Software vendors frequently come under fire for their licensing and pricing practices. I’m not going to say that this is entirely unjustified, but I will assert that there are many issues relevant to this discussion.
There are many ways to acquire software licenses. Buyers, as well as vendors, have the obligation to consider more than one licensing plan for any given application. In the world of enterprise software, ERP especially, the nature of the license itself is as important as the functionality, features and benefits built into the product.
Recently, I read a blog posting opining that business software vendors should simply give away licenses and then base their fees on actual value delivered downstream. The real issue addressed by the author was the large upfront fee changed by vendors. This fee is typically associated with the acquisition of the software license itself. The downstream fees are typically associated with maintaining the software via updates and to some degree enhancements in the future.
The writer made the point that these initial fees are charged at a time when the product is delivering zero value because ERP software does not start delivering value until it is installed, deployed and functioning. The piece then implied that this was the only licensing model alternative available for on-site installed software. The message was that the onsite model was dead unless vendors would just waive the initial fees and charge for ongoing maintenance. The author maintained that the only real alternative was the SaaS (software-as-a-service) model.
The SaaS model makes great sense for some companies, but it is by no means the only alternative for companies wishing to acquire software usage rights without paying huge upfront fees. There are other alternatives. Many of which carry the added tax benefit of being treated as an operating expense from an accounting point of view.
Some of the more popular alternatives would include the following:
Subscription License – These licenses offer the user all the flexibility of any onsite installed software license, without the big upfront fee. The agreement is a subscription, just like a magazine subscription or a video subscription service. You take custody of the software and documentation. The product is installed on your hardware, accessed and operated by your own personnel and you use it as needed according to the provisions in a usage agreement. You will make monthly or at least periodic payments in order to maintain the license over time. When the product is judged to be without further value, you simply de-install the software and opt to not renew the license.
Software Leases – Similar to the subscription license, the software lease builds all of the applicable fees associated with product usage (sometimes including implementation fees) into a neat periodic payment. Again, you have custody of the code but there is no big upfront fee. You make the lease payments and you use the product according to your usage agreement. When you are done with the software, de-install it and do not renew the lease.
Software Rentals – It is the same concept, different name and slightly different implications from a Financial Accounting Standards Board or accounting point of view. You use the product as long as it serves a need and delivers value. Then you dump it and you do not renew the rental agreement.
Software Financing – Another alternative is to finance the initial license fees over an extended period. Some vendors offer internal financing plans that preclude the need to involve outside or third party funding sources. You will pay interest for this regardless of where your funding comes from. Software vendors tend to look at this as a convenience service and will typically try to resell the paper. This means your ultimate funding source will likely be a third party anyhow.
Multiple Year Usage Agreement – In some cases, users can benefit from a multiple-year usage agreement. These incorporate all fees into a single payment plan over a specific term. The terms and conditions associated with these agreements vary widely, but the benefit is a fixed expense line over an extended usage term.
All of these plans offer the user full onsite control of the product and access to the product. All avoid the large upfront fee payments found with traditional software license acquisition pricing models. None of these plans requires the user to continue usage or payments beyond a point where the product is no longer delivering value to the user’s enterprise.
The user does need to be careful evaluating the term, scope and other usage variables before putting a signature on a contract. There should be some flexibility built into the agreement, but ultimately, payments are fixed for the term of usage agreed to.
SaaS is a great option for some companies, but companies simply wishing to flatten out expense lines would do well to evaluate other alternatives as well. Software vendors are always anxious to find ways to make their solution work for you, and alternative licensing plans can be exactly what you need to get the best solution available for your needs.