Total Cost of Ownership and Return on Investment model for Software Licensing

Total Cost of Ownership and Return on Investment model for Software Licensing A discussion document about the real costs, risks and issues associated with Software License Management solutions. Designed to assist in business decisions about internal development and 3rd party vendor selection. Written by: Jon Gillespie-Brown, CEO, Nalpeiron

contents 3 4-6 7-10 In today s economy, Software ISVs are suffering from variable demand, tighter operational controls and shirinking IT budgets and resources Evaluate the TCO of the various options in choosing a Software Licensing Vendor including comparing the costs of in-house and outsourced options A detailed review of the associated and hidden costs of a Software License Management System 11 12 13 A look at just some of the reasons that customers have chosen Nalpeiron over our competitors The Nalpeiron Licensing Service has been built so you can deploy it fast, with everything you need out of the box Remove the distractions of trying to beat casual software theft and your team can get on with making the best software on the planet. Sources: IDC Research, Gartner Research, Software CEO and LinkedIn forums, Proformative, NetSuite, Sand Hill Group, Intacct 2

The shifting economic climate In today s economy, Software ISVs are suffering from variable demand, tighter operational controls and shrinking IT budgets and resources, prompting them to look for aggressive ways to cut costs and make their IT operations more efficient. ISVs today face profitability challenges from both internal and external sources. Factors such as variable market demand, rampant piracy, new business models and increased competitive pressures cause huge stresses on your business and cost the industry billions of dollars each year. At the same time, your customers are demanding new ways of managing, understanding reporting on software licensing usage. This in turn pressurizes ISVs to offer new flexible business models such as usage, subscription and software as a service to meet customer needs. hardware, but also indirect costs, such as software asset management, desktop administration and end-user support. In addition, there are many soft costs that need to be factored in when considering the licensing landscape such as revenue recovery from piracy or overuse, competitive issues and speed to market along with simple opportunity costs from developing in-house licensing vs. outsourcing. Software ISVs that embed software in the products using hard-coded licensing terms and inflexible pricing models have are having real difficulty responding to these changing market demands. One implication of shrinking resources is that it has never been more timely or critical to understand the Total Cost of Ownership ( TCO ) of software purchases. A TCO analysis helps an organization understand and manage the many inter-related direct and indirect costs involved in managing and licensing a ISVs Software Assets. A thorough analysis considers not only direct costs, such as software licenses, maintenance, and required 3

A TCO Comparison The purpose of this paper is to help readers evaluate the TCO of the various options in choosing a Software Licensing Vendor including comparing the costs of in-house and other outsourced options vs. the hosted Nalpeiron Software Licensing Service. It will provide readers with a guideline for developing a TCO comparison that will help them determine which model is the best financial and strategic value for their application licensing needs both near-term and longer-term. TCO Expense Areas To compare the TCO of the traditional Software License Management vendor and In-house development with Nalpeiron Licensing Service, there are three main expense areas and additional strategic costs to be considered: Capital Expenses Operating Expenses End-User Expenses Other soft costs The following are the qualitative descriptions for each of these three areas. Capital Expenses Software Licenses Direct costs for software license purchases, per user and/or per workstation, CPU, server, etc. Software maintenance Traditional annual maintenance costs for acquired software. Software maintenance costs are estimated at 25% of the original purchase price per year for a three-year period. New Hardware Purchase costs for new hardware. Hardware maintenance All costs associated with acquiring and maintaining hardware servers and other infrastructure components necessary to deploy, maintain, and manage the software. Hardware maintenance costs are estimated at 25% of the original purchase price per year for a three-year period. IT software Includes all the software needed to run and maintain the IT systems. One important point is that when considering the investment required for building a platform internally, publishers often underestimate the cost unless they have already tried this approach. Source: IDC 4

