Tips to avoid over-purchasing software

Software licensing is a complex issue. Gartner offers tips for investing right.

Software licensing is an important issue for SMBs not only because of its immediate significance, but also because of its long-term financial impact in terms of maintenance fees. And not to mention the prospect of software usage audits, which means SMBs cannot take the issue lightly.

Although selecting the right vendor solution is critical, it is not the subject of this article. For the purpose of this discussion, it is assumed that software managers or CIOs have short listed vendors.

Here are seven important considerations to keep in mind:

1. Named versus concurrent users

In organizations where usage of the application per employee is intermittent, concurrent user license may be a more suitable choice.

If software is licensed on a per named-user basis, it means that each user of the software must have his or her own individual license. If one particular employee is on vacation, another staff is not allowed to use it. In the concurrent user scenario, the right to use is not limited to particular employees, but there is a cap on the number of users at any given time. This gives the user organization greater flexibility. Also, in organizations where usage of the application per employee is intermittent, concurrent user license may be a more suitable choice. A number of SMB-focused business application vendors offer concurrent-user pricing to cater to firms that need fewer licenses. However, concurrent licenses tend to cost somewhat more. Therefore, SMBs should keep this in mind when calculating the investment cost and comparing vendor solutions.

Sometimes, pricing for the server, engine and transactions is per module, number of servers or some other metric, such as million instructions per second, number of payrolls processed or bills generated.

This may be in addition to, or in place of number of users. Thus, pricing tends to be complex and not always apparent at the time of finalizing the vendor. This also makes comparison between different vendors difficult. SMBs should seek clarity on these issues to avoid surprises. A combination of fixed and variable prices means that they need to carefully work out the cost of each vendor offering.

2. Type of users
Not all users of an application use it to the same extent. In fact, some are "light" users, for example, employees accessing their HR records. Others, such as those in finance, sales or marketing, may be ”heavy” or power users of the applications. License fee is, therefore, different for different categories of users. SMBs need to carefully audit the number of users by type and intensity of usage so as not to over-invest in licenses. Some vendors also charge a fee when another application ”uses” their application, say accessing data captured or generated by the vendor application. This can become a thorny issue between vendor and user, if not clarified in advance.

3. Technical support and upgrades
Charged usually as a percentage of license fees, this varies between 10 percent and 25 percent. While some software vendors charge for both and provide support directly, others, mostly SMB-focused vendors, charge only the upgrade fee but allow their channel partners to charge for technical support. SMBs need to keep in mind that even if they do get discounts on the license fee, the maintenance fee is usually charged on list price. They should therefore negotiate both the license and maintenance fees.

4. Bundled versus standalone software
More SMB-focused vendors are offering fixed-price, fixed-scope packages that include a minimum number of modules and user licenses, as well as hardware and services. While, this may be generally useful, each SMB needs to determine if they do need all the modules or the minimum number of licenses. They should compare such an offering with an option of individually-selected and negotiated components. This effort may be worthwhile for some.

5. Hosted applications
Although the most common way to use a business application is to license it for in-house deployment, hosting is fast becoming popular. Though CRM (customer relationship management) is the most popular hosted solution, hosted accounting and payroll solutions are also available. Hosting allows SMBs to reduce the risk and up-front expense. Although vendors claim that their hosted solutions provide applications as services on demand, this is not strictly true. This is because unlike a true utility, price does not vary directly in proportion to usage. Instead, it is proportional to the number of users and remains unchanged for the duration of the contract, unless a firm signs up for more number of users. It is somewhat like a power utility charging its customers for each electrical appliance rather than the quantum of electrical power used. Thus, hosted-solution pricing is flexible upwards and sticky downwards. Therefore, SMBs will do well to be conservative in signing up users at the outset. It is much easier to increase the number of users and usually not possible to reduce it.

6. How many is too many?
SMBs sometimes err on the side of extravagance and buy too many licenses, either due to pressure from the vendor or because they feel overly optimistic about the future. However, the reality is that future is uncertain. Users should not take more licenses, or modules, than they expect to utilize in the next six months. At the same time, they should negotiate locked-in prices for future demand when their business does expand fast enough. Even if you have a firm plan to deploy a certain number of licenses in stages, you may sign up for all the licenses but pay only for as many as you deploy at one time. Vendors are increasingly getting used to receiving payment in stages.

7. Up-front payment versus installments
Some vendors provide an option for users to pay in installments. This is no different from buying a car on hire purchase and therefore the same considerations should apply. When there is less up-front expense, buyers tend to buy more than they otherwise would. Thus, SMBs should scope the project as if they intended to make the payment today and then decide whether they want to pay up front or by installments. They should also factor interest paid in their cost calculations.

By being careful, informed and vigilant about licensing issues, SMBs can significantly reduce their costs on business application projects and drive higher returns on investment.

Pranav Kumar is research director for Enterprise Application Software, Gartner Asia Pacific. He is also a member of the CNETAsia SMB Advisory Board.