software licensing – Evolving ITSM

The Internet of Things has some interesting implications for Software Asset Managers (part 2)

Posted on May 30, 2015May 30, 2015 by Jon Hall

Gartner Projection for Growth in Internet of Things, from 0.9bn in 2009 to 25bn in 2020.

In part one of this blog, I discussed the potential impact of an exponential growth of connected devices, in terms of today’s software licenses.

However, the Internet of Things is already bringing a different licensing challenge. An ever-increasing number of smart devices are being brought to home, street and workplaces. As with many rapid technical revolutions, the focus has been on innovation and market growth. Monetisation has been a secondary concern. Reality, however, has to catch up in time, and now we are seeing a number of blogs and articles (such as this example from Wired’s Jerome Buvat) debating how IoT vendors might actually start to make some money back.

So why does this matter to Software Asset Managers?

In April 2014, Gartner published a research paper, aimed at IoT vendors, entitled “Licensing and Entitlement Management is One of the Keys to Monetizing the Internet of Things“. Its author, Lawrie Wurster, argued strongly that vendors should see IoT devices not so much as hardware assets, but as platforms for software:

“…to secure additional revenue, manufacturers need to recognize the role that embedded software and applications play in the IoT, and they need to monetize this value”

Gartner point out a number of big advantages for vendors:

New offerings can be created with software enhancements, increasing speed to market and removing the expensive retooling of production lines.
A single license can bundle hardware, feature offerings and supporting services such as consulting.
Vendors can create tiered offerings, enabling the customer to start with basic levels of capability, but with the possibility to purchase more advanced features as they mature.
Offerings can be diversified. The vendor can create specific regional offerings, or niche solutions for specialist markets, without needing to manufacture different hardware.

This is not merely analyst speculation, though. It is already happening, and there are already vendors like Flexera helping to enable it. Flexera are a well known name to software asset managers (and my employer, BMC, works in close partnership with them in the SAM space), but another significant part of their business is the provision of licensing frameworks to vendors. This year, they co-published a report with IDC which presented some striking findings from a survey of 172 device vendors

60% of the vendors are already bundling a mixture of device, software and services into licenses:
32% already use software to enable upsold options. More than half will be doing this by 2017.
27% already use a pay-per-use model, charging by the amount of consumption of the software on the devices. A further 22% plan to do so by 2017.
While there are clear advantages, both to vendors and consumers, there is a big unspoken challenge here. With licensing comes the difficulty of license management. This is not something that industry has done well even before the smart device revolution: Billions of dollars are paid annually by enterprises in compliance settlements.

Many ITAM functions depend heavily on automated discovery of software installed and used on devices. However, today’s discovery tools may not adapt to discovering multiple new classes of IP-connected devices. Even when the devices are visible, it may not be easy to detect which licensed options have been purchased and enabled.

Another big challenge might arise from a lack of centralisation. The growth of smart devices will be seen right across the business: in vehicles, facilities, logistics, manufacturing, even on the very products the company itself is selling. With software, the IT department typically had some oversight, although even this has been eroding (SkyHigh Networks, for example, now put the average number of cloud services in an enterprise at over 900… and it’s likely that a significant number of these were bought outside IT’s line of sight). Put bluntly: IT may simply have no mandate to control purchasing of licensed devices.

This puts the IT Asset Management function in an interesting position. Software Asset Management and Hardware Asset Management, traditionally seen as two related but separable personas, are going to converge when it comes to smart devices. More widely, businesses may need guidance and support, to learn the lessons from IT’s previous difficulties in this area, and avoid even greater compliance and cost-sprawl problems in future.

The Internet of Things has some interesting implications for Software Asset Managers (part 1)

Posted on May 27, 2015May 31, 2015 by Jon Hall

The phrase, “the Internet of Things”, is believed to have been coined by a brand manager at Proctor and Gamble. Kevin Ashton, in a 1999 presentation, envisaged an exponential growth of connected devices, as supply chain logistics got smarter.

Today, the Internet of Things is seen as one of the most significant technology trends, with analysts predicting that the number of connected, smart devices will grow to tens of billions over the next few years.

Much of this proliferation will happen in the workplace. For Software Asset Managers, this could have significant implications. The Internet of Things will not merely be a corner case for SAM: it could impact some of the biggest contracts, with key vendors like Oracle.

Oracle’s licensing rules are explained, at some length, in their Software Investment Guide. One commonly-used license type is called “Named-User Plus”. Aimed at “environments where users and/or devices can be easily identified and counted”, the license model is illustrated with the following example:

Here, 15 fixed temperature devices are communicating directly with an Oracle database. There are also 30 forklifts, each of which has a transporter which also writes to the database.

In this case, a total of 415 licenses are required: 15 for the temperature sensors, and 400 for the humans operating the forklifts (because “the forklift is not a non-human-operated device”).

In the past, I’ve used this example, only semi-seriously, to illustrate what might happen if the Internet of Things grows at the speed of the pundits’ projections. Recently, the 2015 Gartner Predicts report for the Internet of Things projected an almost 28-fold growth in connected devices from 2009 to 2020.

The year 2009 is rather pertinent, because Oracle’s forklift example seems to have first appeared in the Software Investment Guide in that year (here’s an example at the Internet Archive).

If we crudely apply the Gartner’s connected growth rate to the number of devices shown in Oracle’s forklift example, there would be well over 1200 connected devices to license by 2020. That’s a trebling of the cost.