Operating Expenses Tier 1-3 support IT and Help Desk Operations associated with Tier 1-3 support. Security Costs associated with keeping the applications and data secure. Desktop management Costs to manage the desktop operations, including: The savvy CxO will want to bridge the future rather than jump in and take the massive risks associated with changing business models. License Allocation/Provisioning administrative costs associated with allocating, de-allocating, and re-allocating licenses as project and staffing needs evolve. Compliance administrative costs related to license compliance: inventory, internal & external communication, true-ups, etc. Administration FTEs and hours dedicated to deploying and administering the system, including the cost of packaging and deploying the software, and keeping it current with the latest updates. Also include costs for unscheduled maintenance and outage recovery of systems. Management FTE costs to evaluate and acquire new software as well as managing upgrades and vendors. This includes: Evaluation cost of searching for the right software, conducting the requisite due diligence on vendors and products and comparing candidate solutions, vetting vendors and products with corporate architecture standards, etc. Procurement costs of processing an order, including negotiating a contract (legal), budgeting, order processing, accounting, etc. Vendor Management costs related to the initiation and ongoing cultivation of a vendor relationship, including administrative, legal, and operational: managing contracts, maintaining approved vendor lists, adapting to each vendor s support procedures, etc. Budgeting Costs to optimize allocation of new licenses and licenses under maintenance to projects, departments, and business units. Also includes the cost of making special purchases outside of standard budgetary cycles. User & IT Training Costs of ensuring that the personnel responsible for managing the software are equipped with the right knowledge. This primarily includes the groups responsible for first-tier support within the organization (Help Desk) and those groups responsible for deploying the software. Disposal Costs to dispose of systems. /Continued on the next page. Benefits of using SAAS software survey This means mixing old and new licensing systems, and the need for a careful research project on what works for existing and new customers as well as the organization as a whole. As a first step to the future, one option is to switch your licensing to a SaaS provider so that you can start to see the benefits of Saas yourselves! This may seem obvious but many CxO s don t even know that they can stop using outdated, inflexible and extremely costly in-house or legacy software licensing technologies as these have become so embedded in their older processes. 5

End User (Internal) Expenses End-user training Cost of user training. (Noting that a proper training plan will ensure that the various benefits primarily productivity that result from training substantially outweigh the direct and indirect costs of training.) Fixing Costs associated with support, trouble-shooting, and fixing applications. This relates primarily to custom applications, where the company is responsible for maintaining its own software. This area is where the productivity benefits of software tooling are counted, together with the time spent troubleshooting software configuration issues in the tools themselves, which tends to increase with the number of tools and vendors. Downtime Cost of downtime, including considerations for: Time costs of lost productivity while software evaluation, license allocation, and other parts of the process are taking place. Other Inefficiencies companies often pay a great deal for each tool, but are not able to maximize its use for a variety of reasons, including sub-optimal or infrequent use. Summary other forms of Costs Opportunity costs These can be very large indeed, but very hard to easily calculate. Indeed, these are really about strategic thinking behind focusing on core competency and growing that way rather being a jack of all trades. There are some easy to show hard costs like engineers dedicated to the licensing but this category should also include how well you could do if you avoided non-core activity. Speed to market costs This breaks into several areas; one is the time it takes for your own team or an outsourced one to respond to your initial requirements and then any changes in market needs. When considering outsourcing you need to consider the on-premise vs. hosted models as relates to speed along with the initial setup times these vary wildly and increase PS costs significantly. For your internal development there is not only the fact you are likely to have limited resources to make changes, they can also slow down the business as you wait for licensing work to complete a big downside to competitiveness. Piracy and security costs These relate to your markets and customers and could be very high if you are working with the consumer/international or very low if you are mainly US enterprise focused. A look at the audience will help judge this but in general outsourced vendors have far better technology for protection and show anywhere up to 10% revenue gains if piracy is an issue. Build versus buy decisions often come down to cost. Either approach is going to require an investment. Oftentimes, the decision comes down to whether it makes more sense to continue spending money on maintaining a homegrown system or outdated product that isn't meeting the need, or if investing in a thirdparty solution that meets current and future needs is a better approach Source: IDC 6

Detailed review of the associated costs for a Software License Management system Capital Expenses Software License solution cost Using the Nalpeiron Licensing Service switches the high perpetual % revenue based costs of others to a lower annual operational cost. Those costs are also fixed and transparent vs. the constantly increasing % costs of the competition. Software Maintenance & Updates All the costs for maintenance and updates are included in the annual fee structure of a hosted service saving a large % cost of the license fee. On-premise solutions require ongoing maintenance and those costs are usually over 18% of the initial system cost. Database licenses Licensing servers run on databases such as SQL server and Oracle, you will need to provide for these license costs unless you use a hosted service where this cost is included. Again saving $10Ks per year. Installation & Training In the first instance your engineers will need training and installation professional services to take delivery of the licensing system if it s an on premise based solution. Nalpeiron s solution is easy to use and cloud based so very little training is required. There is no associated training fee. Development costs If you choose to build your own solution, you will need the above costs plus the time and cost of internal development. This is usually in the region of $250-500,000 for the initial cost for an enterprise solution. New Hardware No need for a capital expense for new hardware (servers, switches, firewalls, load balancers etc.), all of which you will need with competing on premise solutions. These costs can easily run $100K per year. This also removes this cost from your users and the overhead on your own sale costs making you more competitive. Project Consulting Expenses Most on premise solutions require some 3 months of planning, consulting and related professional service costs, often adding 30%+ to the base costs of the licensing solution, often over $100K. 7

