Subscription revenue in the software industry is growing at a much faster rate than perpetual licence revenue, with a five year 2011-2016 growth rate of 17.5 per cent for subscription-based versus four per cent for perpetual, according to research group IDC.
But subscription-based licensing isn’t perhaps all it’s cracked up to be. Indeed, many of the vexing challenges associated with managing the software estate surprisingly still remain with subscription-based software.
Simply because an organisation consumes their software via a subscription-based model doesn’t mean the subscription licences they’ve bought don’t need to be identified, tracked, managed and optimised in the same way as perpetual licence software. And yet many organisations today still seem to be unaware of this.
The allure of renting software
The idea of subscription licensing is of course very appealing. Rather than paying a steep upfront fee for a perpetual licence, companies can simply rent the software. The rental model works for cloud-based, software as a service (SaaS) software and on-premises applications that reside on the organisation’s internal servers. In many cases, the subscription payments are treated as an operating expense (OPEX) rather than a capital expense (CAPEX), which can be easier to obtain budget approval for.
The myths and realities
Subscription licensing is appealing to enterprises for several reasons. First, it reduces initial cost compared to the perpetual licence, as the subscription fees spread payment out across the term of the agreement.
For SaaS-based solutions, the upfront costs diminish further due to reduced set-up time and expense - organisations don’t need to make the investment in infrastructure to host the application on-site or personnel to configure the system. However, it’s important to note this benefit stems from the hosted delivery model, and not the subscription-based fee structure itself.
However, the notion that organisations will ultimately pay less in software fees is a myth. After a certain amount of time, usually three to four years, the subscription costs to enterprises actually begin to exceed those associated with the perpetual model, even taking into account the ongoing annual maintenance costs for perpetual licences.
So organisations that do not eventually swap out the rental agreement for a traditional licence could end up paying more in the long run, a long-term cost for the flexibility built into the subscription model. This may be a very good trade-off for the organisation, but should be considered early on.
Software licence management
Perhaps the greatest confusion around subscription-based licences is in the area of software licence management and software licence optimisation. Many incorrectly believe that issues of shelfware (buying too much software) and non-compliant software use (and the resulting software audit penalties) disappear by moving to a subscription model.
A subscription licence is essentially just a payment plan for access to the software, not to be confused with the delivery model for the software - for instance SaaS versus on-premises. If the software is licensed under a subscription model, organisations must still understand and keep track of the licence metric, which could be named user or some usage-based metric like CPU seconds or number of transactions processed.
In the usage-based metric case, if usage exceeds the agreed-upon metric, the means of enforcement may vary depending on the contract - from denial-of-service (DoS) to a bill for overage (similar to a software licence audit true-up penalty). So organisations still need processes and tools in place to keep track of installations and / or usage and compare that to their licence entitlements to understand whether they are under, over or ‘just right’ in terms of licensing.
Moreover, most organisations will not move exclusively to subscription-based software, which means they will continue to have a mix of subscription and perpetual licences, depending on what makes sense. Accordingly, organisations will need systems and technology in place to manage and optimise the use of this increasingly complicated software mix to ensure they continue to buy (or rent) only what they need, and use what they have.
By the same token, software licence optimisation tools need to evolve to accommodate the new usage-based licence metrics that may be contained in the subscription licensing agreements. This involves new licencing model variants linked to metrics beyond just number and time - such as how the software is being used. This requires new definitions of entitlements and usage and an understanding of patterns of usage on an ongoing basis, and not just a snapshot in time.
Both software vendors and enterprises benefit from more sophisticated software licence management that accommodates subscription models and more unique usage-based models. It ensures a common definition of the ‘truth’ and a mechanism for reporting on usage that both enterprises and vendors can agree upon.
It helps ensure compliance and eliminate shelfware, so that maximum benefit is being received by the customer and appropriate compensation paid to the producer. And these tools ensure better planning and analysis so that enterprises have a more confident picture of the software they need and negotiations for the optimum rate plans can proceed based on better data.
Optimising software assets will continue to be as important in the world of the subscription-based licence as it was when the perpetual licence was king. And for the foreseeable future, most organisations will have to manage both types of software simultaneously. Today the confusion over the variety of software consumption models and what it means to be compliant with licensing terms is indeed still very clouded.