I have always laughingly acknowledged this as a crude illustration, until I chanced upon a March 2015 Forbes article titled “The Intelligent Forklift in the Age of the Industrial Internet of Things”:

Today’s “smart” forklift includes diagnostics that allow the equipment to signal when it needs to be serviced, speed controls, anti-slip technology that monitors wheel spin and improve traction on slick floors, collision detection, fork speed optimization, and more.

All of a sudden, my deliberately far-fetched example didn’t seem quite so unlikely.

As always, in Software Asset Management, the challenge is unlikely to be simple or contained. Software Asset Managers deal with many vendors, with many license types. Many of those licenses may depend on counts of connected devices. Many contracts pre-date the Internet of Things, which means costing models are outdated. Unfortunately, that’s unlikely to make the consumer any less liable.

In part 2 of this article, we will look at another major challenge already arising from the Internet of Things: the increasing application of software-style license terms to hardware.

This fascinating KPMG survey reveals the software license auditor’s viewpoint

Posted on December 3, 2013May 27, 2015 by Jon Hall

KPMG survey front cover - "Is unlicensed software hurting your bottom line"

Software licensing audits are a big challenge for IT departments. 65% of respondents to a 2012 Gartner survey reported that they had been audited by at least one software vendor in the past 12 months, a figure which has been on a steady upward trajectory for a number of years.

Often, companies being audited for software compliance will actually deal, at the front-line, with a 3rd party audit provider. One of the big names in this niche is KPMG, whose freely-downloadable November 2013 report, “Is unlicensed software hurting your bottom line?”, provides a very interesting window into the software compliance business.

The report details the results of a survey conducted between February and April 2013, with respondents made up “31 software companies representing more than 50 percent of the revenue in the software industry”.

Revenue is driving software audits

The survey results show, rather conclusively, a belief in the business value of tackling non-compliance:

52% of companies felt that their losses through unlicensed use of software amounted to more than 10% of their revenue.
Almost 90% reported that their compliance program is a source of revenue. For about a tenth, it makes up more than 10% of their overall software revenue. For roughly half, it is at least 4%.

Compliance audits are increasingly seen as a sales process

In more than half of responding organisations, the software compliance function is part of Sales. This is reported as being up from 1 in 3, in an equivalent 2007 survey.
In 2007, 47% of compliance teams were part of the Finance department. This figure has plummeted to just 13%.

This shift is not universal, and some companies seem committed to a non-Sales model for their compliance team. A compliance team member from one major software vendor talked to me about the benefit of this to his role: He can tell the customer he is completely independent of the sales function, and is paid no commission or bonus based on audit findings. Many other vendors, however, structure audits as a fully-commissioned role. As the survey points out:

Only 20% of companies pay no commission to any individuals involved in the compliance process.
In 59% of cases, the commission structure used is the same as the normal sales commission program.

There is further indication of the role of sales in the audit process, in the answers to the question on “settlement philosophy”. More than half of the respondents reported a preference for using audit findings as leverage in a “forward-looking sales approach”, rather than wanting to seek an immediate financial settlement.

Almost half of vendors select audit targets based on profiling

The biggest single selection reason for a compliance review was nomination by the sales account team (53%), with previous account history in close second place (50%).

Interestingly, however, 47% reported selecting customers for review based on “Data analytics suggesting higher risk of non-compliance”, with 7% stating that random selection is used. It seems that audits are still a strong likelihood regardless of an organisation’s actual compliance management.

Auditors prefer their own proprietary tools to customers’ SAM tools

There seems to be a distinct lack of regard for Software Asset Management tools. 42% of respondents seek to use their own discovery scripts in the audit process. Only 26% of the vendors stated that they use customers’ SAM tools, and remarkably this is down from 29% in 2007, when one might expect few SAM tools would have been found on customer sites anyway.

This echoes the experience of a number of customers with whom I have previously spoken, and it can be a real source of annoyance. How, some argue, is it fair that license models are so complex that it takes a secretive proprietary script, only available to the auditor, to perform a definitive deployment count?

Other observations

Software tagging has not been widely adopted: Less than half of respondents do it, or have plans to do so.
SaaS reduces the role of the software auditor. Only 15% reported any compliance issues, and more than half don’t even look for them.
Few companies seek to build protection against overdeployment into their software. From conversations I have had, most seem to want to encourage wide distribution. Some desktop software was deliberately released in a manner that has encouraged wide, almost viral distribution. In at least one case, an acquisition by a larger company has been the trigger for a significant and aggressive audit program, targeting almost every large company on the assumption that the software is likely to be found there.

Conclusions?

It is very clear from the survey results that many large software vendors have established their compliance program as a significant revenue generator, and with a significant shift of these functions into the sales department, we can probably assume that there is a broad intent to maintain or even grow this role.

Whether this is even compatible with a more collaborate model of software compliance management is highly questionable: the business case for the status quo seems very sound, from the vendor’s point of view. With so many vendors only trusting the discovery scripts used by their auditors, the situation for customers is nearly impossible: how can they verify compliance if the only counting tool is in the hand of the vendor?

The light at the end of the tunnel for many customer may be SaaS: SaaS software tends to be more self-policing, and consumption models are often simpler. However, it brings its own challenges: zombie accounts, decentralised purchasing, and a new set of inconsistent consumption models. Meanwhile, hosted software does not go away.