TrendView Report
Successful 2011-12 Legal IT Budget Planning
Published: August 30, 2011
Analyst: Ralph Schroeder
Successful technology implementation starts with the budgeting
process. This time of the year is an active period of annual budget planning,
and we work with our clients to ensure they develop and submit their requests as
accurately and effectively as possible. This year we see increased interest in
understanding how the latest evolving technology trends might impact the budget
planning process. Of particularly note are SaaS, subscription model solutions
versus traditional on premises, perpetual licenses. Each model presents a broad
range of budget related considerations, including license fees, maintenance,
training, support and infrastructure.
In this TrendView Report we review the key areas to consider in
developing your software procurement budget in the SaaS and perpetual license
worlds. We discuss license fee options, infrastructure costs and ongoing
maintenance and support, as well as upgrades and budget treatment. We outline
the differences between subscription and perpetual licenses, and identify a
number of key considerations in selecting the best approach for your
situation.
Discussion
In the software selection process, the license fee often garners the greatest attention. Most software purchasers are familiar with "perpetual" licenses that grant use of the software for an unlimited time duration - you purchase the software and basically own the software forever. Likewise, software systems have been generally deployed through the company's internal data center and network, whereby the company purchases the hardware and software required to operate the application.
Increasingly we see vendors in the Legal software market (and this is pervasive in all business application categories) offering their software as "subscription" licenses. This is often associated with SaaS models which provide hosted, turn key access to the application including all infrastructure (hardware, software, network and disaster recovery), plus full application management services.
In comparing the cost of a perpetual, in-house deployment versus a subscription, hosted deployment, there are six main areas of consideration. In doing a true comparison between the models it is important to look at all cost components over a multi-year time period, generally either three years or five years for most total cost of ownership (TCO) analyses.
- License Fee
- Software Maintenance and Support
- Infrastructure Costs - Initial and Ongoing
- IT Staff
- Upgrades - Enhancements and New Product Versions
- Capital v. Operating Expense Budget
License Fee
A perpetual license is generally purchased as a "one time" upfront payment. This provides the licensee-purchaser with full ownership of the application, and no ongoing license fee obligation.
Under the subscription license approach, the licensee-purchaser agrees to use the software for a fixed term. These are often for multi-year subscription terms; for example, three or five years are common. During the subscription term the licensee-purchaser has rights to use the software, and is obligated to pay the subscription license fee. After the subscription term, the licensee-purchaser either renews the subscription, or stops using the software without further obligation (retaining their data and proprietary information.)
In most instances the subscription fee includes the hosting infrastructure (hardware, software, network and disaster recovery), as well as Maintenance and Support (M&S).
It should also be noted in considering license fees that vendors will generally reserve the right to adjust license fees for increased use of the system - in terms of users and/or records. This is often referred to as "usage metrics", and allows vendors to increase their license fee to adjust for increased use of the system. This is a feature of both perpetual and subscription license models. Usage metrics are a common feature of most enterprise application markets, and is not unique to legal technology vendors.
Software Maintenance and Support
Maintenance and Support (M&S) is generally considered part-and-parcel to the license. M&S provides software fixes, updates or enhancements to licensed modules, and technical and user support services. In the legal software market - for example intellectual property systems or litigation docketing software - these may also include updates to country laws and rules, forms, fees and other oft-updated reference information.
In a perpetual license model, M&S is usually charged annually, and is calculated as a percentage of the base license fee - typically 20%-25%. In a subscription model, M&S is usually included in the subscription fee with no additional charge.
Infrastructure Costs - Initial and Ongoing
With in-house deployment, all infrastructure (hardware and software, such as operating system and database) are provided by the company, not the vendor. In addition, all infrastructure support, such as initial hardware and software setup work, infrastructure maintenance, and disaster recover, are the company's responsibility. These costs should also be considered as part of both the initial and ongoing long term cost. Depending on existing cost allocation policy, infrastructure costs can impact the comparison in different ways.
