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A Better Software Procurement Model: Consumption-Based Licensing

Earlier this month Central Technology Services was a sponsor at Gartner Group’s 2018 IT Sourcing, Procurement, Vendor & Asset Management Summit in Orlando. Fourteen hundred delegates, 45 analysts and 30+ vendors attended 100+ sessions focused on smart software procurement, improved vendor management, more effective negotiations, software asset management and increased financial transparency.

 While the Summit was divided into multiple streams, IT Financial Management was of particular interest to the 100+ who attended “Managing the Shift from CapEx to OpEx”. In an audience poll, over 80% indicated they work in OpEx constrained organizations. We’re not surprised. Why? Higher OpEx = lower EBITDA.  According to Grant Thornton’s 2016 Financial Executive Compensation Survey 2016, in private companies EBITDA is the single highest executive performance measure influencing variable compensation. At 39%, more executives are measured by EBITDA than achieving company objectives (37%) or share price (12%).1

How do OpEx constraints impact your folks who purchase and use enterprise software? Well, today’s technology and software environment features flat budgets and more complexity.

  • Budgets may be flat but enterprise software spend will grow by 23% 2015-2018.
  • Cloud may generate the buzz but legacy products still represent the bulk of software spend. According to Gartner, by 2022 cloud and subscription licensing combined will still account for less than one-half of your total software spend.
  • Traditional enterprise software acquisition is built on EBITDA-friendly CapEx models, whereas subscription licensing consists entirely of OpEx service fees, which puts pressure on operating budgets and potentially executive compensation.
  • And, as we know, your software vendor is focused on maximizing immediate revenue, often at the expense of understanding your budget, finance and accounting drivers.

Is it any wonder over 60% of customers want more flexible licensing and deployment options? The problem of course is that despite the evolution in software functionality, what hasn’t changed are your licensing options.

Want the flexibility of periodic purchasing without committing to volume buys due to extended implementation periods? Of course, who doesn’t? The trade-off is significantly higher unit costs, as much as 50% more than a volume buy.  Behind door number two, you’re willing to pull the trigger on a bulk buy to get a lower unit cost, but your budget takes an immediate hit for product that will take months, maybe quarters to roll-out.  

Behind door number three there is an alternative… consumption-based licensing. It combines the  lower unit costs offered by volume purchases with the deployment flexibility and the OpEx treatment of periodic purchasing. With no increase in Total Cost of Ownership (TCO). For twenty years and almost $1B in business, Central Technology Services has provided creative licensing solutions for Fortune-class enterprise customers in the United States and Canada.  

 How does consumption-based licensing work? You pick your software vendor and negotiate as usual, we act only as your licensing partner. Ask us to work with your IT or corporate finance people to build a financial model based on your actual deal parameters. In complex environments with lengthy roll-outs our customers regularly save over 25% in year one OpEx with no increase in TCO compared to your best vendor offer. Having worked with over 45 software publishers across perpetual license, subscription and cloud there’s a good chance we have an alliance partnership with your target vendor and can combine the pricing and licensing flexibility you want with the deal-size and revenue recognition your vendor wants.

The benefits are immediate: 

  • Unit pricing is optimized. You win with the lowest unit price possible
  • Spend is staggered to match your implementation schedule
  • Costs are aligned to business strategy and the timing of value delivered
  • Budgets are smoothed to match your deployment schedule
  • OpEx management is improved ( maybe EBITDA too )

Optimized license spend. Better OpEx management. Tighter TCO control. Central Technology Services (www.centralts.com) is expert at assisting Fortune companies and their vendors manage the financial, operational and budgetary issues associated with acquiring enterprise software. Call or email us to learn more.  

1 Grant Thornton 2016 Financial Executive Compensation Survey - 2016

 

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