Seeking Assurance?

Governments grapple with Microsoft volume licensing changes.

by / April 22, 2003
Microsoft's May 2001 announcement of wholesale changes to its volume-licensing programs generated significant gnashing of teeth among enterprise customers -- so much gnashing that the Redmond, Wash.-based company twice extended the launch date of the new licensing programs.

Among the more controversial changes is a program known as Software Assurance, where enterprise customers pay an annual fee in exchange for the right to upgrade a particular application, such as Microsoft Office, if a new version is released during the coverage period.

Critics say Software Assurance essentially forces enterprise customers to purchase upgrades for desktop and server applications on Microsoft's schedule, instead of making those upgrades whenever they want. Of course, organizations can choose not to buy Software Assurance, but they may lose out on software discounts and other benefits, forcing them to pay a higher price when they do decide to upgrade.

"A lot of the objections that people have are the ability of the individual IT manager to make [upgrade] judgments has been somewhat constrained by the changes," said Terry Savage, CIO of Nevada and chairman the Microsoft Licensing Committee for the National Association of State Chief Information Officers (NASCIO).

Although some government agencies already have decided which way to go on the Software Assurance issue, others are still sweating over the spreadsheet, crunching numbers as they try to make their choice.

There is potentially good news for jurisdictions that haven't yet taken the plunge. A NASCIO subcommittee has been meeting with Microsoft representatives to discuss some public-sector concerns, and NASCIO said the company has been receptive.


What's It All About?
Microsoft bills Software Assurance as a "simpler way for volume licensing customers to keep current with the latest and most innovative Microsoft products." The subscription program, which was introduced with Microsoft's Licensing 6.0, replaces several one-time upgrade options.

The company said Software Assurance helps enterprises standardize on up-to-date versions and spreads out software spending, avoiding the spikes that coincide with the releases of new versions.

Software Assurance's approach is a good idea in theory, Savage said. It saves money for jurisdictions that already have software upgrade cycles of three years or less. For those that don't, Software Assurance offers a means for standardizing on the latest releases -- but at a potentially higher cost up front.

"From a financial standpoint, if you used to upgrade regularly every time there was a change, [Software Assurance] saves you money," he said. "If you're somebody who, as most people did, would skip an upgrade here or there or delay doing it, this ends up costing you more money."

Aside from the software expense, agencies may see higher hardware costs because they need more powerful PCs to run the newer programs, Savage said.

Failing to keep current has its set of drawbacks, however. Skipping upgrades may save money in the short term, but there is a price to pay down the line when organizations begin facing compatibility issues caused by the lack of uniform software across the enterprise, he said.

"If I put together a Word file or Excel file and send it to a wide distribution list, and I'm on the current version and some agency is two versions behind, they won't be able to read it," Savage said. "Either I have to take the time to send it out in a degraded version, that might not even have some of the functionality that I wanted to use in the document, or I send it out as the full version, I get told people can't read it, then I have to fix it ... those things take time, and time is money."

But the current fiscal crisis may prevent jurisdictions from considering Software Assurance, regardless of its potential benefits.

"Because of the budget crunch, the tendency is to not buy Software Assurance," Savage said. "All state governments are suffering pretty badly, us among them."

Other factors come into play as well.

Some employees in Nevada's Department of Corrections still use 386s, for instance, so any large-scale software upgrade also would trigger significant hardware expenses, said Savage.

He added that the Software Assurance decision was easy in Nevada this year, given the timing of the new licensing program. The state operates under a two-year budget process, and Microsoft announced the changes midway through the budget period.

"I ain't getting any new money, anyway, so it doesn't make any difference -- we're not going to do it," Savage said. "I didn't have any decision to make. But now, going forward, with each new product we buy, we'll have to decide. Are we going to buy Software Assurance? Or are we not, and just accept the fact that when we upgrade, we're going to have to pay full freight for the new version."


Changing Its Terms
Microsoft is working to answer concerns about the new licensing program, said Kathryn Mihalich, business and operations manager for Microsoft Government. She said the company is pleased to be talking with NASCIO.

"It helps us to have a focused forum for feedback, particularly when it comes to issues that are unique to state and local government," Mihalich said. "We've been working hard to customize our corporate agreements and our commercial agreements into something that would do better, from a legal and a functional perspective, for state and local government.

"We've had agreements in place [with government], and NASCIO has helped us make sure we're getting the proper feedback from those on the other end of these agreements, so we can fine-tune those agreements and make sure anything that's unique to state and local government, we're addressing," she said.

But wide diversity in government purchasing laws and regulations presents a steep challenge for the company, Mihalich added. It's difficult for the company to customize licensing agreements for every state, city or county.

To that end, the company is seeking more input from government through a separate licensing advisory council, Mihalich said. The Microsoft-sponsored organization is designed to let government jurisdictions and other customers air complaints or make suggestions about licensing terms and conditions.

"We've been working with NASCIO to identify those issues that are specific to state and local governments and see where we can find some compromise," she said. "One of those is that in our state and local agreements, we have built in the right for states to terminate our contracts if, in fact, they come up with nonappropriation issues.

"We're trying to work with them so that they're not holding an obligation that they may or may not be able to meet," she said. "We hope they don't select that option, but we've made allowances for it. We've also worked with states on budget issues. Maybe they're getting quarterly funding, and what they would be using for a payment would not be available for another 30 or 60 days; we'll work with them to help them through those situations."


Another Strategy
One analyst said the best course of action may be avoiding license upgrades altogether.

"The most cost-effective way for an enterprise to maintain its operating systems in the future is to not upgrade them in place anymore," said Alvin Park, Gartner's research director for software asset management. "An enterprise should consider what we call 'managed diversity.'"

Under that plan, an organization sets up a hardware replacement cycle spanning 36 to 48 months, orders new PCs loaded with the most current software available and uses the software until the PC's useful life is over. At that point, the enterprise replaces the old machine with another loaded with the most current software available.

"If you do that, you'll never have to buy a Windows Professional upgrade. You won't have to buy an enterprise agreement to cover those desktops. You won't have to buy Software Assurance. You won't have to buy anything to keep them current," Park said.

The rub is that an organization still must support more than one OS at any given time across the enterprise, he said. In addition, government agencies may face a tougher challenge due to slower cycles for equipment replacement.

"Government agencies, more than corporate America, probably tend to run PCs longer, especially since it's so hard to get budget approval to upgrade hardware," he said. "Government agencies may be in worse shape, but managed diversity wouldn't cost them any more. They just need to start doing it real soon."


Simple Math?
Park contended most government agencies will take a pass on Software Assurance because, over the course of time, it will simply cost them too much. The yearly cost for Software Assurance coverage is 29 percent of the new license price for eligible desktop applications, such as Windows and Office.

"Just doing simple math, you'll find that every 3.45 years you would pay Microsoft the equivalent of a brand new license in maintenance charges," Park said.

If an enterprise pays approximately $300 for a copy of Office, he explained, it would pay an additional $87 per year for the right to upgrade under Software Assurance. At about three years, the cost roughly equals the price of a new license. At four years and beyond, the Software Assurance price exceeds that of a new license.

Enterprises that bought Software Assurance to keep software costs flat may be in for a rude surprise if they don't upgrade frequently, Park said. He predicted some organizations would purchase the coverage, yet still not upgrade often enough to make it cost-effective.

"If you went back and audited them after the fact, you'd find out they were really wasting a lot of money because they paid for these upgrades and never put them in," he said. "I think that's what you'll find in the next few years."
Shane Peterson Associate Editor