Entitlement and Compliance Management

Top 13 Entitlement and Compliance Management Blog Posts of 2012

By Ann Reist

After researching the most read Entitlement and Compliance Management: Talking Successful Software blog posts of 2012, we found that the most popular topics were on the subscription economy, software-defined networking, usage-based (pay-as-you-go) licensing, virtualization, software license compliance and SaaS. Not surprising, as all these topics and technologies will most likely continue to dominate the market in 2013.

Top 13 Posts

1. Don't be Afraid of Subscription License Models
2. Common Software License Types and Terms
3. What the Heck is a Token Software License Model?
4. Software Defined Networking Enables New Software Licensing and Business Models
5. Usage-Based Licensing without Usage Data – Is it Possible?
6. Software Licensing – What are the Best License Metrics for a Virtual Machine World?
7. The Software Industry is Recovering from the Recession
8. True Pay-As-You-Go Software Licensing Model – Myth or Reality?
9. What is the ISO-19770-3 Standard and How Will it Make Software License Compliance Easier?
10. Virtualization is the Biggest Game Changer in Software Licensing in Many Years
11. The Next Evolution of Software Licensing: Monetization of Usage Data
12. An Introduction to the ISO/IEC 19770-3 SAM Standard Software Entitlement Tag
13. SaaS is More Than a Software License Model

What technology played the biggest role your in business in 2012? What topics would you like us to address in 2013?

Fine-Tuning Freemium Models through Software Product Usage Analysis

By Bashyam Anant

A colleague described an interesting business problem that his former employer, a cloud-based provider of developer tools (e.g. source control, agile collaboration), faced. Like many SaaS and cloud providers, the company priced its software on a user metric – the number of developers using their software in a given enterprise.  Until recently, they offered a "free edition" for up to 10 users. But, they turned off their freemium offer because they found that there was near-zero conversion from the free edition to a paid tier.

Freemium models are a common strategy to attract and grow users, especially for brand new products. They are based on the premise that adequate number of users will sign up for paid editions, to more than make up for serving the vast majority of users on free editions – an assumption that did not quite pan out for my colleague's former employer.

Getting your freemium model right requires that you understand several aspects of your economic model, your end users and their software usage patterns. Freemium economics are driven by three factors:

• total user base
• paid-to-total-user ratio ("the conversion rate")
• unit cost to acquire and serve user

Say you have 1 million total users of which 2% convert (the conversion rate is 1-5% for most freemium offers). If your cost to acquire and serve users is $100/user/year, then the 20,000 (=2% * 1,000,000) paid users have to each pay $5000/user/year (= 1,000,000 * $100/$20000) for the product to break even. Attracting lots of users at a low cost requires building a great product on a scalable platform with a lot of viral marketing – these topics are covered well elsewhere.

Pricing and packaging choices have a huge impact on conversion rates and it critical to the success of your freemium model. Analyzing product usage is an essential first step to optimizing pricing/packaging for freemium models. The figure below shows popularity of different features for a Flexera Software product (the data is real, but the product name and feature names have been anonymized). An easy way to gather this type of data is to have "try before you buy" offers - users can try out all features of your product while you observe patterns of usage.   

Obviously, you need a framework for gathering and analyzing software product usage.  Feature usage is one type of analysis you should plan for. Analyzing user engagement with features is another important analysis. For example, for a SaaS product, you would want to know how often users log in, how long they spend on different features in a given session and so on.

Once you have an understanding of usage, the next challenge is figuring out where to draw the line between free versus paid editions. Pick a boundary that delivers too much value in a free edition and very few users will feel compelled to convert. Conversely, delivering very little value for free will not help grow the total user base. For the Flexera Software product referenced in the figure, we would pick Feature A and B (used by 90% of users) for the free edition and build paid tiers using the remaining features. While that analysis was based on features, if your pricing model involves a usage metric (e.g. number of users or GB of files stored), you would want the usage metric to be the basis of the analysis. For the developer tools product described at the outset, the publisher chose 10 users as the boundary between free versus paid. Experimenting on the free versus paid cut off will help find the right balance.

Besides establishing value of paid features and driving conversion, getting the free versus paid boundary right also has a huge impact on operating costs as Dropbox found out: "Dropbox's realization that its unlimited undo history — available to free and paying users — was responsible for a huge and growing share of its costs. And further, few customers actually used the feature." Hardly a surprise that the feature is no longer free!

