Aligning Business Models And Technology Architectures Ore Dev Conference 2008

Aligning Business Models and Technology Architectures Luke Hohmann CEO, Enthiosys Feb 27, 2008

Founder/CEO of Enthiosys

Agile product management consulting

Customer needs, roadmaps, business model

Product management mentoring and training

Agile product guy

VP Bus Dev (Aladdin), VP Eng &Product Dev’t (Aurigin), VP Systems Eng (EDS Fleet Services)

Board of Agile A’liance

Author, speaker, blogger

“ Innovation Games”

“ Beyond Software Architecture”

“ Journey of the Software Professional”

agile PM blog at www.Enthiosys.com

About Luke Hohmann

Agenda

Great products make money

An overview of business issues

Seven ways software generate revenue

Understanding licensing

Implementing enforcement

Additional areas of potential impact

A Reminder…

Consider reading each slide with the following preamble:

My architecture might fail

{ to achieve its objectives | in the long run }

if I fail to { choose | specify | create } { the | a }

issue that we’re talking about…

Some Key Business Issues

Business Models

Licensing

Portability

Deployment architecture

Integration

Installation

Upgrade

Performance

Configuration parameters

Log files

Not exhaustive…

Business Model Framework

A framework of interrelated choices that help you create offerings that provide maximum value.

Customer ROI Model Quantifies Return Enforcement Protection of Rights Licensing Terms and Conditions of Use Type of Value Exchange The way you make money Profit Engine Causes More Money Making Events Customer Value Analysis Identifies Value Pricing How much money you make

Value Exchange Models

The way money is exchanged

Multiple types of value exchange can co-exist in the same product e.g., txn fees and “optional modules”

OEM / In-licenses may create potential incompatibilities

Core Value Exchange Models

Time-based access

Transaction

Meter

Percentage of revenue gained / costs saved

Hardware

Service

Data / Content

Charity?

Time-Based Access

Grant “right to use” for a defined period of time (even if you don’t actually use)

Perpetual (like Microsoft Windows)

Annual (like many ERP)

Rental

Subscription

Pay After Use...

Transaction

Transactions: Measurable units of work

Exchange of money is always tied to the transaction but value (and price) is often associated with an attribute

Duration of a phone call

Time of day call is made

To whom the call is made

Meter

Constraining a well-defined resource

Consuming a well-defined resource

Concurrent (e.g., concurrent user)

Identifiable resource (e.g., named user)

Consumptive (e.g., you have 100 hours)

Hardware

Associate the amount charged for the software with some element of hardware

Software anti-piracy dongles – you pay for both the dongle and the license SDK/run-time

Huge challenge: software becomes “free”, especially in embedded software

Home appliances: microwave ovens

Information appliances: router/VPN server

Consumer electronics

Service

The exchange of money is tied to a service; software is required to provide the service or is intimately related to the service

Symantec: anti-virus updates

AOL: email

Red Hat: Linux-related services such as support or upgrades

Often associated with subscription pricing

Revenue Obtained / Cost Saved

Charge based on revenue obtained or costs saved, often in terms of percentages

Retail yield management

ServiceSource, with annual revenue between $25M - $50M, says it receives compensation based on the revenue it generates for its clients and charges no consulting, training or implementation fees, or ongoing management costs. - June 29, 2005, San Jose Mercury News

Data / Content

The software creates unique data/content

The exchange of value provides access to these data

FICO scores

re-processed government data (patents, TIGER/Line® files)

Often associated with subscription pricing

A Smattering of Examples... Transaction Fee: Flat or % of some defined txn Visa, BEA (when used in an ASP) Perpetual License: Upfront fee + 15-22% annual maintenance ERP Annual License: Yearly License, must be renewed ERP, MSFT Per-user, Concurrent, & Named User ERP Per-CPU (Hardware) MSFT, Oracle, BEA Service (subscriptions) Anti-Virus, AOL Consumables (Meter) Printers (ink, paper)

Architectural Impact

Value exchange model choices inter-twine themselves with technical choices

Does your architecture fully support your model?

Are you (perhaps unexpectedly) constrained by business model choices?

Let’s review two examples

Effects of Time-Based Access on Tarchitecture

Today? Generally, minimal (honor system)

Future? Disallow use

Microsoft and others pioneering model

Rentals / other models require both protection and backend systems to support

Effects of Transactions on Tarchitecture

Do legal and technical definitions match?

