Software licensing is vastly complex. To simplify software licensing, we need to stop counting. It’s a radical idea, one that has the power to disrupt the industry. With myriad software licensing models and types of agreements, it can be confusing to navigate multi-page contracts and different terminology from different vendors.
Here are just a few examples of licensing models and types of agreements:
- Proprietary license
- End-user license agreement
- Workstation license
- Concurrent use license
- Volume and site license
- Perpetual licenses
- Non-perpetual licenses
- License with maintenance
- Client access license
It can be hard to understand just what you are agreeing to when you enter into an agreement. If you are operating globally, you may have different licenses for different countries as well. Terms may start out reasonable, as your initial use is often limited; however, over time, deployment costs tend to rise and the scope of deployment can be confusing. It may not be clear who needs a license and who doesn’t.
Some of the various factors in pricing include:
- Royalties
- Run times
- Server deployment fees
- Number of servers
- Number of users
- Number of developers
Careful counting and auditing of licenses are required to ensure that you are in compliance with your licensing agreements and that you don’t get hit with unanticipated costs, causing software licensing to become closely intertwined with accounting. There may even be a need to purchase software to monitor your software license compliance.
Slack is an example of a user-based license agreement. Slack is a popular platform that enables teams to collaborate with instant messaging and file sharing. Slack offers its customers built-in integrations for a host of outside tools like MailChimp, GitHub, Trello, Zoom, and Twitter, to name a few. It permits teams to automatically receive updates on activity and pulls in relevant information. At $12.50 per user, per month, for the highest-cost subscription, the cost can be significant for a medium to large company. If your company has 1,000 employees, you are looking at an investment of $150,000 per year. As you scale, your software costs also scale.
Oftentimes, organizations may lose track of deployments. Big companies operate in silos, and departments can act like small companies within the larger organization. These departments may not know what other divisions are doing. This results in expensive penalties and other issues when such use is discovered by the software vendor. Deployments that are not tracked can explode in scope with popular products, leading to huge, unforeseen expenses. And if you are outsourcing to third parties, you are liable for use of software on your behalf. If your usage is not accurately tracked by the vendor and is reported unexpectedly, you may be looking at a huge expense when you least expect it. Simply put: Cost escalation can be unpredictable.
You may encounter other roadblocks with compliance. Licensing of products shipped with or embedded in your product can be risky. Vendors can potentially veto your product distribution if you don’t adhere to the terms. Embedded libraries may involve the payment of royalties and other types of deployment fees, or support costs may be more expensive when compared to the initial license. At times, you may need to license source code for security reasons, and that code may be unavailable or very costly. Server, processor-based fees are also quite common and can add up. Rights such as transfer between employees, machines, assignments to third parties, and deployment to the cloud can also be tightly regulated or completely prohibited without special licenses in place. If you are licensing multiple products from the same vendor, chances are that each product is governed by a vastly different license, and licenses can create problems when you plan to sell your company or your intellectual property if you are dependent on your software vendors, especially when their software is embedded in your IP.
It’s clear that it’s time to simplify these agreements. Richard Koch, an investor and entrepreneur, and venture capitalist Greg Lockwood researched industry game changers for their book Simplify: How the Best Businesses in the World Succeed. They looked at successful companies like Uber, IKEA, Ford, and McDonald’s and found that they all shared the ability to simplify. They argue that by simplifying your products, you can offer value for money and make a market grow exponentially. Price simplifying, which is the strategy of cutting the price of a product or service in half or more, causes the demand to soar, and most of the market share goes to the innovator who simplified things.
One example to consider is Southwest Airlines. Southwest simplified the process of seat selection: Their passengers choose their seats once they are on the plane. This simple change saved money for the airline, allowing them to cut costs and pass the savings on to the customer.
Analyst Amy Konary recently shared a LinkedIn post, “IDC Software Licensing and Pricing Predictions 2016: Top 10 Predictions”. In the post, she predicted that software license complexity will indirectly cost organizations an average of 25 percent of their software license budgets in 2016; not an insignificant amount by any means. IDC is also predicting that in 2017, at least five major software providers will announce plans to roll out a new licensing program specifically designed to simplify customer licensing. They also believe that by the end of 2017, 50 percent of software providers will offer flexible monetization approaches, such as consumption-based pricing.
Clearly the time for change is here. So how can your company get started? Here are a few things to consider:
- Design your software around your customer.
- Keep your customer’s ROI at the top of your mind and work that into your development and support process.
- Maintain end-to-end support over the entire development process.
- Invest back into your product development.
- Keep it simple; charge one fee with no surprises.
There are lessons we can learn from companies like Southwest, Uber, and IKEA. We can look for ways to simplify, and that simplification should start with our license agreements. Innovation should not be hampered by the need to carefully count users, servers, and deployments. The industry is ready for disruption and that disruption will be a win-win for both vendors and customers who are ready to innovate.
