization per dollar of revenue (3.1 in the table below) is 10 times that of Ford's.

 

The good news, though, is that these types of returns are very much within reach, and Ford, in particular, is already making progress in that direction.  Ford Sync is an early example of a next generation vehicle information and communications system – a connected, software-driven dashboard in simple terms. Ford offers Sync in four editions based on levels of features, bundled services and optional subscription plans as summarized below:

 

	Sync	Sync with Voice-Activated Navigation	Sync with MyFord	Sync with MyFord Touch
Handsfree calling	X	X	X	X
Entertainment
Voice-activated music search, Bluetooth audio streaming	X	X	X	X
Voice-activated radio tuning		X		X
HD Radio (pay per song)				X
Satellite radio (subscription)		X		X
Navigation	X	X	X	X
Subscription Services				X
411 business search, Personalized news, weather, sports, traffic alerts	X	X	X	X
Vehicle Health Report	X	X	X	X
Wi-Fi hotspot				X

 

Ford Sync illustrates several strategies to grow revenues from a "platform + apps + services" approach, covered in Part 2.

Next time: Car-as-a-Service – Part 2: Platform + Apps + Services = Strategies for Growing Revenue

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Consumerization of Industrial Technology

Google's Driverless Car | Shocking Effects & Information

Usage-Based Software Licensing Examples and Patterns

By Mathieu Baissac

For the last year, I've been talking to a large number of software vendors and device manufacturers about pricing their products using usage-based licensing models.

There seems to be an explosion of new licensing models being considered. I personally believe that this new approach will be the default pricing model within the next 5 years and therefore wanted to share some potential applications (to stir up the creative juices).  I have kept these examples anonymous, as most of these licensing models have not been released in the market place yet (but soon)…  

• Marketing application vendor
  • Old: moving from user/size of database
  • New: # of emails sent on a monthly basis
• Development platform/ hosted RDMS
  • Old: # of developers, perpetual license
  • New: # of gigs managed on a quarterly basis
• CAD/CAM vendor
  • Old: perpetual license based on features/capabilities
  • New: # of drawings rendered in 3D on a monthly basis
• Telephone equipment provider
  • Old: perpetual license based on features/capabilities
  • New: peak throughput # of text messages sent per month
• Translation services
  • Old: each job was priced based on complexity, language, speed of job
  • New: # of characters translated by the month (regardless of all other factors)
• Video data conversion provider
  • Old: hardware
  • New: # of megs converted per month
• Project management vendor
  • Old: perpetual software based on size of hardware (# CPU cores)
  • New: # of active projects managed per month
• Chip design software vendor
  • Old: perpetual software based on size of hardware (#CPUs)
  • New: # of designs compiled per month
• Application converter
  • Old: perpetual software-per seat
  • New: # of applications "managed" for conversion & perpetual license for capabilities
• Software development tool vendor
  • Old: perpetual concurrent # of users
  • New: # of users exceeding perpetual license per month

There seems to be some patterns:

1. Combination of "usage" (pay-for-use) and "capabilities" (pay perpetual or time-based for access to these services)
2. A significant reduction in what is being monetized (2-3 meters, no more than that)
3. Meters are aligned much closer to the value derived from the use (# of megs converted vs. #CPU)
4. All producers are providing a predictable/consistent pricing meter and a variable component so that CIOs/finance can budget

I think the combinations of:

• Simple
• Easily tied to value
• Mostly predictable

 Is right on the money….

Learn more about compliance management solutions that enable usage-based licensing and pricing.

Year in Review: Most Watched, Read and Viewed Software Licensing and Entitlement Management Content of 2012

By Ann Reist

In keeping with our review of 2012, I also wanted to share with you the Most Watched Videos, the Most Read White Papers and the Most Viewed Webinars. "

Most Watched Videos

1. Creating "One Avid" with a Unified Software Licensing Framework
2. InstallShield Uses Tamper Resistant Software Licensing Code to Prevent Piracy and Hacking
3. Subscription Licensing Helps Transform Business from Hardware to Software-Centric
4. Insights from Citrix: Software Licensing Implications of Virtualization and the Cloud
5. Software Pricing and Packaging Best Practice Advice from Software Pricing Partners
6. Software Licensing Implications of Moving Applications to the Cloud

 Most Read White Papers

1. 2011 Key Trends Software Pricing and Licensing Report**
2. 10 Reasons to Buy a Software Licensing & Entitlement Management Solution
3. IDC White Paper—Software Licensing & Entitlement Management: The Next Generation
4. How to Grow SaaS Revenue, Profits and Market Share with Use-Appropriate Software Licensing and Pricing
5. Software License Compliance Management: Optimizing Software Revenue and Customer Satisfaction
6. Ten Steps to Optimizing Your Software Licensing Revenue
   

** Note the 2012 Key Trends Software Pricing and Licensing Report is now available.

Most Viewed Webinars

1. 2011 Key Trends in Software Licensing and Pricing and 2012 Predictions
2. Why Software Publishers are Migrating from Certificates to Activations
3. Software Licensing and Entitlement Management: The Next Generation—An IDC white paper webcast
4. Bridging the DevOps Divide by Automating the Handshake between Dev and Ops
5. Making the Most (Money) with Your SaaS Offering
6. Creating a Customer-Centric and High-Performance Entitlement Management System