Uniquely identify & understand entire life

Capturing the necessary data (schema)

Direct: System captures and manages all data necessary to support the business model

Indirect: System must be integrated with other systems to capture/manage necessary data

Reporting/Remittance requirements

Format? Security? Auditability?

Licensing Terms and Conditions of Use

License Choices

Rights/restrictions you associate with your IP

Right to use, copy, resell, embed, modify, etc.

Rights you request from your licensees

Right to co-market, access system, analyze data, etc.

Customers will often pay for specific kinds of rights (if you let them...)

Not all are enforceable

Disclaimer: Enthiosys cannot provide legal advice – we’re not lawyers. Instead, we’ll focus on many common business terms associated of software licensing agreements.

Flip-Chart Exercise

What are the rights / restrictions that you (typically) grant with…

your hardware?

your software?

Which of these do you think you can enforce via technology?

What are the rights you (typically) request from your customers?

SoftCo Software License License Term Meaning Grant of License: non-exclusive non-assignable, non-transferable USE SoftCo grants the purchaser (licensee) the right to use the software, and licensee cannot give or sell it to anyone else. SoftCo can continue to license the same software to anyone they want to Ownership of Software SoftCo owns the actual software that is licensed to the purchaser. Copy Restrictions The only copy of the software that the licensee can make is for backup purposes. Use Restrictions Licensee cannot distribute the software. Licensee cannot crack software or derive new IP from it. Assignment and Transfer Restrictions Licensee cannot sell or give the Grant of License to anyone else without SoftCo’s permission. If SoftCo does grant permission, the new licensee is bound by the original license

SoftCo Software License License Term Meaning Termination License is in force until terminated by SoftCo. When terminated, licensee shall destroy or return the software and media. Update Policy Reinforces SoftCo’s ownership of the software. SoftCo can change the software anytime without having to notify the licensee or granting use of the new software to the licensee. Export Law Licensee must abide by applicable export laws. Confidentiality Complex expression that tries to protect SoftCo’s IP contained within the software. Disclaimers of warranty and Liability Litigation attorney’s requirements. Releases SoftCo from ANY AND ALL CONCEIVEABLE FORMS OF HARM TO THE LICENSEE IN ALL WAYS AND FOREVER. 

Common Rights

Do they have the right to:

Upgrade to latest version?

Receive bug fixes for current version?

Refuse bug fixes for current version?

Return the software?

Move it to a different machine?

Embed your software as a component in their software and resell it?

Rights, Restrictions, and Architectures

Which of the rights presented above could require support from your architecture?

Case Study: Promising the Future

Context

Small supplier of key software infrastructure technology

Out-license promised to “support Mac OS 8.6 and later”

Consequences

Licensees demanded Mac OSX support

Company forced to spend more than $4M

Company constrained in operating freedoms

Lesson

License agreements must be structured in the near and long term interests of both software vendor and licensee

Try This Now AND At Work…

Refer to the License Model Summary

Enforcement Protection of Rights

Enforce? What Do You Mean?

Typically one of

Disabling some or all of the application when one or more terms of the license agreement have been violated

Capturing usage data for post-processing (e.g., to enforce pay-after-use business models)

Key challenges include

Detecting violation

Choosing a suitable response

Motivations for License Enforcement

Improve profitability by

Motivating / requiring purchase of additional licenses (depending on business models)

Prevent losses due to inappropriate use or theft

Improving cross-sell / up-sell opportunities

Improve customer satisfaction by

Only licensing what customers use

Better matching use model with business & pricing models and/or payment mechanics

Enforcement

Honor system (contract, audits)

License managers

Home-grown

Professional

Persistently protected software

Injection

API

SW License Manager Basics Protect “ Server” License Manager License Generator Embedded License Manager License

HW License Manager Basics Protect “ Server” License Manager License Generator Embedded License Manager Strong protection: a) Software and license on key b) Must have physical token to run! License

SW License Manager Attacks Protect “ Server” License Manager License Generator Embedded License Manager License

HW License Manager Attacks Protect License Generator Embedded License Manager “ Server” License Manager License

Tangible Costs

Development costs

Lost opportunity costs

Skill-set acquisition costs

Ongoing maintenance - TCO

Projected Total Cost over Solution Lifetime Development cost based on US Bureau of Labor Statistics mean salary for computer software engineers. Lost opportunity cost based on Software Magazine , "Software 500“: Average Revenue/Employee (2007). Total cost of ownership based on Gartner Research estimate of $3.40 lifetime costs for every dollar invested in initial development.

Challenges with eLicensing