Thumbscrew, 2.0

Seems those 17th-century Italians were wrong: you can get blood from a stone.

In a move that is guaranteed to raise the hackles of finance chiefs at cash-strapped companies, software vendors are attempting to wring more money out of existing customers. Part of the wringing stems from revamped pricing strategies — strategies necessitated by such emerging technologies as partitioned servers and multicore chip processors.

A good portion of the extra vendor income, however, is coming from aggressive policing of current licensing agreements. The new get-tough attitude of vendors has, in part, been spawned by the revival of the enterprise software industry. During the tech downturn that commenced in 2001, application makers were so keen to hold on to customers that they often looked the other way when clients violated terms of their agreements.

No longer. With the return of corporate spending on software, vendors now appear more willing to confront abusers and cheats (aka paying customers). Licensing fees, which include yearly charges for maintenance, support, and upgrades, are on the rise, and now routinely top 20 percent of the purchase price of an application. Tech research firm Gartner sees no letup there, noting that the cost of software licenses could bump up by as much as 50 percent by 2006. With the cost of enterprise apps also on the way up, the recurring income generated by licenses has become too sizable for software makers to ignore. "Vendors are now looking at their licensing agreements," confirms San Francisco-based David Marston, PricewaterhouseCoopers's U.S. leader for licensing management services. "Customers are going to have to start living with the terms of their agreements."

They may not have any choice. While Ford Motor Co. ditched its Oracle procurement system in August, few management teams are willing to rip out entire enterprise applications. For large companies, such programs cost tens of millions of dollars to buy and take months — if not years — to deploy. Indeed, it appears a growing number of executives at IT companies now view their existing customers as chickens ready for the plucking. "Where [else] can vendors get growth in earnings per share?" asks Marston. "It means they don't have to spend to acquire new customers."

But industry watchers say some old customers resent being socked for products and services that, until recently, could be taken for granted. "Customers felt like they had finally been liberated from this onerous and somewhat unpredictable cost structure," says Steven Frank, a partner in the patent and intellectual-property practice group at Boston law firm Testa Hurwitz & Thibeault LLP. "Many now feel that they're essentially paying to maintain a product they've already bought."

License to Bill
The hard-as-nails attitude of vendors reflects a marked change in the software business itself. Increasingly, companies are purchasing suites of software from single businesses, rather than buying best-of-breed applications from various designers. While the approach simplifies systems administration — and improves data flow — it virtually locks customers into one product line.

At the same time, this rise of single-vendor shops has made it tougher for vendors to poach large accounts from rivals. Hence, technology sellers have come to realize that connections with existing customers must be leveraged — some would say exploited — to pump up recurring revenues. "During the tech drought, software vendors were practically giving maintenance and upgrades away," notes Frank. "Software vendors are now going back to the more-traditional model: maintenance fees are going up, upgrade fees are going up."

A recently released survey supports the assertion. Conducted by PricewaterhouseCoopers, it found that 42 percent of executives at U.S. technology companies believe licensing fees will grow by 10 percent in 2005. With vendors counting on the fees to help meet income projections, says one consultant, "the need for companies to focus their controls over revenue leakage will be essential."

Easy Money The majority of technology companies surveyed expect a bump-up in licensing revenues this year. No growth: 4% Less than 10% 31% More than 10% 28% More than 20% 14% Source: PricewaterhouseCoopers

Toward that, a number of vendors have started "license management" or "license compliance" programs. Typically, such programs include tougher and more-frequent customer audits. In some cases, vendors force business users to run software that automatically counts the type and number of products installed. "It's up to you to make sure you have a license for everything," advises E. Robert Yoches, a partner at Finnegan, Henderson, Farabow, Garrett & Dunner LLP, a Washington, D.C., law firm that focuses on intellectual-property matters. "If you don't have a license for a particular product, you'll have to work out some sort of settlement agreement."

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