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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

SIDEBAR: A Bitter Aftertaste

How one CIO's experience with Microsoft soured him on subscription licensing

Larry Shutzberg, CIO at packaging maker Rock-Tenn, has bitter memories of the day in May 2001 when Microsoft announced it was changing the way companies would pay for its software. The plan, known as Volume Licensing 6.0, replaced confusing upgrading rules and options with a maintenance plan called Software Assurance (SA). Under the new plan, customers would pay for the original licence and a yearly fee and would be covered for all upgrades. Shutzberg baulked at the new arrangement because, among other things, he calculated he would have to pay an additional 29 percent each year for the desktop software maintenance.

He was not alone. A significant number of CIOs said no to Microsoft that year. Since then, Shutzberg says he has gone "cold turkey", by declining almost all upgrades to Microsoft Office desktop software over the past two years. "The goal is to only upgrade when we absolutely have compelling business drivers," he says.

Microsoft defends its licensing plan and says that it has added to its package, which now has 14 benefits, including training vouchers and home use support. And the company says that up to 35 percent of SA's customers are expected to renew their subscriptions. According to a Microsoft spokesperson, that number is "in line with company expectations". Microsoft also has a wide variety of subscription licensing plans for its software but says customers usually go with perpetual licences.

Shutzberg says he won't be tempted by Licensing 6.0, although he has a good relationship with his Microsoft sales reps, because he dislikes any licensing agreement that charges maintenance fees for Office software. When the time comes to upgrade on Office software, he will negotiate the deal on its own merits. What's more: The experience with Microsoft has soured him on other forms of subscription-based software pricing, at least for the moment. He says he will continue to pay maintenance fees on his perpetual licences for enterprise software "as long as we see value". When a vendor can show him the business case for a subscription licence, he says, then he might be inclined to try it.

Five Tips on Negotiating Subscription Licences

1.If you're new to subscription licensing, start with an application that you plan to use for two to three years.

2.If you plan to use the software for a longer period, negotiate protection from sharp price increases for as long as possible. Try for seven years.

3.Make sure your contract allows for user growth at a reasonable rate.

4.Estimate how long you think you will be using the software, and do the maths to compare costs over the long run with a perpetual licence plus yearly maintenance fees.

5.Start negotiating with your vendor one year before your price protection ends to avoid getting stuck with little time to find a replacement if the subscription price goes way up.

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