Microsoft is unveiling some of the biggest changes to its business technology since the launch of Windows 95, including a new operating system, applications and devices designed for the era of social media, touch screens and mobility. But when it comes to the perpetual-license business model that governs the sale of that technology, CIOs should be aware that Microsoft is hewing to tradition, enforcing the terms of its complex licensing plans to squeeze additional revenue out of its larger customers.
Industry experts say Microsoft has been checking up on its customers’ software usage more vigorously than ever. The company declined to comment on the number of audits it undertakes each year.
Microsoft’s licensing scheme is highly complex. Often, it is based on the number of customer devices or users. But there are a handful of other license variations, including per-processor licenses for managing server software products. Virtualization, in which companies run multiple instances of an operating system on a single computer, further complicates licensing volume. “It’s like tax accounting; there are very arcane rules and IT folks have to deal with it,” said Directions on Microsoft CEO Rob Horwitz, who spent eight years at Microsoft in technical and marketing roles and now conducts boot camps to teach customers about Microsoft’s licensing processes.
The onus is ultimately on the CIO to ensure that the company is licensed correctly. And the multi-layered licensing scheme, coupled with the fact there is nothing built into the software to alert CIOs when they are overusing software, often leads to confusion. Sometimes, CIOs purchase licenses for software that is already included in the price of other Microsoft bundles. CIOs also sometimes discover that they need to pay more—the result of a “true-up” process, a sort of self-audit for mid to large-size business customers.
Want to publish your own articles on DistilINFO Publications?
Send us an email, we will get in touch with you.
Michael Harte, CIO and group executive of enterprise services at Microsoft customer Commonwealth Bank of Australia, said he had a hard time ascertaining how much Microsoft software his bank actually used. “I have looked at our consumption on an individual basis and we struggle to see how much of the services are used. And what is more, it is hard to see how true value is created,” Harte said. ”If Google could provide true alternative enterprise apps in the cloud I would switch today.”
He compared the true-up process to a hotel that charges people for products that aren’t used. “It’s like as if you bought the hotel for a year, then the hotel charges for the rooms and then charges for all the services on top in an additional bundle – the mini bar, soaps and cosmetics and extras even if you don’t use them,” said Harte. “And then turning around at the end of the year and charging you for having extra people in the rooms.”
During the true-up process, customers report that they have licenses for all of their desktops, processors and users. For example, a company that owns 900 Windows licenses but finds it has installed 1,100 instances on its corporate equipment will owe Microsoft for an additional 200 installations, said Jon Winsett, CEO of NPI Financial, which helps IT leaders navigate contract negotiations with major software makers such as Microsoft, SAP and Oracle. This is true even if the Microsoft software covered under the license isn’t being used on all 1,100 PCs. But CIOs often miss those details prior to the true-up, and become upset when they realize they have to pay for software that no one is using. “Microsoft is geared to find where their customers are over-installed and subsequently able to charge hefty true-up fees,” said Winsett.
“They’re really going after this market much more aggressively,” said Joshua Greenbaum, principal analyst with Enterprise Applications Consulting, an independent software consulting firm. He added that Microsoft appears to be following the lead of SAP, Oracle and IBM in making sure the largest businesses pay everything they owe. “I think Microsoft is being consistent with the industry in really saying ‘we’re going to get every dollar out of these guys.’”
Some CIOs who are already responsible for true-ups through their contract with Microsoft say the company is also recommending they participate in a “software asset management” engagement, which is a voluntary, informal audit. During such an engagement, a Microsoft consulting partner such as CDW pores over the customer’s Microsoft software assets to make sure it is paying for every software installation. The audits can be time-consuming. Land O’ Lakes CIO Barry Libenson said the engagement he endured five years ago when he was the CIO at Ingersoll-Rand was a big distraction. “I had to assign several people pretty much full time for a couple of weeks to help with the audit and ensure we found all the license information we had,” he said.
One CIO, who earlier this year received such a letter from a Microsoft partner inviting him to one of these engagements, said the subtext of the letter was “we’d really like you to do this.” If a CIO declines the voluntary audit, Microsoft could serve the customer with a more formal audit demand said the CIO, who declined to go on record because he is negotiating a licensing renewal with Microsoft. “What is troubling as a CIO is that the main reason for having an enterprise agreement with Microsoft is to simplify a true-up process so you don’t have the time and expense of conducting audits with Microsoft,” said the CIO.
“We understand that managing an enterprise’s IT inventory can be time-consuming process,” a Microsoft spokesperson said. “Microsoft provides free tools and best practices to help our customers simplify their licensing management and optimize for emerging trends, including virtualization, mobility and more.”
Sometimes the software licensing engagement can be beneficial to customers. Sean O’Mahoney, vice president and senior manager of technology services at Republic Bank & Trust Company, said that his bank saved about $5,000 on Microsoft products that it had licensed but were not longer in use after CDW conducted a SAM engagement in 2010. He also said the SAM engagement was an opportunity to have a second set of eyes “to make sure we were paying for what we were using and that we were using things we were paying for.”
Microsoft is not the only company vexing CIOs with its software licensing rules. Earlier this year, CIOs complained about what they perceived as exorbitant software maintenance fees from Oracle. Customers also said SAP was becoming more aggressive enforcing its software policies.
But Constellation Research analyst Ray Wang, who has worked on approximately 1,200 contract negotiations between vendors and clients, said he has been hearing more complaints about Microsoft of late, which he attributed to soft sales at Microsoft as the company battled the effects of flat Windows PC sales, and to purchasing delays by customers in anticipation of Windows 8, which is expected to launch this October. At times like this, true-ups and audits can help Microsoft get more revenue from their customers.
To avoid overpaying for software, Wang recommends companies do their own audits before they go into renewal negotiations with Microsoft. That may be timely advice as CIOs start to shape upgrade plans for Windows 8 and Office 2013, which will launch next year. “That way, you have the upper edge,” said Wang.