Operating Expenses IT and Help Desk operations support costs Supporting your own or a 3rd party licensing solution has ongoing costs. The great benefit of a hosted, easy to use system like Nalpeiron is this cost is reduced significantly due to lack of hardware or software required it s all in the cloud and available 24x7x365. Desktop Management and Administration Costs associated with deploying, provisioning, reprovisioning, inventory tracking and license compliance efforts can be surprisingly high. Once again the basic concept of a hosted service is that is removes this complexity and has the added benefit of being always up to date (with no need for staff to install updates and patches) and its scalable on demand. Software License Management This can be a complex and demanding task to manage the licensing of your own and then your end users licenses. Nalpeiron removes this headache by providing instant analytics and reporting for both you and your users licensing and time you need it with a simple button click. Internal User and IT Training Nalpeiron uses a simple and standard API across platforms and technologies making the internal user training overhead as low as possible and far easier than competitor s solutions. The same goes for your end users, our one click processes make end users lives easy and the UX is in 8 languages. Data center costs (Bandwidth, backup, etc) If you choose to host your own or a competitive solution you need to consider the costs associated with a data center as well as your own staff. These can easily run $100K per year per server install. All included in the Nalpeiron hosted service. User Management Expenses End-user Training & Support Nalpeiron uses a simple and standard API across platforms and technologies making user training overhead as low as possible and far easier than competitor s solutions. The Nalpeiron one click processes make end users lives easy and the UX is in 8 languages. Additionally, your end users get access to a variety of self-service materials helping to reduce costs associated with end-user training. End user license support The Nalpeiron hosted service has been designed to be the most user-friendly solution today offering two offline and self-service methods for licensing radically reducing user license costs that are generally far higher than the solution cost itself. Additionally, Nalpeiron provides you with a call center UX so you do not need to develop an internal system for your own staff to manage your users. Fixing Nalpeiron relieves internal staff with the constant need for fixing your internal licensing solution; we do that for you, freeing your staff to focus on your core products. This is especially important with licensing as the environment is hostile and crackers are a constant drain on resources to counter their activity. Downtime Cloud software architectures are designed from the ground up for maximum network performance, so they frequently deliver better application-level availability than conventional, on-premise solutions. 8

Other forms of Costs Opportunity costs ISVs grow revenue and stay competitive by delivering new features and functionality to meet customer demands. When ISVs dedicate technical staff resources to development of an in-house licensing system, they can drain their core development efforts and delay time to market for new products. Most likely, any money perceived as saved by building a software licensing solution internally will be more than offset by the diversion of key resources away from the core business. The best way to optimize productivity is to keep development resources focused right where they should be: on differentiating products in the marketplace. These lost opportunity costs are the highest of all, often running into $M s. In addition, Competitive Differentiation Costs relative to a home grown solution can be hard to measure but also critical to the business. Piracy and security costs Rampant piracy and unlicensed use cost the industry billions of dollars every year, making this one of the top challenges that technology companies face. The Business Software Alliance estimates that worldwide $30 billion worth of software is pirated annually, with rates in the U.S. and Western Europe estimated at 23 percent and 36 percent, respectively. Piracy tactics are constantly becoming more and more advanced, requiring vendors to stay continuously on top of their anti-piracy measures. Remaining abreast of current piracy methods, protecting against them, keeping in-house licensing systems updated and legally enforcing compliance can add considerably to the piracy-related expenses, which can be a significant hit to the bottom line. Nalpeiron customers who have switched from homegrown licensing have reported gains of 10% of revenues or more. Speed to market costs In today s highly competitive market speed is of paramount importance, delays to projects mean delays in revenues. Worse, they drive up costs and open the market to competitors you need to get your best products in the customer s hands as fast as possible. Many things cause delays - don t let one of those is the non-core activity of licensing that is often left to the end of the project and has inherent risks of internal staff failing to deliver or leaving with their expertise and holding the rest of the development team up. Also, the difference between a premise-based license solution and a hosted one is usually more than 3 months of additional time lag and extra professional services cost. With a home grown solution you will likely be losing the flexibility to respond on a dime to market/customer demands to be able to flexibly price & package your products the way the end users want to buy them and this means losing the leverage to beat out the competition. Using outsourced licensing gives you the ability compete more effectively and removes the lost opportunity cost. A software publisher's understanding of its core competencies with regards to building and maintaining a licensing technology platform is often a key driver in the build versus buy decision. Some publishers may believe that since the company's core business is developing software, this capability can and should be extended to software-based licensing technologies. Executives at other publishers may come to the conclusion that although developing software is a core competency, developing and maintaining a platform of licensing technologies is not. Source: IDC 9

