A License to Deal

Enterprise licensing agreements have come under intense scrutiny since California's flawed deal with Oracle. But state and local CIOs say they aren't bad, just complicated.

by / September 24, 2002
Contra Costa County is less than 100 miles from the state capital in Sacramento, Calif., but when it comes to software licensing agreements, the two jurisdictions are worlds apart.

California's infamous deal with Oracle rocked state government and led to the dismissal of Gov. Gray Davis' highest ranking IT executives, as well as playing the final-nail-in-the-coffin role in the shutdown of the Department of Information Technology. But in Contra Costa County, the tone is decidedly different.

CIO Steven Steinbrecher has nothing but praise for how his department and Oracle worked together to fashion an enterprise licensing agreement (ELA) that will save the county an estimated $750,000 over the life of the four-year contract.

"Oracle informed us when we reached the magic number [in terms of user volume] making us eligible for an enterprise license, and they worked diligently with us to make it work," Steinbrecher said. "This stuff isn't easy to do."

Granted, the size difference between the two ELA's is large. But both were aiming for the same results - locking in a better price break based on a projected number of users. The big distinction was that Contra Costa counted carefully. California did not.

IT departments in both the public and private sectors are waking up to a new world when it comes to software. Bulk users, such as large corporations and governments, are discovering that software is no longer a commodity, but a service that can be rented, and long-term agreements are the norm, not the exception. Besides Oracle, IBM and Microsoft have been aggressive in converting their software licenses from something that a customer buys to something a customer leases.

The promise of an ELA is that volume software users can save money over the long term. But as California found out, it's important to move carefully with these agreements to ensure what is wanted - nothing more, nothing less.

"Every organization is different when it comes to crafting these agreements, so it's important to know the details of the agreements," said Rock Regan, CIO of Connecticut and president of the National Association of State Chief Information Officers (NASCIO). "The problem is figuring out the details."

Licenses by the Processor
One state that has the details figured out is Delaware.

Like many other governments, Delaware used to purchase user licenses from Oracle for thousands of workers. This approach worked fine so long as an agency could easily manage the number of workers eligible to use the database software. But today's Web-based applications have turned that notion on its head. The number of users who may need to use an application has grown significantly, and their numbers can fluctuate considerably each day.

This year, Delaware signed a processor-based licensing agreement with Oracle worth $2.1 million, said Mark Headd, executive assistant to the secretary of the Department of Technology and Information. The deal allows the state to run Oracle's most current software on as many as 115 processors, but with no limits on the number of users.

"It's really an application license agreement," Headd explained. "Now, anyone can use an application involving Oracle's software as opposed to strict limits on the number of users in the past."

He said the processor-based agreement fits with Gov. Ruth Ann Minner's mission of Web-enabling as many government services and operations as possible.

Trying to predict the number of users of the software down the road was one of the problems California ran into with its ELA. Headd said Delaware used its current numbers as the benchmark and by switching to a processor-based agreement, they ensured the head count issue wouldn't create a problem later on.

"We may have some applications that will only have 50 users and others that are Web-enabled with thousands of users," he explained.

But what looks good for one government looks entirely different to another.

Steinbrecher said processor-based licenses wouldn't work in Contra Costa's current environment and would be less cost-effective for the county. When it comes to Oracle, he's sticking with a site license based on the number of users.

But change the name of the company and software, and the story is entirely different. Contra Costa also has a site license with Peoplesoft that is based on the county's gross revenue, not the number of users or processors.

There's little consistency across the board, Steinbrecher said.

A License to Lease
State and local governments are also grappling with another licensing issue - Microsoft's new software-upgrade policy. Last year, Microsoft announced major changes to its licensing programs, which are having a major impact on government users. Instead of buying perpetual licenses, states and localities can now subscribe to the firm's software programs, paying a fee each year and receiving rights to software upgrades during the license's contract terms, usually two to three years.

The annual subscription fees range from 25 percent to 29 percent of the original cost of the software program, depending on its function.

Microsoft introduced the program to reduce what it called the "confusion surrounding its upgrade choices." The software giant explained that the changes would reduce costs for about 30 percent of its volume-licensing customers and have no impact on about half of its enterprise customers. But it also estimated that about 20 percent of its customers would end up paying more.

Since announced, the program, called Software Assurance, has run into controversy. Originally, customers with at least 250 software users had until Oct. 1 2001 to either join the program or pay the full price of upgrading a program. Though many governments liked the idea of spreading out software costs, they also felt they had little choice in the matter and not enough time to line up funding to take advantage of the upgrade option.

"Lots of states are on biennial budgets and aren't in a position to take advantage of Microsoft's offer by the latest deadline (July 31)," said Terry Savage, CIO of Nevada. "If they hadn't extended the original grace period, it would have cost Nevada $2.1 million to upgrade its software."

Savage is the chairman of a NASCIO subcommittee that's been looking into the Microsoft licensing program. Most states like the idea of subscription-based software but aren't happy with how the company has rolled out the program. In meetings with state CIOs, Microsoft agreed it should engage government much earlier in the process, given the way state and local budgets work.

But for some agencies and local governments, the Microsoft deal doesn't look as sweet. Contra Costa's Steinbrecher noted that only a handful of county departments have taken advantage of the subscription service. Other departments, where upgrades occur less frequently, have opted not to join. Overall, he sees the county's software costs rising, not falling because of the change.

"I'm not happy with the arrangement," he said.

Some jurisdictions are even looking at other, less costly options, such as Sun Microsystems's office software program, which is compatible with a number of computer platforms.

Whether state and local governments are happy or upset with the newest wrinkles in ELA's, one thing is for certain - they are here to stay.

"We're dealing with a revenue-driven industry here," said Connecticut's Regan. "Software is an intellectual property, and the vendors are constantly trying to recapture their costs. Changing the way you pay for upgrades is one way to do that. In certain situations there are savings, but the devil is in the details."
Tod Newcombe Features Editor