Five lock-in traps to avoid when buying software

The software industry, with its high stakes and low barriers to market entry, is particularly vulnerable to "lock-in" tactics on the part of vendors.

At many levels of the enterprise stack such as the database or app server, there has been arguably little innovation for some years, and yet software vendors still manage to find excuses to bill customers for such technologies as though they were at the cutting edge.

Linus Lai, associate director of research and consulting at IDC, believed it was only natural that an innovator attempted to squeeze the most profits they can out of any competitive advantage for as long as possible.

"It is in the nature for vendors to want to lock in their customers and make it as difficult as possible for them to move elsewhere," he said.

"The barriers to market entry for software [are] very low - anyone can develop software and cheaply. So whether it be Oracle or Microsoft spending hundreds of millions of dollars every year on advertising, or some lock-in around licensing, there is a strong incentive to create barriers in the market. You have to make sure the customer will resist from switching for as long as possible."

Buyers of technology will always be prepared to accept a trade off between lock-in and the functionality of the product, but only "if they value the functionality enough," Lai said.

But he warned vendors that they can only hold onto competitive advantage "for a time."

"Technologies tend to become more open as the competition catches up," he said. "Users will demand interoperability and less lock-in."

Technology buyers have to look at every purchase in terms of this trade off. Is the software you are set to invest in an innovation or a well-marketed commodity?

Over the coming pages we examine five lock-in traps to help you avoid becoming a victim of vendor marketing.

5. AVOID EXTENSIONS THAT ARE VENDOR-SPECIFIC

Inevitably when purchasing enterprise software, customers are attracted to the core functionality of the product but are often tempted to invest further into the stack by purchasing extensions - other modules that offer more specific functionality or a vertical application of the built-in smarts.

These extensions, however, tend to deviate from agreed industry-wide standards - making it far more difficult for users to swap in and out any given component of the stack - both from a technology and licensing perspective.

Lai believed it stood to reason that any data stored in application extensions be "migratable."

"Any proprietary extensions need to be of a nature that you can still export the data, even if only as a CSV or text file," he said.

Jason Leonidas, vice president of sales and services at open source software vendor Ingres, said that nearly all the major software vendors offered additional functionality in extensions that were vendor-specific.

"Oracle, for example, has some SQL extensions that are not standard," he said. "The problem for users is that you can rarely demarcate where you move from a standard piece of functionality into a non-standard extension."

Leonidas said that the Eclipse Foundation was now working on a system in the Eclipse development tool to warn developers whilst they are coding whenever they deviate into non-standard processes.

Lai said he also expected the proprietary extension issue to be resolved somewhat by the development of software as a service (SaaS) business models.

"The question being asked of these new players is: how can I export my data if I want to end this agreement? So in order to attract customers, most SaaS now offer the ability to export a text or CSV file of your data, with the basic database format intact."

Read on for more...

4. WATCH FOR 'TRANSFER OF OWNERSHIP' OR EARLY EXIT FEES

It was important to look for clauses within any software contract that related to how a merger, acquisition or change of company name might affect software licensing.

Some software contracts limited or prohibited transfer of ownership of a software license, and most charged hefty transfer of ownership fees.

While it was rare, Leonidas claimed to have seen numerous examples of companies being caught out with inflexible contracts and "downright greedy actions" on the part of vendors.

"When negotiating software deals, if you get sold or bought out, or if you acquire, or if you merely change your company name, your software can become a poison pill," he said.

Leonidas claimed to know of two major US banks burned by such clauses - with the company being acquired asked to pay an exit fee and the acquiring party simultaneously asked to purchase new licenses for the merged entity.

Various State Governments in Australia have enacted legislation to protect merging departments from being charged exit fees, and the scuttlebutt in Canberra was that new Commonwealth legislation aimed at consumer contracts, which takes aim at unreasonable exit fees, may be extended to include business contracts in future.

Read on for more...

3. DON'T INVEST TOO FAR INTO ONE VENDOR'S STACK

The prevailing 'lock-in' technique of the major software vendors IBM, Microsoft and Oracle was to offer a vertical software stack with everything from the hardware to the application tied together and tuned for performance.

Oracle, for example, had achieved the final pieces of this stack after the acquisitions of Sun Microsystems and BEA. It could now offer organisations the ability to run an application built using Oracle's JDeveloper on the Oracle-owned BEA app server, which in turn is atop an Oracle database, running on Oracle-owned Sun hardware.

IBM, meanwhile, bought out Rational Software for the development of applications on a stack that includes the WebSphere App server, the DB2 database and AIX operating system. Microsoft does much the same using the integrated stack of Visual Studio development tools, the .NET web server, Microsoft SQL Server and the Windows 2008 server operating system.

Invest too far into the stack, and your ability as a buyer to negotiate became far more difficult if not impossible.

It was what IBRS analyst Joe Sweeney called the "art of creeping commitment."

Sweeney was putting the "final touches" on a study into the means by which software vendors "block out other vendors in the marketplace."

"You can start to become, for example, an all-Microsoft or all-IBM shop," he said.