TCO worksheet to compare costs of various options Capital Expenses Software License Solution Software Maintenance & updates Internal Costs Internal development costs and support Internal development costs and support 3rd party vendor 1-2% revenues New hardware $100K+? $100K? % of license fee Database licenses $10-100K? 1-2% revenues Installation & Training N/A % of license fee Project Consulting Expenses N/A % of license fee Development Costs $250-500K+? N/A Operating Expenses IT and Help Desk operations support costs Desktop Management and Administration Software License Management Internal Costs 3rd party vendor Nalpeiron Fixed based on product subscriptions Included No costs No costs Not required Not required No costs for licensing Nalpeiron Very low Very low Very low Conclusion While it s hard to quantify every cost in this simple analysis this documents purpose is to highlight the very many often overlooked costs associated with selecting the most cost effective path. It s often tempting as a Software ISV to consider building the non-core licensing functionality yourself when looking to control your Software assets. In many ways it appears to make sense, you are an expert in Software development and this is an important part of your product requirements. However, often many of the issues of building in-house are overlooked. In particular the costs and business risks are under estimated according to Gartner. In our estimation any internal development project will cost $250-500,000 per year if you include all the engineering, support, licensing, server and related support costs vs. outsourcing usually at a fraction of this cost. If you discount an internal build and look to find a vendor then these considerations may help you choose between the options. Internal User and IT Training Very low Data center costs (Bandwidth, backup, etc) $100K+? p/year N/A Not required User Management Expenses Internal Costs 3rd party vendor End-user Training & Support, poor offline support and user technology Downtime End user License Support Fixing $100K+? p/year N/A Other forms of costs Internal Costs 3rd party vendor Opportunity costs Very high No costs Speed to market costs Very high, old technology Piracy and security costs Variable, 10-40% loss >10% revenue Nalpeiron Very low, easy to use, lots of offline and cloud based options 99.999% uptime Very low N/A Nalpeiron No costs No costs >10% revenue Since adding the Nalpeiron protection we have experienced a 15% growth in international markets, 8-10% of which we attribute to having the Nalpeiron protection in place. Thomson Reuters 10

Just some of the reasons that customers have chosen Nalpeiron over our competitors... Technically superior In many cases our Customers simply find our platform offers a far superior technical solution to their needs. NLS covers all major platforms, 8 languages, an extensive API to connect everything and totally flexible way to sell and manage your software. Nalpeiron offers a faster ROI Saving engineering, operational and capital costs over an in-house or competitive solution usually shows ROI in months not years. Our hosted solution also offers a transparent and cost effective pricing plan. Nalpeiron drives revenue As well as offering the obvious means to control licenses and boost revenue that way, Nalpeiron also offers a complete range of marketing tools that focus sales on hot leads, offer product marketing useful reporting and allows marketing to create new sales from automated systems to tap revenue leakage and more. Modern way to license your software Nalpeiron offers you the choice to outsource all of the difficult and expensive infrastructure associated with licensing; this is the modern way to run a Software ISV, allowing you to focus on your core business while Nalpeiron hosts the licensing. 11

Our 20 year Software Licensing Industry pedigree Nalpeiron was the first to offer a cross platform, cloud-based, licensing service that allowed our Customers to remove the need for all the costs, time and hassles of setting up their own licensing infrastructure. Today we have expanded our offering to encompass not only basic licensing but also extensive marketing and reporting functions that add even more value to our Customer s business - driving new revenues from Software Copy Protection, trial optimization, piracy revenue recovery and sales tools. To be clear, the Nalpeiron Software Licensing Service is a pure cloud-based solution. This means first of all your customers software activations are taking place and being kept securely in the cloud, freeing you from the cost and hassle of server deployment and its associated on-going maintenance overheads to your business. Not only this but all your access and control is done anytime, anywhere, by your staff via an intuitive web-based user interface. The same goes for your reseller channel and end user support, no need for you to setup or maintain any of these important services. About Nalpeiron Nalpeiron was the first to offer a cross platform, cloud-based, licensing service that allowed our Customers to remove the need for all the costs, time and hassles of setting up their own licensing infrastructure. At the time outsourcing to hosted services like ours was in its infancy and we lead the charge to lowering costs and speeding time to market for Software ISVs. Nalpeiron today leads the way not only advanced cloud based licensing but also in extensive marketing and reporting features that drive revenue growth for our customers like nothing else available. Nalpeiron has also spent years with millions of end users perfecting the most robust but user friendly activation process available today it offers users ease of use and access to their records, while offering you the ISV the lowest operational costs. With 100 s of Software ISVs, large and small, across the world we are the partner of choice for anyone looking for modern licensing solutions in the cloud. Nalpeiron is a privately held corporation based in the US and the UK. Nalpeiron was responsive, professional and fully understood business and enterprise software requirements. What would have taken three weeks for our previous licensing provider to achieve is taking Nalpeiron one day....it is no coincidence that the Nalpeiron Licensing Service is the choice of 100s software developers worldwide including Reuters, Unisys, Symantec, Zebra and Texas Instruments. John Safa Development Director. SDL PLC 12