It is important to set some limits for your freemium packages. Netflix, for example, allows 1 month of free streaming for new customers. "Dropbox allows you to store up to 2 GB free of charge. Dropbox reserves the right to terminate Free Accounts at any time, with or without notice…if a Free Account is inactive for ninety (90) days, then Dropbox may delete any or all of Your Files….". Setting a limit forces an interaction between the producer and the consumer. For a user, it is about deciding if the product adds any value (or conversely if the user would even miss the feature if it was turned off) and for the software producer to check up on actual usage and decide if it is worth serving the user.

Which bring us to the final requirement: tracking limits requires you to track users and their software entitlements.   

What could my colleague's developer's tools company have done differently? Analyzing usage patterns would have helped them pick a different cut off for their free edition (rather than removing freemium altogether). It turns out many of their competitors only allow 2-3 users for their free edition. Or they could also have a put a time limit on their free edition (e.g. 10 users free for 1 year) which would have forced a "value-based" conversation at renewal time.

To summarize, fine-tuning software pricing and packaging to optimize freemium conversions requires you to:

• Collect and analyze software product usage to understand most popular features or levels of consumption
• Using software usage data to fine tune the boundary between free versus paid feature or editions
• Set time or software usage limits on freemium packages
• Track users and their software entitlements

Have you tried a freemium model for your software or service? I would love to hear about your experiences.

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

By Cris Wendt 

When you fully understand how customers use and value your software, you may begin to realize the benefits of offering entitlements to different license models to meet the nuances of deployment requirements.  This is especially true for software vendors and embedded device manufacturers that offer enterprise-level software that forms part of the backbone for the customer’s operational infrastructure.   What you may find, is that these nuanced requirements may be reasonably common, and possibly represent revenue opportunities.

By offering these deployment-centric licenses, you tell your customer that you understand how they use your software, and, that your offering is targeted to meet their operational deployment needs.  In addition, by communicating value, you may begin to realize increased revenue. Furthermore, if you begin to codify these licenses into your product SKU structure or entitlement model, then these models can be integral to your offering.  Such models can be built into your entitlement management processes in an automated fashion, and not become an after-thought that requires manual intervention or special considerations when managing software compliance.

The software license models that we see that are often after-thoughts to a company include:

• Development and Test Licenses:  In direct B2B sales models, the enterprise customers of the software vendor often require copies of the software to perform internal test and development to incorporate new versions of your software into their environment.  This is often the case for ERP, MRP, or CRM software, which is integrated with other systems.  It’s not uncommon to have 3 “non-production” uses for (what becomes) production software, including development, QA/test, and user-acceptance test.  These tend to be offered as perpetual or subscription licenses, with restricted usage limitations (e.g. internal use, non-production).
• Fail-Over / High Availability Licenses:   This is a requirement if you  sell software that is used in mission critical applications, such as 9-11 response systems,  industrial control systems, medical systems, high-availability storage, power management systems, or financial transaction centers.  In these mission-critical situations, your customers will have a business continuity plan to continue operation in cases where there is a disaster such as an act of war, flood, earthquake or similar emergency.  In these cases, software licenses will need to be immediately available so that the business can continue operation.  Depending upon your customer’s plans, you may need a “hot backup”, “cold standby” or ongoing high-availability license to provide your customer.   Depending upon how you provide value, these can be a selection from: perpetual licenses governed by restricted usage limitations, event-based licensing (e.g. a fixed number of fail-over events), or an event triggered time-based license.
• Deployment Licenses: These are licenses required by your customer’s internal services organization, external partner, or customer to deploy operational software in a production environment. These licenses are required for software that requires a lengthy configuration setup period, such as setting up a telecommunications environment, or, complex financial transaction center.  These licenses are required by software vendors who sell a subscription license or software support, who want the start date of the license or support to align with the end of the deployment.  This is typically a time-based license that requires entitlement processes aligned with the software deployment model.  While this may be a potentially complex process, these are easily accommodated with a well-designed entitlement management process and system.

Anytime you price and license software, it’s important to consider how the software and pricing align with commercial value.  But, often neglected are the use-cases described above which may provide areas of untapped opportunity.

Organizations Facing Increased Cost & Risk Exposure Software License Compliance Audits

By John Lipsey

According to the 2012 Software Pricing and Licensing Survey published recently by IDC and Flexera Software, software vendors are availing themselves more frequently of their rights to audit their customers’ software use, and of their right to exact “true-up” penalties if that use exceeds licensing agreement terms and is found to be “non-compliant.”

According to the survey the problem can be traced back to organizations’ challenges tracking and managing software license use, and aligning that use to ensure compliance with the complex software licensing terms found in each of the dozens, hundreds or even thousands of licensing agreements to which organizations are legally bound.  One third of enterprises surveyed said they are either dissatisfied or very dissatisfied with their current method for managing software licenses and usage.