While all the major enterprise software vendors used the tactic, Sweeney said that when organisations purchased Microsoft technologies in particular, "they don't realise they are paying for much more functionality than they are likely to use."

He believed Microsoft offered this additional functionality to start the organisation down the path of choosing Microsoft for their next project, without realising some of the costs they would have to face as a result.

"There are often cross-licensing ramifications when you use one tool that then impacts the other licenses within your organisation - which you need to upgrade," he said.

For example, Sweeney said he had one client who was interested in developing a business intelligence strategy, not realising that some of the required technology was already available via the SharePoint tool the organisation was otherwise using for collaboration.

"Once they spec'd out what they wanted, they realised that they only had Standard Microsoft Client Access Licenses, rather than Enterprise Licenses," he said. "They had to upgrade to Enterprise [licenses] to use the business intelligence tools effectively."

Microsoft's electronic forms suite InfoPath, as a further example, required an upgrade from the Ultimate license of Microsoft to the Enterprise license.

The tactic "increased an organisation's overall licensing costs incrementally," Sweeney said.

To counter Sweeney's argument, some would also argue that an integrated stack was worth the lock-in if it saved on maintenance and integration costs.

"Yes, you do get a lot of additional functionality going for a holistic vendor stack approach, and that is often cheaper than choosing the best of breed," Sweeney conceded.

But if a buyer was to have any flexibility or negotiating power in terms of software licensing, it was important to develop and maintain their environment such that these pieces remained distinct - ensuring that levels of the stack could be swapped in or out should they not be getting a good deal.

One mistake enterprise users often made was putting business logic (data) at the app server level - when all data should reside in the database. Lai recommended keeping separate the application stack and the data.

"It's basic IT discipline," he said.

Read on for more...

2. CONSIDER THE IMPACT OF VIRTUALISATION AND OTHER NEW TECHNOLOGIES

Software vendors will often charge a premium for using their wares within virtualisation platforms or using multi-core processing, or even for having multiple companies represented within a single database.

It's vitally important to take a thorough look at any software contract to ensure the terms and conditions don't limit your organisation's ability to adopt new and innovative technologies.

"Virtualisation is an absolute nightmare for software vendors," Sweeney said. "There is a tension emerging between what vendors want and what users expect."

Sweeney said many software vendors were still struggling to move beyond 1980's-era licensing schemes of "one program on one box".

Pricing for most Microsoft enterprise software, meanwhile, was currently based on devices accessing a service. This clashed with the ideals of the "internet generation", Sweeney said, which wanted to be charged on a "per use" rather than "per device" basis.

Sweeney said the per device model came with complications.

"Let's say you have 3000 desktops on a fleet, running an OEM version of Windows XP with Office installed," Sweeney said. "But you have 200 Program Managers amongst your staff that also need to use Microsoft Project and Visio.

"You could install a Citrix client such that those 200 can access that software no matter what machine they are on. How many licenses of Visio and Project do you need? Not 200, says Microsoft, but as many as the devices they could potentially access that software from!"

The licensing scenario was complicated further should the organisation also invest in purchasing "home rights" for use of that software under Microsoft's software assurance licensing schema.

"As soon as you have VPN access into those tools, there is another device which officially Microsoft expects a license for," Sweeney said.

Read on for the number one...

1. DON'T STOP AT LIST-PRICE DISCOUNTS

The natural instinct for buyers is to seek discounts, knowing that a competitive market for a relatively commoditised product should warrant a lower price.

But Lai warned that a discount on the list-price of software delivered very little value in the long-run unless the Total Cost of Ownership (TCO) of the solution was considered.

Even when a discount was offered, maintenance and support were often offered at list prices rather than at the discounted rate.

"The one that stands out for me is negotiating discounts on software," said Lai. "The vendors will usually give a discount on the upfront cost, but the annual maintenance fee is anywhere between 17 and 20 percent on top every year.

"And that is where the software vendor makes its discount back. Indeed, that is where some software companies make the largest amount of their revenue.

"Look up the annual reports of the likes of Oracle, you will find that more revenue comes from maintenance than from software licenses."

The problem for users, Lai said, was that "maintenance is the last thing on your mind when you are buying software licenses.

"You need to make sure you get the same quantum of discounts on maintenance as you do on the upfront price," he said. "The question you need to ask is - can I get that same discount on my maintenance?"

Many organisations also found it difficult to wind back their investments on software licenses during leaner times. While the vendor was only too happy to push prices up when the customer hired staff, often there was no flexibility to move prices in the other direction.

"You never get in a situation where you tell your software vendor, I reduced my headcount by ten percent, I'd like to pay ten percent less," said Emma McGrattan, senior vice president of engineering at Ingres.  "They find some way of jamming it up."

While legal resources were often scarce among mid-market organisations in particular, the key to negotiating any software deal was to realise that you can negotiate on far more than price 

"You can negotiate discounts on support, or to stop the clock when it comes to certain issues," Sweeney said. "You can negotiate free mobility extensions should you want to expand that functionality to mobile devices in the future. You can negotiate additional training for staff members."

"Put short, you can negotiate on everything."

Any glaring omissions or oversights? What other traps should buyers watch out for? Comment below...