Increasingly we see many corporate IT data centers using shared environments for both application servers (i.e., virtual servers) and database servers (DB clusters). Licensee-purchasers should understand whether a vendor is able to function in shared environments, and possible performance or interface implications which might be important to their project.
In a hosted deployment approach, generally all infrastructure is provided by the vendor, including both initial infrastructure setup and ongoing maintenance and support. These costs are embedded as part of the subscription fee. In some instances the vendor will offer options for higher performance or service level (for example, dedicated servers or gold level support) which may increase the subscription cost.
IT Staff
An important aspect of system operations is the IT staff required for both initial setup and ongoing support and maintenance of the infrastructure. (For purpose of comparison it is assumed that the specific application configuration would be the same under either model.) In an in-house deployment the company is responsible for setting up all infrastructure components.
For IT projects, the issue of resource availability and business knowledge is an important consideration. Often the legal system is owned by the Legal Department which may have modest IT resource availability, either through department or corporate IT groups. While application management is of primary importance (i.e., business knowledge required for legal system administrator functions), experienced resources for technical management of the application is important to ensure consistency of operations.
In a hosted deployment, all infrastructure maintenance and support is provided by the vendor. Not only is this advantaged from a scale perspective (i.e., the vendor is managing a large number of clients on the same application), but there are also significant knowledge advantages in having experienced vendor resources managing their infrastructure. There are also risk mitigation advantages in that the hosting service level agreement shift responsibility to the vendor to ensure infrastructure performance and up-time standards.
Gerally under either approach, application management - i.e., system administrator related functions - are provided by the licensee-purchaser. In a hosted deployment, the licensee-purchaser system administrator would be accessing the system remotely for all admin functions, such as user account management and system configuration changes.
Upgrades - Enhancements and New Product Versions
The cost of upgrades is an often overlooked consideration in comparing perpetual, in-house deployments versus subscription, hosted deployments. There are important differences between these approaches which can have a long term impact on system capabilities, continuing effectiveness and user community satisfaction.
In a perpetual license, the scope of the Maintenance and Support (M&S) is usually limited to software fixes and minor updates. Major new releases require a new license purchase (although vendors will often offer upgrade discounts.) Whereas in a subscription model, all updates - including major new product versions - are provided without additional license cost.
There are also other important consideration in the upgrade approach of perpetual versus subscription based software. Generally we find that the pace of innovation lags in perpetual based software as compared to subscription based. This is a by-product of the perpetual business model in which perpetual oriented vendors bundle significant new features and enhancements into major new product releases (which are sold to generate new revenue from existing clients.) There is also the issue of upgrade process in which licensee-purchasers of in-house, perpetual applications find applying upgrades a more costly process (in terms of resources.)
By contract, we find that subscription oriented vendors offer a more steady stream of new features and enhancements. This is driven by a business model that requires continuous client satisfaction to support subscription fee payment and subscription renewals. Also, easier and more cost effective technical M&S to apply upgrades avoids any disincentive against more frequent system changes.
While the actual cost of the differing upgrade approaches between perpetual and subscription models is difficult to quantify, licensee-purchasers should understand the upgrade history and philosophy of their vendor in determining potential impact.
Capital v. Operating Expense Budget
In comparing the perpetual, in-house versus subscription, hosted models, the budget treatment for these costs is an important consideration.
A perpetual, in-house deployment is generally considered a capital expense (CapEx). This includes the license fee and infrastructure (hardware and software), and may include certain aspects of the implementation services.
A subscription, hosted deployment is generally considered an operating expense (OpEx), and is considered an annual budget expense. This is true even if the subscription term is for multiple years. Likewise, implementation services generally considered OpEx.
While there is nothing inherently better about either CapEx or OpEx, each licensee-purchaser should understand their budget situations and how CapEx and OpEx treatment effects their purchase.
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