The reasons for that dissatisfaction are clear:

• 38% of enterprises indicated that 11% or more of their application spend is associated with applications that are overused, and therefore out of compliance, up from 26% one year ago.  
• 64% of enterprises reported that they have been audited over the last 18-24 months… large enterprises – those greater than $1B in revenue – were significantly more likely to be audited three times or more in the last 18-24 months
• 24% of enterprises said their total true-up paid over the past year was $1 million or more

Finally, the survey revealed that the major software vendors – those that typically account for a significant portion of most organizations enterprise application spend – are also the most aggressive auditors.  Enterprises reported that over the last year, they’ve been audited most frequently by Microsoft (51%), followed by Oracle (27%), IBM (24%), SAP (22%) and Adobe (19%).   

 

 

 

 

Amy Konary, research vice president - software licensing and provisioning at IDC summed it up this way:

“Software usage that exceeds the negotiated license terms can represent significant lost revenue for software vendors,” said Amy Konary, research vice president - software licensing and provisioning at IDC. “There are many factors that make license compliance difficult, including license and IT environment complexity, lack of automation, and decentralized IT. IDC expects that vendors will continue to enforce their license agreements with audits, and advises enterprises to pro-actively track and manage usage of their software license assets.”

The need for Software License Optimization for the enterprise organization has never been more stark. Enterprises face tremendous challenges tracking and managing software licenses and reconciling that use against their software license agreements.  If existing license management strategies aren’t significantly reducing or eliminating painful software true up penalties – optimizing the software license estate often eliminates or significantly reduces that risk exposure.

Read the full Software License Compliance Audits and True Ups report.

Will Windows 8 Style Apps Change the Way Software Vendors License Software?

By Constant Fisher

As always, with the release of a new operating system (OS) by Microsoft, there is a lot of talk about the new features introduced by the new OS. This isn't any different for Windows 8.

Some of the most talked-about features are the Windows 8 apps. Why? Because not only does it introduce a new style of app but also a new way to distribute and license Windows applications.

Traditionally, software vendors have been selling software either directly or via resellers to individual users or companies. The new way for software vendors to distribute Windows 8 apps is the Windows Store. This model will certainly suit individual users who are typically happy to download and directly install software on their device but will this suit mid-size or large companies who traditionally want to control the way they deploy applications to their user community? Time will tell.

Additionally, software vendors developing apps will have a very limited choice of software license models to choose from. The default model is a single software license of an app that can run on up to five devices, without payment of any additional fees.

Microsoft provides a software licensing API to help software vendorss to license their app. The API includes methods to allow time-limited trials or feature-limited trial for instance, but the API only works for applications delivered through the Windows store.

What if a software vendor wants to sell an extra product or feature outside of the Windows Store? That's where the in-app purchase option comes into play. This option gives the possibility to use a third-party engine so that customers can buy software from within the app, instead of purchasing directly from the Windows Store.

Therefore, my answer to the initial question is yes but not completely. Even with the advent of the Windows Store, software vendors will still need to consider a software licensing API which works across platforms and distribution channels. What do you think?

Read more articles and blogs:

• The "Holy Trinity" Will Guide Microsoft's Surface Success
• The Year of the Ecosystem – Leveraging Software for Competitive Advantage and Revenue Growth
• Intelligent Hardware Manufacturers That Successfully Release Their Inner Software
• Smart Device, Smarter Services

Device Manufacturers: Adopt the Holy Trinity, Go Intelligent

By John Lipsey

The challenges facing device manufacturers are enormous: Increased competition from new players on the world stage have a commoditizing effect across the spectrum - from medical devices and telecommunications equipment to oil and gas machinery and building automation. Complex supply chains, devices becoming a commodity, and rising fuel and transportation prices are driving manufacturing costs up and margins down. And rapidly evolving markets and changing customer needs require a heightened flexibility and nimbleness that most old-line manufacturers simply don't have.

Flexera Software’s Vincent Smyth believes that “Going Intelligent” provides manufacturers with a solution – enabling them to regain their competitive footing, lower costs and more flexibly tailor their products to meet customer demands.  What’s the formula for going intelligent?  Intelligent Device = App-enabled Hardware + Flexible Licensing.

Read the full article Device Manufacturers: Adopt the Holy Trinity, Go Intelligent.

CPU-based Software Licensing vs. Moore’s Law—Contender or Formula for Trouble?

By Flexera Software Sales Engineering

In reviewing many software vendors licensing practices with an eye towards improving them, I've come across a general dissatisfaction with CPU-based software licensing and pricing models. Because of this, for several years I have done everything I can to steer potential software licensing designs away from any CPU-based licensing model.

