While subscription licensing offers certain advantages, beware unforeseen price increases down the road.

READER ROI

• How subscription licensing can save money in the short term
• Ways to protect yourself from price increases
• When subscriptions don't make sense

Two years ago, Whole Foods Market CIO Mike Clifford surveyed the software landscape with a sense of dread. He knew he had to replace his ageing home-grown data warehousing systems and do a better job of connecting inventory information from Whole Foods stores across the US. Like most CIOs in his position, he was on the lookout for the best deal and fit for his company. But he didn't want to go the usual route: tough negotiations leading to a million-dollar deal to buy the software code outright. He was tired of the typical software pricing and licensing agreements that can trap customers into lengthy deployments and saddle them with hefty maintenance and consulting fees. "I find the pay-in-advance software licensing approach appalling," says Clifford.

Instead, Clifford negotiated a subscription deal with retail software vendor Retek last year, for which he pays a yearly fee and is expected to renew only if he is satisfied. Clifford admits that, in the long run, he may not save money with his subscription licence. But if he isn't happy with the software, he is free to walk away. "The savings are huge on the risk side," he says. And he adds that the vendor is more responsive and eager to get a new system up and running quickly, knowing that the renewal is dependent on the initial performance. (Retek has since agreed to be bought by Oracle.)

Clifford is capitalizing on a gradual shift in the way that enterprise software is being sold. Enterprise software vendors that have long sold their wares via the perpetual licence (in which the customer buys and forever owns the software code and signs up for yearly maintenance and support for an added 15 percent to 20 percent of the licence fee) are increasingly experimenting with pricing and licensing schemes that allow customers to subscribe for a limited period of time. The subscription model, which includes "utility" (or "pay-per-use") agreements and hosted service deals, allows customers to rent software with a low up-front cost and then pay on an ongoing basis. If the fee is not paid, the software will be unplugged. The "on-demand" approach emerged to prevent some of the software blunders of recent years, in which corporations made large bets on ERP and CRM systems that ultimately failed. It can also provide a welcome choice for CIOs who want to try software for a short period of time.

But the new opportunities also bring added challenges. CIOs need to protect themselves against the unforeseen price increases that often accompany subscription licence deals. If customers aren't careful to negotiate protection against steep price jumps, they could end up with ballooning software costs. CIOs also need to predict usage patterns carefully, since the price tag on some subscription deals can suddenly rise if usage unexpectedly increases. And while subscription licensing is saving money and aggravation for some CIOs, it isn't for everyone. Subscription fees paid year after year may create a greater financial burden than a hefty up-front payment if a company ends up using the software for 10 years or more. In order to get the best deals as new licensing and pricing options proliferate, CIOs need to analyze the financial benefits, calculate the expected time frame for the IT investment and work with their CFOs to make sure they are choosing the right model.

"With no killer apps on the horizon, the percentage of software vendors offering this type of model is going to grow," says Amy Konary, software pricing, licensing and delivery analyst at IDC. "CIOs need to be prepared."