The Need for a Trust-But-Verify Software Licensing Approach

1. WHITEPAPER
State of the Cloud Computing Marketplace
The Need for a Trust-But-Verify Software Licensing Approach

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State of the Cloud Computing Marketplace
The Need for a Trust-But-Verify Software Licensing Approach
Executive Overview
Enterprises are accelerating their use of cloud computing
because it provides such an attractive value proposition.
This value proposition is enhanced through usage-based
licensing. However, the difficulty of monitoring usage-based
licensing has slowed its adoption. Flexera Software, the
market leader in software monetization solutions, makes it
possible to efficiently deploy usage-based licensing models.
The company’s solutions empower application producers to
implement a broad spectrum of licensing models within a
single product—from strict enforcement to a more open trust-
but-verify approach—to maximize software revenues and
ensure compliance.
The State of the Cloud Computing Marketplace
Cloud computing continues to grow because it offers a
wealth of benefits to software vendors as well as their
enterprise customers. Rather than a company having to
purchase a software package, which must be deployed and
maintained on their own servers, cloud computing provides
the economies and conveniences of an organization
simply logging into a web-based service. Cloud computing
eliminates the CapEx costs of purchasing dedicated servers
and software, and it greatly reduces OpEx by eliminating
the need for allocating IT personnel for application
administration and maintenance, including keeping up with
security patches. All of this in turn allows companies to focus
on their core competencies, rather than devoting precious
time and resources to peripheral tasks. These benefits are
likely to drive increased SaaS adoption well into the future.
The biggest obstacle to greater adoption of cloud computing
has been enterprise concern and regulatory mandates
concerning privacy and control of sensitive data. Yet these
concerns, including regulatory requirements for on-site
storage and control, have to a great extent been relieved as
cloud providers have gone beyond the original public cloud
model to private cloud deployments (in which cloud-based
resources are only used by a single organization) and
public/private hybrid models in which sensitive information
is stored on dedicated resources on the customer’s premises.
Meanwhile the pressures that have made the cloud
computing marketplace so attractive continue to build.
Organizations see a need to relieve the burdens on
overworked, understaffed and underfunded IT departments.
As long as vendors meet customer requirements for
performance, security and other factors, many more
companies are now willing to use hosted software services.
In many cases, the cloud offers greater redundancy,
fewer points of failure and superior IT resources to ensure
security and high availability than what organizations can
economically provide on their own.
At the same time, the basic cloud value proposition has
become more attractive as cloud providers have created
new pricing models—including usage-based licensing—to
better compete in the marketplace.
Projected Software Growth
Research firm IDC estimates that $367 billion was spent in
2012 globally for packaged software, with a steady growth
for the sector projected for some years out. The cloud
computing market is growing as well, as Gartner estimates
that global cloud computing sales were up nearly 18% to
some $14.5 billion for 2012.
Industry Shift from Perpetual to Consumption-Based
Licensing and Pricing
The shift from perpetual to usage-based licensing models is
driven by a number of IT needs, including a desire to avoid
shelfware and to pay only for actual use, while avoiding the
hassle of software audits. Consumption-based pricing—which
is a hallmark of cloud computing—gives organizations the
flexibility to ramp departments up or down, according to
needs and varying workloads.From a hardware standpoint,
a company can spin up more servers for its testing group to
use, for example, prior to a new release, and then release
the hardware (and its cost) when the extra resources are
no longer needed. The value of such pricing is seen from a
software standpoint, too. All of this points toward the desire
of customers for greater flexibility in licensing. These same
forces provide opportunities for producers to provide a

