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How to Optimize your Microsoft Licensing Agreement

August 24, 2008

Software licenses are one of the largest expense items in a CIO’s budget and, if improperly
managed, can create extraordinary legal liabilities. With this in mind, it is essential that IT decision-makers optimize software licenses to minimize cost, simplify management, and achieve

For most IT decision-makers, Microsoft licensing is opaque, poorly understood, and sub-optimized. I believe that the
majority of companies are not realizing maximum value from Microsoft licensing programs. Specifically, purchasers are
spending more on licensing than necessary because they are:

* Not selecting the appropriate Volume Licensing agreement.
* Selecting licensing options without fully understanding them.
* Making license purchases at sub-optimal times.
* Paying for licenses that go unused.
* Incurring unnecessary compliance-related fines.

Optimizing Microsoft licensing can unlock significant value. The purpose of this post is to deal specifically with these critical issues and to help IT decision-makers penetrate the fog of uncertainty surrounding Microsoft licensing. It will give them confidence that they are making solid licensing decisions, minimizing costs, and maintaining compliance.

Understand Microsoft Licensing

The six-step process begins with “Understand Microsoft Licensing.” Microsoft’s licensing programs are complex and come with a variety of options, restrictions, and conditions. This opening section reduces complexity and helps managers become familiar with the different Microsoft licensing programs and terminology. Managers are introduced to Software Assurance (SA) options, a detailed comparison of agreement types, and sample pricing information.
Achieving clarity on Volume Licensing will help managers achieve significant costs savings. Volume Licensing prices for various Microsoft products decline to almost 50% of the Manufacturer’s Suggested Retail Price (MSRP) with certain programs. Most companies will qualify for at least some portion of these incremental savings.
Note: While the majority of information is universally applicable, this report has been compiled primarily for corporate entities. Microsoft also offers unique non-disclosed agreements to non-profit, educational, and private sector organizations. Since these pricing schemes are not in the public domain, they will not be addressed within the scope of this report.

Audit Microsoft Licenses

This section helps managers become confident in their license compliance and Software Asset Management (SAM) processes. It helps outline the total number of licenses owned versus licenses deployed to ensure compliance.

Prudent license and software management reduces the risk of costly compliance-related penalties as well as optimizing software deployments to reduce licensing costs. For mid-sized companies, this can easily translate into tens of thousands of dollars in savings. For large enterprises, the savings can be dramatically higher. Specific topic areas include:
• Calculating the cost of failing an audit. There are two types of audits that a company may face, defined as the Watchdog Audit and the Microsoft Audit. Companies that do not cooperate with Watchdog Audits can be sued for copyright infringement reaching up to $150,000 per unauthorized software title in the U.S. and up to $20,000 per title in Canada. There is no limit to copyright penalties in the U.K. Looking at a real-life example; in July 2005, the U.S. division of the BSA fined seven Illinois businesses a combined total of $580,000 for unlicensed software.
• Developing a risk mitigation strategy for license non-compliance. Best practices for mitigating compliance-related risks include conducting a self-audit, investing in a SAM solution, and avoidi ng common licensing errors. My analysis shows that the cost of failing a Watchdog Audit can be almost eight times the cost of maintaining compliance through self audits. Consider the example of a typical mid-sized company with Windows XP clients, Microsoft Office, and Windows servers. Even if less than 10% of this software is unlicensed, a company could end up paying in excess of $145,000 in legal penalties, fines, audit costs, and licenses for illegal copies. For large enterprises, the cost can soar to many times this figure.
• Building a business case for SAM. For most companies, the ROI of a SAM implementation will exceed 30% and can easily reach 50% or more. The majority of the underlying cost savings come from improving software usage, reducing the risk of non-compliance, and improving software administration. SAM can help uncover thousands of dollars of unused software. In one example, a large North American consumer products company was overpaying for licenses by approximately $100,000 on a 100-user LAN. For companies with thousands of users, the potential savings ca n be dramatically higher.