The CPU relevant models that most commonly come up are:

1. Number of CPUs/cores
2. Size or capacity of a CPU
3. Amount of CPU time consumed
4. Specific CPU processor model or type

All of these models appear on the surface to be valid ways of aligning price with value received, especially to an engineer that understands what the acronym CPU stands for. But in reality, CPU-based software licensing makes for a very poor business model. Even if Moore's Law doesn't continue on it past path, changes in CPU capability, size, model, cores, etc., occur far too rapidly compared to the lifecycle of most software.

The power and value of a single CPU 5 years ago is not equivalent to today. CPU metrics are hard to understand for business people. CPU metrics are also hard to predict. I may decide to buy and install software on a 4 core machine, but how do I know that I'm going to need all 4 cores? Am I overbuying? This makes the sales of the software very difficult and can easily lead to customer dis-satisfaction if they end up over buying because of unpredictability. Virtualization makes some of the CPU models like number of CPUs irrelevant. I can run 5 virtual machines (VMs) on a single or even a 4-way machine and easily exceed my license terms.

So all of that is a good argument for why not to do CPU-based software licensing, but it doesn't answer what type of software licensing model should be used. The best licensing is tied to a value metric. Feature capabilities or transactional capacities are good examples but the best choices will be a metric that has these properties:

• It is easy for anyone to understand how the metric relates to use of the software, business or technical.
• It is measurable. Can I programmatically determine if the metric is on/off or a quantity from the application?
  • E.g. database size is measureable, employee headcount probably isn't unless the value is stored in the database
• It is enforceable or the value can be aggregated over time and reported upon in support of post use payment models.

 

Finally, the licensing implementation of the product using the value metric must reflect value! If I have a per-use licensing model and I consume a license at startup but then immediately shutdown, have I derived any value from running the application? You can take a good value metric and make it a bad one through poor business rules or enforcement policy. My suspicion is that you can never take a bad value metric and make it a good one through policy.

Download the 2012 Key Trends in Software Licensing and Pricing Report for more information about how software vendors and enterprise customers feel about software licensing and compliance practices, models and metrics.

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SoftSummit Regional Briefings—Register Now

Flexera Software is pleased to announce that registration is now open for the SoftSummit Regional Briefings. 

The SoftSummit Regional Briefings feature the interactive format, informative speakers and networking opportunities that are trademarks of SoftSummit—presented in a smaller, more intimate setting. This year, Flexera Software is offering the SoftSummit Regional Briefings in three locations: San Jose, California; Cambridge, Massachusetts; and Houston, Texas.

These events are free of charge, with sessions open to Flexera Software customers as well as prospective customers. But seating reservations are limited, so you must act now to secure a spot.

Briefings Schedule

Morning Session - 8:30 am to 12:00 pm
Flexera Software Customers and Prospective Customers
Breakfast will be served. Beverages and snacks will be available throughout the session

• Flexera Software State of the Union
• Discussion of major trends (cloud, SaaS, virtualization) and impacts to software licensing and entitlement management
• 2012 Key Trends in Software Licensing and Pricing Survey Results
• Customer case study and presentation
• Panel discussion with all presenters

Afternoon Session - 1:00 pm to 3:30 pm
Flexera Software Customers "Deep Dive" Session
Lunch will be served. Beverages and snacks will be available throughout the session

• Product roadmap discussions
• Customer feedback
• Product direction

Register Now for a SoftSummit Regional Briefing near you!

Peaks and Valleys: Software Licensing for the Elastic Cloud

By Richard Northing

One of the most compelling aspects of cloud computing is its elasticity.  With cloud provisioning models such as SaaS, PaaS and IaaS, organizations can scale up capacity to support business growth and/or temporary spikes in demand much more easily than they can with traditional IT architectures.  They can also scale down capacity when business slows and/or spikes are over.

Just as important in an uncertain and unstable global economy, the cloud mitigates the risk of being locked into fixed IT costs in the vent of a business downturn.  So even if the business continues to grow, the rental model offered by the cloud still feels more prudent than the capital model.

Discussions about cloud elasticity, however, tend to focus on infrastructure—in particular compute, storage and network.  Infrastructure virtualization and automation are enabling vendors, cloud service providers and enterprise IT organizations alike to achieve a great deal of flexibility when it comes to supporting peaks and valleys of demand.

In fact, a general best practice of “buy the base, rent the spike” is beginning to emerge whereby IT organizations are driving down the cost of supporting well-known workloads internally with private on-premise cloud architectures while shifting more dynamic, less predictable workloads to private and public off-premise cloud resources.