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distinguishing value-add through offering innovative licensing
and pricing programs.
Technology Forcing New Monetization and Protection Models
Hybrid cloud computing, much like a hybrid cloud,
describes situations in which a solution is partitioned
between local software running on company premises and
web-hosted cloud-based services. Google Apps and Office
365, for example, can be run both locally and in the cloud.
An important driver for hybrid deployments is the need for
privacy and security. A hybrid cloud computing solution
enables cloud-based resources to support a presentation
tier, for example, while the data could reside either on
customer-based servers or on private cloud infrastructure.
As earlier noted, regulatory compliance for some
industries—such as healthcare and financial services—
mandates that critical content must be stored locally. A
company which handles military contracts might be required
to not let any sensitive data be stored elsewhere. Even
when not mandated, companies with high-value intellectual
property may have internal policies that prohibit use of
public cloud and standard cloud computing solutions.
Customer demands come into play as well. For example,
customers of a chip design firm might stipulate that their
data be stored locally to protect intellectual property.
New monetization models will be required to deal with
hybrid and other specialized solutions. In cases where the
solution is partially cloud-based and partially enterprise-
based, usage-based licensing is a way for companies to
make sure that they are not paying twice for the same services.
Why is Usage-based Licensing So Complex?
Surveys indicate that many companies intend to migrate to
usage-based licensing, but fail to do so. Part of the reason
for this is that usage-based licensing is more complex than
simply buying software to use on the company premises.
Table 1
Pricing & Licensing Strategies in Flux
Forty two percent of application producers report that over the past 18-24 months, their
software pricing and licensing strategies have changed
Change remains the norm for the immediate future. When asked how licensing and
pricing strategies would change over the next 18-24 months, application producers said
they would add subscription/term licensing (26%), better enforcement or security (24%),
pay-as-you-use (24%) and temporary/evaluation/ “try-before-you-buy” licensing (19%).
Source: Flexera Software, 2012 Software Pricing and Licensing Survey

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This is largely due to the need to track much more data,
which then needs to be aggregated for invoicing. For the
vendor, updating their software to generate usage data and
developing the infrastructure required to process that data is
a difficult undertaking. In addition, the reality is that some
enterprises are not willing to let vendors collect and process
product usage data—though others are open to sharing the
usage data as long as it is aggregated and anonymized.
Additional complexity comes with hybrid products as you
need to track both premises-based and remote products.
Not only is keeping track of usage in two different places
harder, but unlike flat licensing, where retrieval of data
from former customers at the end of the contract period is
unnecessary, usage-based licensing makes recovery of that
data essential. This can cause any number of nightmare
scenarios, such where the customer is either unwilling or
unable to send back the information in a timely manner.
Data privacy is another critical issue. One company tried to
do usage-based licensing for a large French manufacturer,
who was going to send the solution provider usage logs
containing the logins of those who used the service. They
found that France prohibits giving that information to third
parties without getting the approval of the employees. The
manufacturer was therefore unable to send the usage logs.
These and other challenges can double the complexity
which must be faced by companies seeking to implement
usage-based licensing, as they need to handle both the on-
premises and SaaS deployments.
The Increasing Complexity of Software Licensing
As producers adapt to embrace new technologies, support
new software deployment models and offer their customers
new licensing options, they and their customers face
growing complexity. For most producers, all of these
changes represent additions, not replacements, to the
number of licensing models they support as they must
continue to support old models for their existing customers.
Application producers and customers enter into contracts in
order to ensure that they make an exchange of fair value.
Software contracts can include a wide range of terms and
conditions. The core terms and conditions of any software
contract, however, are price and use. Customers want to
keep the price down and in some cases only pay for what
they use. Producers want to keep the price up and ensure
that they are getting paid for as much use as actually
occurs. While new models can accommodate these needs,
and bring greater value to users and producers, they can
entail more complexity in the software licensing—though
ultimately, the number of licensing models should decrease.
Licensing Model Definition of Use
Named users Entitles the customer to have a given number of specified individual employees who use
the software
Concurrent use Puts no restrictions on who is entitled to use the software, as long as the customer’s total
number of simultaneous sessions does not exceed a specified number at any time
Node-locked Entitles the customer to only use the software on a specified set of end-user desktops
Server- and/or CPU-
based
Restricts the customer’s entitlement to a specific number of physical servers and/or a specific
number of CPUs within those servers
Transaction-based Entitles the customer the right to execute a specified number of transactions (which must also
be appropriately defined) with the software (similar to usage-based)
Usage-based Entitles the customer the right to use the application freely then captures usage and shares
that usage with the customer. Types of usage data that could be captured include:
# of compilations # of pictures sent
# of characters translated # of campaigns managed
# of drawings rendered # of email messages sent
# of CPU minutes # of gigabytes stores
# of data converted
Environmental
limitations
The producer bases pricing on entitlement for a particular type of use – i.e. in the production
environment, in a development environment, or in a disaster recovery environment
Table 2: A quick look at common licensing models.

