Key Trends in Software Licensing

FindLaw

By Andrew Zangrilli

On September 21, 2006 the Information Technology Association of America (ITAA) and Fenwick & West LLP hosted a seminar on the key trends in software licensing. Speakers from many different areas of industry congregated to discuss their impressions of the current software market with a specific focus on licensing aspects.

General Licensing Trends and Preferences among Enterprise Organizations

Ray Wang, a senior analyst at Forrester Research discussed contemporary trends among enterprise licensing. Wang's research discovered that enterprises are generally dissatisfied with software vendor offerings. To support this general tenet, he identified the following specific trends:

Enterprises have the greatest dissatisfaction with the named-user model in software licensing.

Very large and global enterprises seek an “all you can drink” license model.

User-based pricing trumps usage based license model in terms of preference.

Companies are taking action against the rising cost of software by improving shelfware management.
Virtualization technology, which allows a single machine to run multiple operating systems at once, is gaining appeal.

These trends apply across all types of software, including desktop, networking, security, backup, and web applications.

In light of the recent enterprise trends, Wang identified a few ways that software and Software as a Service ("SaaS") vendors can respond, including:

Limit upgrades. Show value in the IP being provided to the enterprise, because there are a lot of associated costs for the customer each time an upgrade has to be implemented, such as customization, integration, testing and downtime costs.
Offer vendor financing. Due to a variety of economic factors, this payment option is becoming popular.

Selling Open Source Software

Christopher Howden, Director of Pricing, Buying Programs & Business Analysis at Novell, spoke on his company's experience selling Open Source software. He posed the following question: What do you sell when selling Open Source?

His answer: You’re selling support, insurance, indemnity, warranty. You’re selling reliability.

“Open Source software,” Howden remarked, “is similar to information in the public domain.” Everyone can access the code. The value of the product/service is not in the code, but in the warranty.

Thus, the main challenge facing Open Source companies, Howden concluded, is how to provide value in the warranty, be it via Service Level Agreement, technical support, or indemnification. Essentially, these contractual terms are the products.

Legal Trends in Enterprise Licensing

Two attorney speakers presented at the ITAA conference. Stephen Gillespie of Fenwick & West discussed Enterprise Software Licensing from a Legal Perspective. David Schellhase, General Counsel for salesforce.com and author of The Corporate Law Department Handbook, spoke on a panel with other software company representatives on SaaS terms of service.

Speed Is (Almost) Everything in SaaS

For Schellhase and others, speed is critical. “Speed” in the context of software licensing means having a quick turnaround during the procurement process. It also means removing friction from service agreements.

Why is speed important? Shellhase stated that one of his company’s main objectives is to take market share away from competitors. "Speed helps this happen."

Chris Kenney, Vice President of Avolent, an e-invoicing systems vendor, stated that the ability to rapidly push and close contracts is essential for SaaS companies.

Ken Boasso, Principal, Keychain Logic, echoed this sentiment with his point that SaaS vendors should make a short contract part of their go-to-market plan. “Keep them simple.” Boasso counseled against using a hardware or perpetual software license when crafting a SaaS agreement. Instead, look to other technology service contracts, such as telecommunications services for a model.

The Service Level Agreement

The concept and viability of the Service Level Agreement (SLA) was a topic of recurring topic of discussion at the seminar. Schellhase believes that SLAs are on an outward trend. He pointed out that a vendor will never offer an SLA that they can’t meet. Ostensibly, SLAs are somewhat useless because they will rarely, if ever, be breached by the vendor.

Ken Boasso spoke in favor of the Service Level Agreement. He believes that an SLA should be clearly identified in the service contract. Vendors should carefully explain what they are guaranteeing. For example, does “uptime” include regularly scheduled maintenance windows? Is it measured by day, month, or some other metric? Also, he cautioned against including business terms in the SLA. “Make these service level agreements strictly legal in nature.”

Katherine Jones, Director of Marketing at NetSuite, a hosted SaaS solutions provider, also stood behind the concept of the SLA. Her customers have demanded assurances on service, and in response, NetSuite provides a 99.5% uptime service level guarantee, one of the highest in the industry.

Andrew H. Zangrilli is an attorney and Senior Producer in the Sunnyvale office of Thomson FindLaw.

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