Buried in software licensing

The transition to cloud-based services is ratcheting up traditional enterprise software costs and adding layers of complexity. Here's how IT organizations are breaking free.

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The language describing indirect access charges in the general terms and conditions in SAP contracts has been "quite vague and ambiguous," Scavo says, so some enterprises customers that have purchased non-SAP systems have been exposed to unanticipated charges. "It's more of a Trojan horse approach," he says, explaining that once a user brings in third-party software, SAP comes in looking to enforce its indirect access charges.

Lynn Costa, former vice president of shared services at Scholastic Inc., a $2 billion children's book publisher, says she faced such a situation when she discovered that one of the publisher's enterprise software licenses was tied to hardware that was shared with other programs.

Such problems could be avoided by isolating the hardware in its own environment, but that may not always be possible. Costa's advice: It's not enough to have the lawyers and procurement people review these contracts. "Have multiple people on the IT staff read through all of the details," she says. "And push back. If you don't negotiate it at that time, you're never going to get it later."

Steinour says he doesn't want to get caught with last-minute surprises, so he's especially cautious when it comes to renegotiating contracts. "We start talking a year and a half before the contract is up. If it doesn't work out, I still have a year to plan my exit strategy," he says.

The problem with that negotiating strategy is that the university is locked in. Steinour knows it -- and his software vendors know it. "Oracle is my biggest challenge because we don't have much leverage," he admits.

Like many IT executives, Steinour says he would like to take advantage of subscription-based cloud offerings to avoid paying a separate maintenance bill and making capital investments in major software and hardware upgrades every few years. But the university is bound to an ERP implementation that's highly adapted to the ways in which the organization likes to conduct business. "We're used to buying software and customizing it to death," Steinour says.

"When you put in a $40 [million] or $50 million ERP package, it's difficult to have an exit strategy without causing a lot of pain. They know that, and so they increase our costs every year," he says. Therefore, Steinour says he would like to lay the groundwork for a more strategic approach.

"With cloud, you need to adjust your business processes to align with the software," he says. That model will require an expensive business process redesign, and that kind of change won't come easily. "The hardest part is getting the business areas to readjust their business processes, which add overhead to whatever we do," he says. But in the long run, he adds, "we will be more sustainable going forward."

A New Era?

At Red Hat, 40% of the enterprise software runs as cloud-based services under a subscription model, but the vendor of open-source software also has a traditional implementation of core ERP applications running on premises to support its 5,600 employees, according to CIO Lee Congdon.

To Congdon, the key to moving forward is to create a viable option for moving off of those platforms. He worries not just about cost but about being locked into a vendor's software with a highly customized implementation that might lead to inflexibility -- and competitive disadvantage. "What happens when your competitors move to new systems with different attributes?" he asks.

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