Streamline Microsoft Licenses

Companies should not be paying for licenses that they do not need. “Streamline Microsoft Licenses” identifies areas of opportunity in existing Microsoft agreements. It helps companies understand the financial tradeoffs involved in making key licensing decisions. It also shows managers how to save money by trimming unnecessary licenses and adjusting purchasing plans to produce more favorable cash flow scenarios.
Spreading licensing payments over time helps with budgeting and improves cash flow. It also saves companies money. Based on a simple Net Present Value analysis, these savings can easily reach 10% of a company’s total licensing cost.
Leveraging software usage data for strategic initiatives can also save tens to hundreds of thousands of dollars. Some key oppo rtunities include:
• Reducing the number of images supported by IT staff. For companies with over 2,000 PCs, the annual cost of managing a single image can reach up to $100,000.
• Harvesting and reallocating unused licenses. Avoid buying new licenses by finding and redeploying currently unused copies of software.
• Basing purchasing decisions on a business analysis of technology needs and required functionality. Users spend 80% of their time using just a handful of applications. Maximize the return on development initiatives by focusing on software programs that are used the most.
• Improving software use policies. Combat unregulated software usage by managing user rights and making sure that all employees understand and sign the company’s software installation/usage policy.

Plan a License Migration

“Plan a License Migration” helps companies develop multi-year product migration plans that account for the organization’s needs, Microsoft’s projected technology roadmap, product support lifecycles, and other critical factors, managers will be asked to consider the following salient points:
• Key planning assumptions help frame migration decisions. To determine future needs, consult historical data and develop a set of KPAs (Key Planning Assumptions) related to growth, hardware and software longevity, incident support, and the number of unique user groups.
• The decision of when to upgrade software cannot be made in a vacuum. The typical tradeoff with
respect to software upgrades is whether to hold off deployment to optimize the lifecycle of a product or to keep all products up-to-date as new releases become available. Key factors to consider include the ROI of SA, the cost of upgrading, access to new functionality, and end-user requirements.
• Companies should not upgrade unnecessarily. Two important factors to consider are the value added by new functionality, and productivity losses caused by outdated software. In some cases, a “skip version” strategy may be more appropriate.
• Software upgrade paths are linked to support lifecycles. As support incidents increase in frequency, so too does the business case for upgrading. Microsoft’s mainstream support ends after five years, and extended incident support can be an expensive alternative.
Evaluate Licensing Options
Looking at the various tables and multitude of Volume Licensing options presented thus far can be overwhelming. “Evaluate Licensing Options” helps simplify the decision-making process. This section assesses the ROI of SA, reviews and quantifies the value of various options, takes a closer look at CAL licensing, and helps select an overall licensing plan for new software purchases.
• Assess the value of SA. Before signing up for SA, determine if it makes financial sense. In addition to hard ROI figures, try to measure the qualitative benefits of SA. One important factor to consider is the myth of the 3.5-year software lifecycle. Many analysts take for granted the generally accepted estimate of 3.5 years as the approximate breakeven point for Microsoft’s current SA program. My analysis, however, shows that while this may be true for some applications, the real breakeven on SA is closer to 4.5 years, a considerable difference. Taking some of the soft benefits of SA into consideration, the breakeven timeframe could be even longer.
• Select a Volume Licensing plan. Eligibility requirements, software upgrade and migration plans, the company’s growth projections, and the overall IT strategy will help determine what Volume License agreement is appropriate.
• Decide how CALs should be licensed. CALs (Client Access Licenses) can add up to one of the
larger expenditures within a licensing agreement. This section outlines some of the options available within CAL licensing and helps decision-makers decide what makes the most sense for their organization.

Implement a Licensing Strategy

“Implement a Licensing Strategy” is the final section of this post. It summarizes the analysis conducted in previous sections and provides a set of best practices for license negotiations. Formalize the company’s licensing strategy by re-evaluating and finalizing key decisions such as:
• Which licensing program to choose.
• Whether or not to subscribe to SA.
• How to structure migration plans.
• How to arrange license purchasing and administration.
• When to schedule self-audits.
• Whether or not to employ SAM tools.

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