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
Business Challenges
Rethink the channels / partners
Revenue recognition / refunds / manufacturing (HW)
Back office challenges
Configuration engine for terms and conditions of license based on sale
Integration with customer service, fulfillment, ???
Technical challenges
Must certify protected software
Degree of enforceability
Patch management

Underlying Technology Matters
Native object code is easiest to protect
Very hard to protect Java
Replacing VM with “spoofed” VM
Replacing class loader
Replacing JAR files
Patchwork quilt of
vendors, platforms, protection mechanisms, integration approaches, business models, etc.

Developing The License Model
Which rights do you want to protect? Why?
Which terms
support your business and pricing model?
do you want to enforce?
What are the risks associated with breach?

Contact and Content
Reach me at [email_address]
More about agile and business models
agilePM blog and Product Bytes newsletter at http://www.Enthiosys.com/insights-tools/
Join us at
pcamp, Mountain View, Mar 15, 2008
Meet us at Agile 2008, Toronto, Aug 4-8, 2008

Aligning Business Models And Technology Architectures Ore Dev Conference 2008

by Enthiosys Inc

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Aligning Business Models And Technology Architectures Ore Dev Conference 2008 Presentation Transcript