Outrageous fortune?

Mainframe hardware is cheaper than ever but software costs keep rising. Customers stuck with legacy applications say they're fed up, but little relief is in sight

Joseph Beggs is angry.

Mainframe software vendors have price-gouged his company, claims the vice president of enterprise operations at Nabisco Inc. They've stuck him with outrageous upgrade fees and forced him into costly long-term contracts. He has watched in frustration as software has climbed from 15% to more than 40% of his data center budget in the past five years.

To put it bluntly, he's absolutely had it.

Beggs says he desperately wants to see mainframe costs brought more in line with the value he believes he's getting.

He's hardly alone. Powerful new hardware and falling processor costs are delivering far better price and performance on mainframe hardware than ever before. But even as mainframe hardware gets less expensive, the software it runs gets more expensive, with no end in sight.

"If users had a choice, they'd throw the whole bunch of vendors out right now," says Beggs.

Unfortunately, mainframe customers are a captive audience. A mature mainframe market and limited competition means software vendors have little incentive to change existing -- and very profitable -- pricing models.

Ironically, while the public and press have focused on whether Microsoft Corp. could use its position to overcharge for software, mainframe customers have long complained that software vendors have been doing just that.

David Ochroch, a contracts manager at the federal Student Loan Management Association (Sallie Mae) in Reston, Va., recently had to threaten to sue one vendor to get it to back down from a huge license fee increase after Sallie Mae linked several of its mainframes into an IBM Parallel Sysplex cluster. The fee hike, he says, was demanded on software that wasn't even involved in the Parallel Sysplex.

Another time, Sallie Mae was forced to drop plans to migrate critical software to a larger system after the vendor said it would assess Sallie Mae a $1 million upgrade fee even if the software usage remained unchanged.

Like all the customers interviewed, Ochroch declined to identify the vendors involved in specific price negotiations. However, he says, Sallie Mae's large-system software costs now consume around 30% of Sallie Mae's data center budget and will push the budget up at least another 15% in four years.

Carl Greiner, an analyst at Meta Group Inc. in Stamford, Conn., estimates that for most corporations, mainframe software costs can range from two to four times the cost of the hardware.

One issue -- capacity-based licenses and maintenance fees -- is one of the longest-standing customer complaints in the mainframe world.

Under a capacity-based model, software pricing is based on the overall size of the system -- or combination of systems -- on which it runs. The more powerful the hardware, the more it costs to run software on it, regardless of how many people use the software, how often it is used or what it is used for.

The issue is particularly urgent now for the following two reasons:

  • Today's boxes are a lot bigger than previous models -- hence moving any software to them becomes especially costly.

  • Current-generation mainframes from IBM, Santa Clara, Calif.-based Hitachi Data Systems Corp. and Sunnyvale, Calif.-based Amdahl Corp. are large enough, cheap enough and powerful enough to let users do the application and data consolidation needed to reduce costs while dramatically improving performance and manageability -- all crucial factors in the move to the Web-enabled enterprise. Users say software costs are making it far more expensive than it should be.

"There is no correlation between expense and value," says Kevin Berry, a contracts manager at Wells Fargo Services Co. in Minneapolis. "If you are consolidating workloads onto larger CPUs, there is no added value delivered to each workload, yet there may be an upgrade charge. Why should that be?"

Very often, adding new hardware can nudge users into a higher price band, which means new licenses and new maintenance tariffs -- usually 15% of the base software price.

For example, Nabisco recently found itself facing a one-time list price increase of $1.7 million when it decided to move several applications to a system that offered 185 MIPS more than the previous model.

"What's going on is nothing less than a shakedown of customers. . . . It's just hostage rates," says Dan Kaberon, Parallel Sysplex manager at Hewitt Associates LLC in Lincolnshire, Ill., one of the nation's largest benefits outsourcers.

"Here's a company that's selling you the same software, the same amount of documentation and the same usage profile suddenly saying we deserve more because IBM sold you more hardware," Kaberon says.

