IDC Outlines 10 Software Licensing Policies Every Vendor Should Consider 

Software vendors have historically negotiated custom exceptions to software licensing terms and conditions to accommodate customer needs and demands. However, the proliferation of customer use cases that challenge existing licensing practices, such as virtualization, software as a service (SaaS), and cloud computing, suggests that the time has come for software vendors to move toward a more uniform licensing structure that can be applied across customer segments and even across products. To accommodate such a move, International Data Corporation (IDC) has identified 10 software licensing policies that address the scenarios most commonly handled via custom agreements.

“In general, custom licenses created on the fly have been done in the spirit of what is good for the account executive (and his/her manager) in that specific case at that specific time, as opposed to what is good for the company over time,” said Amy Konary, research director, Software Pricing, Licensing, and Delivery. “Now is the time to change this practice. A coherent policy that allows software vendors to clearly communicate its business practices, terms and conditions, and underlying rationale to their customers is increasingly becoming a competitive differentiator. Public articulation of customer-friendly licensing practices not only sends the message that the vendor is listening to customer concerns, but challenges competitors to offer a similar level of transparency.”

The benefits of having clear policies in place where custom licensing arrangements have been the norm include: shorter, more efficient sales cycles; less time spent inventing new terms; reduced contract administration and cost; reduced opportunity for error; and the ability to create a strategy for addressing important issues that impact the way software is licensed that works for the vendor from a profitability perspective while addressing the needs of the customer.

The 10 “must-have” policies that every vendor should consider to address the most pressing and prevalent customer needs are:

1. Subscription: Almost every software vendor does some subscription pricing, a large portion of which is custom. Although creating a subscription pricing policy will not be easy, it is possible and, increasingly, a competitive necessity.

2. Virtualized Environments: A very large number of software vendors have made no changes to their licensing policy in light of virtualization. Vendors need a strategy, and ideally a policy, to address the proliferation of virtual machines in the customer environment.

3. Service Provider Licensing Agreement: As more and more customers turn to SaaS firms or other service providers for their business application needs, software vendors need to develop or refine their licensing policies to address the provision of their software by service providers.

4. Disaster Recovery Rights: A range of disaster recovery policy options are needed to address everything from customers running software for mission-critical tasks to customers that need a cold (ie, not running) backup for unexpected situations.

5. Buying Programs: Buying programs should be designed to help simplify the software purchase process for customers by including consistent messaging and discounting, a common membership available through any channel, and detailed volume license certificates.

6. OEM Programs: Many vendors have built strong businesses around selling components to other vendors, and this portion of the total software industry continues to post strong growth rates. As pricing and payment strategies start to change, vendors would do well to develop guidelines for measuring success, roles and responsibilities, and operating principles.

7. Pay-per-Use Licensing: Pay-per-use (PPM) licensing software pricing provides customers with an annuity license model where cost is based on metered use of a software resource. Before a vendor can offer the granularity of PPU packaging and pricing, it must first develop a metric for per-use measurement that closely aligns with how and why customers use the software.

8. Global Licensing Policy: Software vendors maintain a delicate balance between offering a competitive price at the outset and meeting discount expectations, which can be very steep in certain cultures. Periodic review of list and net prices by a central body, combined with a review of exchange rates and local prices, are crucial to maintaining price stability and consistency.

9. IP Indemnification: Past IDC research has shown that, while many vendors consider indemnification a basic customer obligation, it isn’t always clearly stated. Proper indemnification can help a client limit or eliminate litigation concerns while still allowing the customer to embrace a broad range of software.

10. Licensing Communications: The industry is moving toward more transparency in licensing and pricing. As licensing has become a competitive differentiator, licensing communications has become an important tool for vendors to help customers understand policy and the rationale behind it, as well as to challenge competitors to match customer-friendly policies.

The IDC study, Policy is the Best Policy: Ten Software Licensing Policies Every ISV Should Consider (IDC #222495), makes the case for developing licensing policy for customer situations that are typically handled on a one-off custom basis. Ten software licensing policies are identified that many ISVs handle via custom arrangements.

To download a free copy of this IDC report, go to http://www.idc.com/research/swlicensing.jsp.