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Matching the Entitlement to Usage
The first challenge in engineering the exchange of fair value
in a software sale is to define use. This is no small matter.
In fact, use of software can be defined in many ways, as
shown in table 2.
Not listed in the table, but a much-used alternative is the
enterprise license approach, which sets no limits whatsoever
on the use of the software within the organization—
although the contract may define the bounds of such a license
to ensure that changes in the business don’t result in use
beyond that which is anticipated at the time of the agreement.
The enterprise license may also include some type of a
periodic true-up, whereby the customer agrees to pay for
actual use according to a pre-defined schedule in exchange
for the flexibility of using the software on an as-needed basis.
All of these licensing models may be appropriate based on
the products sold, the markets served and corporate culture.
For example, a node-locked model may make the most
sense in a 24/7 contact center where different users may
occupy any seat at any given moment—but where users
won’t need access to the software from home or on the
road. A transaction-based model, on the other hand, may
be more appropriate for applications that are exposed to
the producer’s customers via the web—making it impossible
to accurately predict total utilization in advance.
Producers and customers who enter into these types of
contracts in good faith must clearly have some means
of capturing usage and ensuring compliance with these
various complex models of compliance or use. If they don’t
have such a mechanism in place, there won’t be any way to
ensure that the terms of the contract are being honored and
that a fair exchange of value is actually taking place.
No Tools to Track, Aggregate and Share Usage Data
The clear definition of customer entitlements only has real
meaning when it is accompanied by an effective means
of managing and capturing use in the context of those
entitlements. Traditionally, application producers have
failed to provide customers with an effective means of
pro-actively discovering disparities between authorized
and actual use. This lack of a compliance management
capability greatly increases the likelihood that customers
will inadvertently violate their contract terms. It also prevents
customers from defending their own integrity by either
restricting their use or offering producers fair additional
compensation for observed additional use.
This helps explain the rise in products such as Software
Asset Management (SAM) tools—though they are limited in
the number of models they can support. The lack of tools to
track and aggregate usage data can be credited to the vast
complexity involved, due to the amount of data as well as
the need to address privacy concerns.
As covered in more detail in the final sections of this white
paper, Flexera Software provides one of the only tools
available to track, aggregate and share usage data. For
transparency, we make this data available to the end user
as well as the publisher.
Data Privacy and Tamper-Proofing Concerns
Enterprises suffer from a lack of communication and trust
in regard to software publishers, software publishers, in
return, have the same issues with customers. Data privacy
is an enterprise concern, tamper proofing is a publisher
concern—and both are hard to deal with.
Companies are reluctant to share their usage data with
publishers, and are more comfortable with aggregating
and forwarding it in paper form at agreed intervals. The
publishers find this unacceptable because of the possibility
that the customer will tamper with the data to lower their
apparent usage. The customer in turn is reluctant to send the
data electronically because of concerns that the publisher
will use the data to learn the customer’s usage patterns, and
alter their pricing structure to maximize their revenue at the
expense of the customer.
One way around this impasse is to have both parties agree
to a fixed rate for a certain period, such as five years, such
as was done with cell phones. In the early 1990s, users
had to pay for every minute on the huge cell phones that
existed at that time. They had to pay for roaming and other
usage patterns, and they never knew how much the bill
would be. For this reason, users would put usage alerts on
their phone, or shut off roaming, which is why the ability to
turn off roaming still exists on mobile phones.
Service providers learned from this, and began to offer a
certain number of minutes for a fixed price, and only charge
for roaming after that limit is reached. This practice is now
nearly universal, as it offers users far more control of their
mobile telephone costs. The cloud computing and SaaS
marketplace, as well as enterprises in general, can and
should learn from this experience.
A Trust-But-Verify Approach to Usage-Based Licensing
Successful business relationships depend on trust between
buyers and sellers. Both sides want and need the other
side to succeed. With the right monitoring technology,
organizations can take advantage of a trust-but-verify
approach to usage-based licensing. This gives both sides
complete transparency of usage, while sparing producers
the expense—and users the invasiveness—of the traditional
usage audit.
Adopting a trust-but-verify approach is a particularly
attractive alternative for application producers seeking to
ensure the exchange of fair value in an atmosphere of trust.
With this usage-based model, application producers and
customers have access to actual customer application usage
information that can be reconciled against the customer
contracted entitlements.

