Storage apps: Lease or buy?

Conventional belief holds that leasing saves money in the long run. But in the case of storage-based software, organizations doing so could end up paying twice the cost of purchase, according to Meta Group's Rob Schafer.

Organizations leasing storage-based software could end up paying twice the cost of purchase.

With storage software costs projected to exceed that of storage hardware during the next two to three years, IT organizations must apply asset management disciplines to the growing software components of storage.

Specifically, users who lease the software component of storage subsystems could end up repeatedly paying for the same licensed software capacity, significantly inflating the cost of storage software (see Figure 1: The hidden costs of leasing storage).

In a purchase scenario, users should accrue licensed software capacity as part of a growing enterprise asset base. Indeed, when a storage subsystem is purchased, the associated software is typically acquired under a perpetual license (IBM is an exception to this, a competitive disadvantage that we believe it will correct within 12 months-see side bar).

Therefore, unlike the underlying hardware that is usually refreshed every three to four years, the purchased software license should remain an IT organization's asset in perpetuity. Contrast this to the scenario of leasing the software associated with a storage subsystem. In this case, the IT organization must rebuy the same software license capacity with each new lease cycle. For example, at lease expiration, the licensed software capacity is returned with the underlying hardware.

Lease or buy?
Often, IT organizations that are replacing a purchased storage subsystem unknowingly throw away the accumulated software license assets that come with it.

In such cases, the IT organization fails to question the vendor, which is only too willing to significantly enhance the new procurement's revenue yield and profitability by ignoring the purchased software capacity of the system being replaced.

Moreover, we have also seen, though more rarely, some vendors trying to charge a "transfer fee" for the privilege of preserving the accumulated software license capacity on the new hardware. Such artificial fees can be as high as US$50,000 and should be firmly rejected.

Figure 1 illustrates a comparison of the software financing implications when IT organizations lease and purchase storage software.

The example takes a representative sample of EMC software (e.g., ControlCenter package, Symmetrix Optimizer, TimeFinder, SRDF, SAN Manager) configured on a typical subsystem. The IT organization approaching end of term on a 21TB system (e.g., the DMX 1,000) requires an additional 16TB of net new capacity. The acquisition of the new 37TB system is evaluated under the following lease and purchase financing scenarios:

  • Purchase: The compelling advantage of purchasing storage-based software assets derives from the benefits of their perpetual license. The purchase example outlined in Figure 1 shows that the IT organization is obligated to pay only for a five-tier license upgrade from 21TB to 37TB (assumes a 40 percent license discount). Annual software maintenance costs are typically 15 percent of the net 37TB Tier 19 license, and are calculated here over three years, minus a negotiated 12-month warranty on the five-tier 16TB net capacity upgrade.

  • Lease: Under the lease financing scenario, the storage assets being retired (both hardware and software) typically revert to the leasing party at end of term. Although the IT Organization loses little in hardware residual value equity versus the purchase case most storage hardware has minimal wholesale value after three years, it fails to benefit from the accumulation of software license equity.
The IT organization that leases its storage software licenses-typically financed at full payout-will inevitably and continually rebuy/finance its growing capacity base. Indeed, the consequences of this important financing distinction are in effect compounded with each asset refresh cycle which is typically three to four years.

Therefore, in the previous example, as long as the user continues to lease software, the capacity license for the original 27TB of software will be repurchased and financed with each new refresh cycle.

IT organizations for whith lease financing should negotiate contractual retention of the accrued benefits of the perpetual software license. This can be done by separating the financing of hardware from software. They can also purchase or negotiate perpetual rights for the procurement's software license component.

The bottomline
IT departments that lease storage software can face significantly higher long-term costs than those that accrue software license capacity through purchase. Storage-based licenses must be considered and managed in order to lower incremental infrastructure costs and create a leaner, more responsive IT organization.

No perpetual license from IBM--yet
IBM's Enterprise Storage Server (ESS) effectively has no perpetual license structure, regardless of financing. The two previous ESS models, E and F, had advanced function software (e.g. FlashCopy, PPRC, XRC, PAV) feature codes associated directly with the hardware model itself.

With the ESS model 800, IBM took a first step toward distinguishing its storage-based software from the hardware on which it runs, by introducing a separate model type (the 2240). However, each 2240 is still uniquely tied to a specific ESS 2105-800 serial number and is not transferable between machines (e.g. from an older E or F model to an 800 or between 800s).

Thus, as each ESS serial number frame is replaced, the user is technically obligated to rebuy the license to any existing advanced function software.

Our research indicates that, in reality, this gross license fee is often negotiated down to a prorated net capacity increase--similar to the purchase case in Figure 1. Although this does provide the essence of license transferability, it is a cumbersome manual system that is too dependent on the user's negotiating leverage. Nonetheless, we believe this is a first step in IBM's transition to treating its storage-based advanced function as the software it is.

Indeed, we project IBM will offer perpetual licenses for its ESS advanced function by early 2005, matching its standard terms for Tivoli storage software.

Rob Schafer is the program director of enterprise data center strategies for Meta Group.