SEISMIC SHIFTS IN SOFTWARE LICENSING MODELS: IMPLICATIONS FOR YOUR RENEWALS
Craig Johansen
Sourcing and Vendor Management Consultant
In part one of our series on renewals, we compared a recent software industry shift towards significant, and often unexpected, renewal cost increases to the peril felt in Middle Earth in The Lord of the Rings as Sauron and his armies began a multi-front final assault to find, and secure, the One Ring. Just as Saruman the wizard, previously ally of the humans, Elves, and Dwarves, turned to the dark, so too are vendor salespeople being forced to deliver the message of unreasonably high renewal increases or wholesale changes to the licensing model or metrics, even in cases where the relationship has been long and strong and such increases have not previously been imposed. Fortunately, like the heroes in the story, you have a path towards protecting yourself from the darkness. Just as the Fellowship of the Ring identified the solution (they had to throw the Ring in the fire of Mount Doom and stave off Sauron’s armies while that happened) and charted their course, we can help guide you on your journey to being protected from unreasonable and unexpected price increases.
If you recall from our first article in this series, we described several different ways we’re seeing vendors unilaterally impose price increases at renewal time. These include using inflation as an excuse to justify unreasonably high year-over-year renewal increases, or when vendors consolidate or acquire one another and claim that the previous fees, or license model, or both are no longer ‘available’ and have been replaced, or when they disguise price increases as license model changes (which just happen to be far more expensive than the previous licensing or fee model). It is on the latter that we’ll focus in this article.
As you likely have seen, software licensing has been evolving for years. In the mid-2000’s, early pioneers started moving to subscription and software-as-a-service (SaaS) licenses from perpetual ones, and by the 2010’s most of the really big players offered subscription models, sometimes exclusively. In May 2018, Gartner predicted that “all new entrants and 80% of historical vendors will offer subscription-based business models.” While I can’t find any firm statistics on the current state of that, as a sourcing and vendor management consultancy, we do a lot of software deals, and certainly the vast majority of new software purchases we negotiate use the subscription/SaaS model. For new purchases, this model can offer advantages over the previously standard perpetual license model. Rather than paying a large upfront perpetual license fee, plus annual support payments in the range of 15-20+%, plus paying the costs and/or bearing the burden of hosting the software, customers pay one fee for their licenses, support and maintenance, and hosting. That provides both parties the benefit of budget/revenue certainty and consistency. However, what happens when you already own those perpetual licenses and the vendor forces you to make the change? (That can make you feel like Gandalf when he went to seek help and advice from his friend and mentor, Saruman, only to be betrayed, attacked and, ultimately, trapped on the top of a tower, alone, cold, and wondering what happens next.)
Such was the experience of one of our Clients at year-end 2023. That Client had licensed key technology under a perpetual license nearly a decade before and had experienced relatively minor year-over-year cost increases for ongoing maintenance support since the initial purchase. The Client was pleased with the technology and the vendor’s technical support, so they had no interest in making a change. The renewal project started out as all renewal projects do…questions were asked, priorities identified and agreed upon, and a strategy developed (yes, even for simple renewals, the process is necessary, and you’ll soon see why. If you are not following a formal renewals process, please contact us about helping you do so). Unfortunately for the Client, it all went off the rails at the first meeting with the vendor when the team was informed that the software vendor was not only no longer offering perpetual licenses (meaning the Client couldn’t buy additional licenses if they needed them), they were also ceasing to offer ongoing maintenance and support on previously contracted perpetual licenses. Instead, the vendor said, ALL vendor software was now being contracted under the annual subscription model. Then, the vendor’s Sales Lead shared his screen to show a proposed 5-year, supposedly great deal on this new licensing model ‘renewal’…a proposal that was almost exactly 5X per year higher than what the Client paid for support the previous year, a nearly $200,000 per year increase. Needless to say, the change in licensing model and resulting cost escalation was shocking news, exacerbated by the fact that it came with absolutely no advance warning, AND after 2024 budgets had been locked in. (Poor Gandalf, just laying up on that tower, trapped. But wait…is that a butterfly?)
After the meeting, the team moved into “damage-control” planning. Given the Client had been doing business with this software vendor for nearly a decade without any prior relationship issues of any kind, the team was hopeful that relationship could be leveraged to negotiate a compromise. Otherwise, the Client had few viable options. It was unlikely they could get the necessary budget variance to pay the exponentially higher fees, nor could they replace the vendor or otherwise stop using the solution.
The result? Just like Gandalf was able to use the butterfly to call the Eagles to come fly him off that tower, so too was this Client able to use their best practices sourcing team to find a solution and get them out of this situation. The team was able to leverage their relationship, along with a multi-year commitment (in this case 5-years…a long time, yes, but given their interest in staying on this solution, it was a relatively easy decision) to persuade the vendor to scrap the huge price increase and, instead, offer a reasonable Year 1 increase that stayed within the Client’s budget, with incremental increases over the remainder of the term that, while increasing the fees more than the Client would have wished, were not entirely unreasonable and were, at the very least, known and expected (and could be budgeted for). The Client was also able to secure ongoing year-over-year price protection, not as low as we typically prefer, but, again, not unreasonable and such that the Client would never again be surprised by this sort of price increase (at least until the next time the vendor decides to change the rules).
The key in these negotiations is that it is imperative that you remember that your perpetual licenses are not without value, even if you’ve owned them a long time. Vendors try to suggest that the subscription model is so beneficial and simple (and, as we said above, it can be) but the subscription model typically includes the cost of license, maintenance and support, and hosting. If you own a perpetual license, you’ve already paid for one of those three, and having to pay for it again renders your investment in that perpetual license…and investment in that software company…moot and obsolete. So you must make sure your pricing for the new subscription model takes into account that investment.
Right now, it is more important than ever to make no assumption that it will be “business as usual” when software or software maintenance renewals come due, even with long-term vendors with whom you enjoy a great relationship (or even a great contract). Start your renewals process early, giving yourself enough time to find out what your vendor may have in mind for the renewal and to pivot, if you have to. To fail to do so leaves you at risk for an unexpected, and potentially very unpleasant, surprise.
See you next time in part three of our series, “Un (Middle) Earthing Savings: How an Ancient Contract Saved $100,000” where we discuss how following a formal Renewals Process can (and did) save you from some of these risks.
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