Falling hardware prices and the 30% increase in annual demand for mainframe hardware predicted over the next few years are also highlighting the problem, says Greiner.

Why Change?

At the start of the decade, when a single mainframe MIP cost more than $100,000, nobody noticed software costs. But with an IBM MIP selling at $2,270 today -- and estimated to fall to less than $400 by the end of 2003 -- software costs have suddenly become very visible, Greiner says.

Most of the major mainframe software vendors, such as Computer Associates International Inc. in Islandia, N.Y.; Compuware Corp. in Farmington Hills, Mich.; BMC Software Inc. in Houston; Candle Corp. in Santa Monica, Calif.; and Sterling Software Inc. in Dallas, have little reason to change, says David Floyer, an analyst at IT Centrix, a mainframe and business-process consultancy in Mountain View, Calif.

The mainframe market is mature, and there are limited new markets or first-time users to be won. Almost all the applications still on mainframes are there because they require mainframe power. And few users can afford the expense, resources, time or the disruption of migrating away from mainframes.

Floyer says industry consolidation is limiting choice for users and consolidating too much software in the hands of too few vendors -- most notably CA and Compuware, which he says have "a near duopoly."

CA declined repeated requests for comment. Doug Kuiper, a Compuware spokesman, said the company has no plans to change any of its pricing models but refused further comment.

Steve Wright, a marketing manager at Candle, said the company already supports usage-based pricing in some instances.

Next: Usage-based Pricing?

Change is possible, say analysts and users, but it will be slow, painstaking and full of land mines.

One method that's gaining increasing support is usage-based pricing, which typically charges by how much a customer uses the software or how many employees use it.

Its adoption has been slowed, however, by the relative lack of tools for measuring software usage and the management hassles involved in verifying and auditing usage data.

A longer-term concern is that usage pricing could actually be costlier for users if they aren't careful, warns Tom Moore, a marketing manager at mainframe hardware maker Amdahl. With usage models, "if your transactions suddenly double or triple, you are going to have a lot of people suddenly knocking on your door for money," Moore said.

Site Licensing

Users such as Beggs and Ochroch also favor the increasing use of long-term enterprisewide or site licensing models. There are variations here, too. With one model, for instance, users agree to pay vendors a lump sum for the right to use their software in whatever manner they choose -- on systems of any size -- as long as the total capacity of the hardware complex doesn't exceed a MIPS rating on which the parties agree.

A variation of this model lets users earn a certain number of points by paying a flat amount over a two- or three-year period and then using their software in whatever manner they choose, as long as it stays under the point limit they have purchased.

For example, at $100 per point, a company would pay $500,000 for 5,000 points. The company would then be free to apply the points in moving the vendor's software from one system to another, from one platform to another (such as from an OS/390 mainframe to Unix systems) or from one location to another.

In some cases, points could be applied to the purchase of new products from a designated suite. Vendors that also sell mainframe hardware, such as IBM, have been among the first to change software pricing models because they would be hurt if high software prices cut into hardware sales.

In October 1998, IBM slashed its pricing models from nine categories to two broad categories -- one based on capacity, the other on usage.

"We are doing a lot of things in this space. The fact that our systems get larger and larger means we need to make incremental improvements" to licensing models, says Doug Balog, a software group director at IBM. Others, like Amdahl and Hitachi, offer technologies that allow users to slice their mainframes into several smaller physical boxes -- each with its own serial number. This way, software vendors charge for software based only on the size of that slice, rather than the entire machine.

Ultimately, says Ochroch, the best protection is knowing what software to wean from a mainframe, knowing when to segregate workloads on different systems, restricting growth on some software and building contractual safeguards that bind vendors to specific conditions.

"This kind of protection goes way beyond the legal ideas of liability and software title warranties," Ochroch says.

Copyright © 2000 IDG Communications, Inc.

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