Why use a Cloud-based Licensing Solution? Nalpeiron Software Licensing has been built so you can deploy it fast, with everything you need out of the box, so you can transition as painlessly as possible and start reaping the benefits right away. As it s a hosted license management service, you don t have to worry about the time, cost and hassle of server deployment nor the complexity of connecting the client/server architecture. With outsourcing your non-core activities like Software Licensing come many benefits. Now you can remove the distractions of trying to beat casual software theft and your team can get on with making the best software on the planet. Focus your R&D resources on what they do best, leave targeted marketing of trial users, licensing, activation and license management to Nalpeiron. All the benefits of a hosted cloud-based solution: Rapid time to value: The Nalpeiron Licensing Service lets you get up and running quickly. The suite provides multiple editions, pre-packaged reports and dashboards, free source code, and a out-of-the-box solution based on 20 years of industry experience. No need to setup, deploy, manage or maintain licensing servers. You can be up and running within days not months. Bullet-proof security: The Nalpeiron Licensing Service Cloud provides an industry leading security infrastructure for ensuring physical security, data encryption, and application security. Subscription-based pricing: Pay as you go, on an annual basis, unlike conventional systems where you have to make a major up-front investment in licenses, hardware and software. You benefit from better cash flow and far greater IT flexibility. Focus on your competency: No need to keep up with the crackers and hackers, or the constant technology changes - let Nalpeiron take the burden of software licensing, freeing you to focus on your business instead. Lower risk: Licensing is integral to the success of your Software business and therefore getting the right supplier to support your long term objectives is critical to reducing risk to your business. Nalpeiron reduces the risks of licensing staff leaving and lack of in-house licensing agility. Low cost and time overhead: Lower capital costs and switching CAPEX to OPEX to smooth the cash flow requirements. No need to keep expensive resources in house for non-core functions. Upgrades, maintenance and system administration take place in the cloud and are managed by Nalpeiron, so you don t have to spend nights or weekends supervising a new version upgrade or a failed server. High availability: Cloud software architectures are designed from the ground up for maximum network performance, so they frequently deliver better application-level availability than conventional, on-premise solutions. High performance: Supporting millions of users and 100 s world class clients Nalpeiron s cloud licensing architecture delivers virtually unlimited performance scalability. There are practically no limits to how many users you can have or the number of licenses that can be activated. Ease of access at anytime, and from anywhere: Cloud computing is always on, making it easy to grow your business and support remote workers and locations, or support a highly mobile sales or service team, because people can access the cloud any time, day or night, from any browser, desktop or mobile device. You, your distribution channel and your end users can all access the service 24x7x365, anywhere in the world. Measure and report license activation and usage: Get a clear picture of the products and features actually being activated and used. Use the extensive business intelligence tools to get an edge over the competition, analyze metrics and performance. 13

Want to know more? Don t hesitate. Get in touch... Toll free:+1-888-800-8818 (US only) Who s using us? www.nalpeiron.com +1-650-799-3479 (Canada/World) +44-207-788-7843 (EMEA) +1-650-352-9046 (Fax) USA Nalpeiron Inc 2225 E. Bayshore Road Suite 200 Palo Alto CA 94303 EMEA Nalpeiron Ltd 2nd Floor 145-157 St John Street London EC1V 4PY UK What is the Nalpeiron Software Licensing Service? The Nalpeiron Licensing Service is a comprehensive platform that enables software publishers to create a range of flexible ways to sell and market their software, with coverage for all the major platforms and the ability to choose whether to deploy software licensing infrastructure in the cloud or on-premise. Nalpeiron is one of the strongest and most robust complete solutions on the market that supports millions of end users with strong but friendly ways to monetize your software.