November 19, 2007 4:58 AM PST

Software-licensing costs predicted to fall

Software-licensing costs are set to fall over the next decade, as IT industry trends converge to give buyers more bargaining power.

Research firm Gartner predicts that vendors will find themselves increasingly challenged as IT departments look to reduce software costs, as they have done with hardware and services.

"Up until now, the unique nature of the software market has meant that buyers had very little negotiating power after the initial purchase of a software license," Gartner Vice President William Snyder said in a research note. "We expect those dynamics to change considerably over the next 5 to 10 years, giving CIOs and software procurement officers more bargaining power while potentially reducing software vendor profit margins."

Gartner has identified seven major trends converging to change software delivery models, reduce dependence on the giant application vendors, and force prices down.

These include business process outsourcing; software as a service; low-cost development environments, such as China and India, combined with modular architectures and service-oriented architectures; the emergence of third-party software maintenance and support; growing interest in open source; the rise of Chinese software companies; and the expansion of the Brazilian, Chinese, and Indian markets.

Although Gartner says open source won't topple the likes of IBM and Microsoft, the firm believes that it will put pressure on traditional software margin structures, particularly in areas such as servers, operating systems, development tools, and database technologies.

Gartner also predicts that a fourth of all new business software will be delivered by software as a service by 2011.

Synder said buyers need to realize that the pendulum is beginning to swing in their favor, with an increasing number of alternatives in the software market.

"We would advise IT organizations to use BPO (business process outsourcing) and open-source alternatives to improve their negotiating power with software suppliers, as well as employing the emergence of third-party vendors as a means to reduce higher maintenance fees on older versions of software," he said. "(Pricing) out the possibility of using offshore skills to build application functionality as Web services will also help negotiations with vendors."

Andy McCue of Silicon.com reported from London.

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7 comments

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The value of automation in the process
I agree with your thoughts. However I would
like to add a note about the value of automation
in bringing to fruition lowered costs, specifically in the deployment and provisioning
stages.

A major part of SaaS infrastructure providers,
is consulting. Many of the functions provided
by the consulting, are repetitive and mundane.
Automating these tasks should lead to quicker
turnaround and lowered costs.

And presently there are companies providing
automation solutions. Such as Plesk from SWSoft,
NGASI AppServer Manager from NGASI.COM, and Helm
from WebhostingAutomation.
Posted by ronparris (1 comment )
Reply Link Flag
Operating Minus Clue?
Err, hate to break it to your intrepid reporter there, but CIO's have been using Open Source as a cudgel to beat the likes of high-cost licensing vendors (e.g. Microsoft) over the head on pricing issues for years now.

Here's the clue: Open Source has always meant lower TCO - not only insofar as reliability, stability, and security, but in price. When you can install an entire server room at a small-to-mid sized business for (literally) $0.00 in licensing fees, and do so legally, then obviously your server room costs have dropped dramatically from the start, no?

Here's clue #2: IBM isn't threatened by any of this because they saw it coming years ago and re-positioned themselves to gaining an income based mostly on services, not licensing. It also helps explain why IBM is a huge Linux supporter.

MSFT on the other hand [i]is[/i] threatened by this, because their very survival in the enterprise realm relies on license fees - CAL's, per-processor (or rather, groups thereof) fees, OS base licenses, and suchlike. Without license fees (esp. from business), MSFT would've shrunk down to a fraction of its current size by now.

It may also explain part of why they're so desperately casting about for new markets to shove their fingers into lately, no?

/P
Posted by Penguinisto (5042 comments )
Reply Link Flag
Counting the Cost
True, customers have been using ?free? software as leverage to lower licensing costs for quite some time, but the comparisons are consistently disingenuous. As one Linux consultant I deal with is fond of saying, ?Open source is only free if your time is of no value.? Even the open source fanatics, when they start presenting fairly realistic numbers, are forced to admit that there is not a significant difference in TCO between Windows and Linux ? the method used to manage and maintain the environment has more impact than the actual software being supported. In a typical environment, it takes a higher admin/server ratio to manage *Nix in general than to manage Windows, which counteracts at least a portion of the initial cost savings. In the last mixed environment I managed, changing local administrator passwords on over 300 Windows servers was accomplished in about 4 hours, less than 5 minutes of which required admin involvement; changing the root passwords on 85 Linux servers also took about 4 hours, but the Linux admin (a 15-year *Nix veteran and shell scripting aficionado) had to babysit for over an hour. In just that one example, the Linux systems required roughly 40 times the effort per server. Patch management was similar ? we spent roughly 10 hours per month managing Windows patches for those servers, including testing and automated deployment, and more time each month on the Linux boxes, not including the extra time to have a higher-paid sysadmin manually research multiple patch sources. In addition, the Linux effort increased as the number of servers increased, while the Windows effort did not.

Both Novell and Levanta have very nice management capabilities for Linux, but as of yet, a well-managed Windows environment still requires fewer man hours per server than a comparably well-managed Linux environment. The difference is steadily decreasing, to the point where it is almost a breakeven ? once the effort to manage both environments is equal, or even tips in favor of Linux, Linux will be a serious contender for Windows replacement; in the meantime, Linux will remain primarily a Unix replacement. At the same time, Linux is demonstrating the same weaknesses as Unix ? multiple vendors, competing standards, and no cohesiveness ? which is dramatically slowing the uptake. Techies want flexibility, but the people who actually pay the bills want consistency. Environments do not use ?Unix? ? they use HP-UX, AIX, Irix, etc. Similarly, environments cannot feasibly run ?Linux? ? they have to run Red Hat or SuSe or Ubuntu, and the configurations and skills that apply to one do not always apply to another. In effect, the environment merely changes one proprietary OS for another, even if the codebase of one OS or the other is open source.
Posted by MikeeeC (43 comments )
Link Flag
It looks like Gartner is drinking the coolaid now too!
And got drunk on the lousy stuff to boot. What they failed to say was that software is swinging around full circle back to the centralized control similar to the old mainframe/terminal model, which can substantially lower the TCO. That's what is going to lower costs, not because of open source or outsourcing. Outsourcing will be integral to the software business model eventually anyway if SaaS really takes off. And sure, you can use open source alternatives as a club against proprietary vendor's pricing, but only for so long. Once everyone is on SaaS you are going to see prices creep right back up.
Posted by WJeansonne (480 comments )
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