The State of Software Licensing: The Monetization Playbook

As organizations strive to meet their digital transformation goals to seize new market opportunities and increase their operational effectiveness, they are increasingly using off-the-shelf software and databases in ways not originally envisioned by the products’ developers. Importantly, in some cases, clever organizations are able to significantly increase the business value of their existing software investments without having to pay more.

Software vendors are starting to learn that payment rules of the past are not working as seamlessly as they once were because of rapid advancements in SaaS models, automation, and platform integrations. These usage changes are driving publishers to rewrite licensing rules more regularly to ensure they capitalize fully on the value their solutions deliver.

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End-user organizations need to stay on top of these changes to ensure they are getting the most for their technology investments and not unwittingly introducing more cost into the business or creating a potential compliance risk.

To understand how monetization models will change in this new landscape, we must look at the state of software licensing and monetization as it is now and how technology will work in the future.

State of Software Licensing and Monetization

No matter the industry, business technology is changing at a pace that is unprecedented. Organizations are operating with multiple go-to-market strategies in a wide variety of channels that weren’t known 10 to 15 years ago. In an era of cloud-first (and often cloud-only) enterprise IT, software vendors are reworking their licensing models to capture revenue for not only the direct use of their solutions but also indirect business value (such as when one solution interacts with another, rather than a human user). The goal for vendors is to maximize their license revenues by finding metrics that capture the full worth of the software they provide.

Historic licensing metrics such as per device or even per user are becoming increasingly outdated as businesses change their use of technology, such as issuing multiple devices to employees, integrating their back-end and supply chain systems, adopting business intelligence and analytics platforms, and increasing their use of connected technologies.

Vendors believe that flat-rate licensing plans no longer capture the full business value of their solutions in the scenarios above. Instead, they are looking at new ways to track and monetize the use of their solutions in real-world situations. For example, some vendors are already turning from user and device licensing toward monitoring and billing based on the number of transactions (which can come in all shapes and sizes) processed or records created/edited. The fact that those vendors who have already introduced transaction-based models have met little resistance from customers will be encouraging to others considering similar moves. 

Recently, SAP has announced it is remodeling licensing based on what users are authorized to do, rather than what they actually do. This is complicating how to determine which license type to assign to a user, as for practical reasons, authorization roles are normally not tailored specifically to each individual but to a group of individuals performing a similar function. The upshot is that users tend to be authorized to use more functions than they take advantage of. This will inevitably add to the complexity of SAP licensing and the workload for those charged with managing SAP systems. 

Software publishers are also beginning to realize that some of their customers are using their software in ways that hadn’t been anticipated, especially given the legacy nature of some enterprise applications and databases that were first introduced to market some time ago.  

Even as recently as 5 years ago, many database developers hadn’t fully considered that it might not be a human user accessing the technology. Non-human users (other software, robotic processes, devices) are creating use cases that were not “part of the plan” when many enterprise applications and databases were first launched. In many ways, the organizations’ need to push the boundaries of their technology use has left the software publishers on the back foot, reacting to changes in user behavior and trying to monetize the increased business value that their customers are realizing. 

Assessing the business value of software use can be contentious and is perhaps less clear-cut than other forms of licensing. However, the trend is definitely in this direction, and more vendors will adopt it as both the use cases become more clear (until they change again—many vendors are still ill-prepared for monetizing IoT use cases) and the customers show themselves willing to align their software investments with proven business value. 

As such, there is an onus on the software publishers to work with their customers to identify the business value of their wares. Neither party can work in isolation, as the end-user organizations need the developers to enhance their solutions to accommodate new use cases and the publishers need continued investment to develop those features.

An Ever-Evolving Picture

Today, the predominant licensing metric has shifted from per device to per user. The next logical step is some form of hybrid licensing schema that combines users, transactions, and integrations. This could potentially lead to some kind of “base” license for your organization’s total user base (Active Directory is as good a source for this as you are likely to find), the integrated systems (which will often incorporate “non-human” users or indirect access), and then a “premium” licensing metric (which could be licensed in the form of purchasing up-front “credits” or charge in arrears) based on vendor-defined transactions. 

Ultimately, this will mean that licensing gets more complex. Again. But it also means that end-user organizations should be able to align their software agreements with business values, and even assign portions of the software costs to distinct parts of the business or even defined business processes. This will make it easier for organizations to understand their cost of business down to individual functions and processes, adjusting their investments accordingly. 

To get ahead of the game, CIOs and their teams should start thinking as if they were software publishers and scrutinizing the use of software across the organization. 

Some simple questions to start with might include the following: 

  • How many users do we have (how accurate is our Active Directory?)
  • What software is used widely across the organization and what is role/function specific?
  • What integrations/dependencies do we have that we currently don’t pay for?
  • How do our deployed applications align with core business functions—and what are the key trackable transactions within those functions?
  • What applications do we have that are currently licensed by device or user and how much are we using them and investing in them?

In terms of looking at new applications or renewing licensing agreements with incumbent vendors, again the CIO and their team can take some steps to guard against future surprises:

  • Resist longer-term licensing agreements unless they offer the opportunity to review and right-size (both up and down) at least annually.
  • Gain commitment from the vendor that they will not enforce any new licensing metrics without a pre-agreed notice period.
  • Be transparent about current integrations and use cases in order to avoid surprises later.
  • Agree what business information/transaction records you will provide (or access you will provide) to the software publisher to determine the cost of transaction-based licensing fees.

What’s Ahead

Without the aid of a crystal ball, it’s difficult to say exactly where software licensing is headed, but it is safe to say that we can expect to see multi-layered agreements that take into account multiple metrics and require greater cooperation between customer and vendor.

And this means that, ultimately, the end-user organization will need to take more care (not less) in managing its use of software and tracking its contribution to the business. Managing software investments needs to become part of the organization’s overall governance and risk management functions. It’s no longer about managing software purely to avoid compliance risk. In the future, managing software will become central to the process of ensuring that the organization is operating efficiently, taking full advantage of the technology at its disposal, and supporting core business functions.


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