Conversations about the efficacy of this model, unfortunately, quickly deteriorate when the issue of software licensing comes up.  That’s because ISVs have not all responded with equal speed or with similar policies to the phenomenon of the elastic cloud.  Some want their customers to pay for elasticity with a fixed enterprise software license.  Others want to charge for peaks.  And many are still adopting a wait-and-see attitude—even though the move to the cloud is well underway.

None of these responses seem useful for a market that is demanding elasticity as an intrinsic component of any technology buy, rather than as a value-added option.  Any failure to address this demand for elasticity will simply drive customers to open-source solutions, to SaaS resources that may be functionally inferior but economically more compelling or to other vendors that understand the new rules of the cloud game.

ISVs therefore need to ask themselves some basic questions about how they want to play in the elastic cloud, including:

• How should use and software entitlements be properly defined in computing environments where processor cores and end-user devices are no longer fixed assets—but are instead themselves becoming services that can be spun up, spun down, moved and morphed on an as-desired basis?
• How will revenue and sales compensation be affected if the customer’s cost becomes dynamic?  Are pure-play upfront software licenses and SaaS-style subscriptions the only viable models for ISVs?  Or does the advent of the elastic hybrid cloud call for new elastic hybrid software licensing models?
• How will cloud-friendly innovation in software licensing have a positive impact on brand value, customer experience and competitive positioning in the long term?  Will gains in these areas offset potential short-term losses in revenue and increases in business complexity?

Infrastructure vendors are moving aggressively to offer customers new value propositions around elasticity, economies of scale and the offloading of low-value technology ownership tasks.  In doing so, they are breathing new life into markets that were heading towards stagnation.  It will be interesting to see how—and if—ISVs successfully follow suit.

In fact, being the first to meet the needs of the market with the right software licensing model that monetizes the cloud might just be the differentiator needed to push your solution over the top and give you the competitive advantage.

How do you think ISVs should respond to the new imperative for elasticity?  Do you think the industry as a whole is responding fast enough?  What do you perceive as the primary obstacles to a better, faster response?  Feel free to share your ideas below!

2012 Key Trends in Software Licensing and Pricing Survey Now Open

By Ann Reist

In its eighth year, the 2012 Key Trends in Software Licensing and Pricing Survey is now live. The survey, sponsored by Flexera Software and prepared with assistance from IDC, looks at software licensing, pricing, and compliance enforcement trends and best practices. The survey is open to all software vendors, intelligent device manufacturers, and enterprise customers who use and manage software and devices.

Key Findings from the 2011 Survey

• Revenue Generation and Customer Satisfaction Driving Changes: Forty-two percent of application producers indicate that they have changed their pricing and licensing policies over the past two years to make them more flexible. The top two reasons for this shift have been to improve customer relations (46%) and generate more revenue (40%). Accelerating the sales cycle (27%) was also cited as a key reason for broadening pricing and licensing policies.
• Software Budgets Starting to Increase: Forty-three percent of enterprises report that, looking ahead two years, they expect their software budgets to increase–up from 33% in 2010. Twenty-eight percent expect their budgets to stay the same, and 22% expect them to decrease.
• Moderated Approach to Adopting Cloud Licensing Strategies: Application producers are taking a gradual view in anticipating licensing strategy changes to accommodate the cloud. Forty-six percent indicate the changes they‘ll need to make will be moderate over the next two years. Thirty-four percent anticipate no change, while 21% indicate changes will be significant or dramatic.
• Tracking Customer Usage Remains Blind Spot for Application Producers: Of the application producers responding, the largest proportion, 47%, report that they do not monitor customer usage of their products. For those that do, 20% report doing so using internally developed tracking tools, and 16%, using manual audits. Only 10% use third party tracking tools.

Get the entire 2011 Key Trends in Software Licensing and Pricing Report

Don't miss your opportunity to take part in this year's survey! Emerging trends such as the cloud and virtualization are changing the way software vendors and intelligent device manufacturers must monetize, license and entitle their products in order to meet changing customer needs. These trends also impact how enterprises pay for and use software and intelligent devices.

The survey results will be presented by Amy Konary – Research Vice President, Software Licensing and Provisioning for IDC, at an upcoming webinar.

Be sure to weigh in on the 2012 survey so that your opinions are heard. All those who participate and provide contact information will receive an executive summary of the results and be entered into a drawing for an Apple iPad 3.

Take the survey now!

• Survey for software vendor & intelligent-device manufacturer professionals 
• Survey for enterprise professionals