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The ability to get to a single source of truth regarding
entitlements and actual usage is the foundation of a
successful trust-but-verify approach.
Implementing a trust-but-verify approach for compliance
management automates the entire compliance process.
It requires the producer to instrument their products with
a usage-based licensing model. Today’s sophisticated
enterprise applications are typically comprised of a variety
of functional components that invoke complex sets of
software processes. To capture the use of such applications,
it is necessary to instrument these components and
processes in a way that accurately measures use according
to whichever licensing metric is applied.
How Flexera Software Can Help
As the market leader in software monetization solutions,
Flexera Software empowers application producers to
implement a broad spectrum of licensing models within
a single product—from strict enforcement to a more open
trust-but-verify approach—to maximize revenues and ensure
compliance. Application producers are able to:
• Enable flexible monetization and licensing models.
The ability to sense and respond to changing market
conditions is a significant competitive advantage.
Having keen insight into product use enables you to
quickly alter monetization models across products
and tailor the models for various market segments,
geographies, etc.
• Offer mature monetization models for cloud
computing applications. Many application producers
are developing SaaS applications and require
sophisticated, mature solutions to implement the
required monetization models the market demands
for such solutions (e.g., pay-for-overage, pay-for-burst,
pay-for-use).
• Ensure that application producers get paid for the
value delivered. Prevent anti-piracy and licensing abuse
across all geographies with the right licensing model.
Automate back-office operations that ensure license
compliance to streamline internal operations (i.e.,
reduces the costs of audits) while ensuring all potential
revenue is realized.
The software monetization solutions from Flexera Software
automates compliance management by supporting the
full licensing spectrum, all licensing models and the back-
office automation required to manage a growing software
business, enabling application producers to generate more
recurring and predictable revenue from customers.
About Flexera Software
Flexera Software helps application producers and
enterprises increase application usage and the value they
derive from their software. Our next-generation software
licensing, compliance and installation solutions are essential
to ensure continuous licensing compliance, optimized
software investments and to future-proof businesses against
the risks and costs of constantly changing technology. Over
80,000 customers turn to Flexera Software as a trusted and
neutral source for the knowledge and expertise we have
gained as the marketplace leader for over 25 years and for
the automation and intelligence designed into our products.
For more information, please go to:
www.flexerasoftware.com

7. Flexera Software LLC
(Global Headquarters):
+1 800-809-5659
United Kingdom (Europe,
Middle East Headquarters):
+44 870-871-1111
+44 870-873-6300
Australia (Asia,
Pacific Headquarters):
+61 3-9895-2000
For more office locations visit:
www.flexerasoftware.com
Copyright © 2015 Flexera Software LLC. All other brand and product names mentioned herein may be the trademarks and registered trademarks of their respective owners.
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