Five tips for managing Microsoft licensing costs

Microsoft Corp. (NASDAQ: MSFT) earns billions of dollars a year selling software licenses for products such as Windows and Office — if you’re running a business of any size, chances are you’re a Microsoft customer. But unless you’re an expert negotiator, there’s a good chance you’re paying too much for Microsoft licenses.

Entire books have been devoted to Microsoft licensing, and the industry analyst firm Directions on Microsoft even holds a “boot camp” to help customers better understand Microsoft’s licensing schemes.

No single article can cover everything you need to know about Microsoft licenses. But here are five tips that could save your business money when it comes time to upgrade or purchase new Microsoft software.

Get “unlimited virtualization rights” with the Datacenter license

Windows Server licenses can be quite costly in large deployments, and virtualization technologies can make licensing even more confusing than it was in the days when physical x86 servers ruled the data center.

But both problems can be solved by taking advantage of the “Datacenter Edition” license, a pricing scheme for Windows Server 2008 R2 which has been ignored by many customers that could benefit from it, according to analysts.

Windows Server is licensed per processor, and with today’s multi-core processors the number of licenses required may far exceed the actual number of servers in a data center. But Microsoft’s Datacenter Edition license offers “unlimited virtualization rights, meaning customers have the use rights to run an unlimited number of virtualized instances of Windows Server on processors licensed with Windows Server 2008 R2 Datacenter without purchasing additional licenses,” according to Microsoft.

“A lot of organizations don’t know about the Datacenter Edition,” and have simply licensed each Windows Server instance running on a virtual machine separately, says Cynthia Farren, who runs a consulting firm and writes a blog on Microsoft licensing for Network World.

One reason this license is underutilized is that just two years ago, virtualization density usually wasn’t great enough to make the unlimited virtualization rights necessary.

The Datacenter Edition costs about $3,000 per processor, while the standard edition starts at $1,029. The cost of Client Access Licenses, or CALs, must also be factored in, and prices can vary depending on how large the customer is and how savvy the customer is during negotiations.

But in general, if you have a dual-core machine running eight VMs, licensing costs are about the same whether you buy the Datacenter License or not, according to Farren. Once an enterprise is heavily into virtualization, the Datacenter License can offer excellent savings.

“It’s pure math,” Farren says. “If you’re running 40 virtual servers on a quad-core machine, you’re going to save a lot of money by doing the Datacenter license.”

Unfortunately, it’s not uncommon for businesses to have a “dual processor running 20 virtual instances, and they will have bought 20 Windows servers,” she says.

Decide whether “Software Assurance” is worth it

Just like the Datacenter Edition, there are numerous types of Microsoft licensing programs that will be right for some customers and completely wrong for others. Licensing analysis therefore becomes a valuable skill in the IT and finance departments.

One key decision your organization will make is whether to purchase Software Assurance, a maintenance program for Windows, Microsoft Office and other applications.

Software Assurance spreads software payments over an extended period of time, typically three years, and offers certain benefits, such as free training, and 24/7 phone and Web support. But analysts say the greatest benefit is that SA guarantees access to new versions of software at no additional cost during the contract period.

If you’re purchasing Windows or Office today and expect Microsoft to make a massive upgrade just one year from now, Software Assurance will often be worth it, analysts say. But some customers have soured on the concept because of delays in Microsoft development cycles.

“A lot of customers got burned by how long Microsoft took with Vista,” says Paul DeGroot, an analyst with Directions on Microsoft. “They kept paying Software Assurance and never got anything for it. So they basically quit buying it. Why should I keep paying Microsoft for the next version of the operating system when they don’t deliver?”

When Vista finally came out, the interface was completely different and didn’t run certain Windows XP applications, which for many justified the decision not to buy Software Assurance, DeGroot says.

Software Assurance typically costs almost as much as one full license (which is $200 for Windows 7 Professional), with the SA price spread out over three years, Farren says. Ultimately, that means you’re basically paying twice for each user so you have the rights to upgrade to new software versions, she says.

In a worst-case scenario, DeGroot says you might pay three times for the same Windows OS — once for the OEM license that comes with a physical desktop that has Windows pre-installed; once for an “upgrade license” as part of a volume licensing agreement; and third for the Software Assurance payment.

Information Technology Intelligence Corp (ITIC) analyst Laura DiDio argues that Software Assurance includes “a host of goodies that make it worthwhile,” including free training vouchers, management tools and virtualization rights for applications and Windows desktops. (There will be more on virtual desktops later in this article).

But Farren believes that the benefits of Software Assurance are “minimal.” While SA includes support it’s not as robust as a premier support contract, she notes. “If there’s no [software] upgrade in those three years [you pay for SA] you would never recoup your costs,” Farren says.

Farren says that, before purchasing Software Assurance, customers should examine their own infrastructures and Microsoft’s product road maps, make some educated guesses about future product upgrades and map out their own organization’s plans to refresh Windows, Office and other technologies.

Avoid overpaying for Windows 7

As DeGroot notes above, a worst-case scenario can require three payments for the same Windows license — once for a new machine, once in a volume licensing plan, and once again for Software Assurance.

But there are several strategies to avoid the worst-case scenario for organizations upgrading to Windows 7, DeGroot writes in a new report titled “Licensing Strategies for Windows 7 Upgrades.”

For one thing, “While Windows 7 has many valuable benefits, a hard-nosed analysis of an organization’s requirements may reveal that few users really need them,” DeGroot writes.

Once you decide how many users actually need Windows 7, there are several strategies to minimize your investment, he says.

One is to purchase the so-called “Open License,” which is often ignored by large businesses because it is primarily intended for small companies, DeGroot says.

Open License essentially allows businesses to purchase Software Assurance for two years, rather than three, offering 33% savings. While certain benefits, such as VDI rights, will go away after the two years, the right to use the Windows 7 Enterprise Edition remains indefinitely, DeGroot says. This is an issue because Windows 7 Enterprise is only available to Software Assurance customers.

Even better discounts are available through Microsoft “Select” agreements, which also let customers purchase Software Assurance for terms less than three years.

“In theory, all you need is Software Assurance for one month, and you get the Enterprise Edition indefinitely,” DeGroot says.

Windows shops may also consider the Enterprise Agreement volume licensing plan, but they shouldn’t assume that they have to pay for every single desktop in their organization.

The Enterprise Agreement is the most common way for businesses with at least 1,000 computers to license their desktops, and receive the latest versions of Windows and Office, according to DeGroot.

But the agreement is somewhat inflexible, typically requiring customers to pay for every desktop in the enterprise, Farren says. However, it’s worth asking Microsoft for an exception.

“Say you have 2,000 machines,” she says. “For 1,700 of them, the Enterprise Agreement makes a lot of sense. You have 300 of that 2,000 that it doesn’t make a lot of sense. Throw it to Microsoft to get creative. Don’t assume you have to over-license for those 300. Exceptions are made.”

The customer may have to give something up in exchange for the price break, but that’s what negotiations are all about.

Know your virtual desktop options

Windows 7 is expected to fuel growing adoption of desktop virtualization technologies, and some customers say they have been able to save loads of cash by virtualizing PCs.

But analysts say enterprises will not automatically save money with virtual desktop infrastructure (VDI), with the cost of new hardware and licenses often outweighing the benefits.

ROI calculations include a lot more than just licensing costs, but selecting the right mix of Windows licenses is a key part of any VDI strategy (assuming you’re a Windows shop).

Microsoft just lowered its VDI prices, making it a free feature of Software Assurance, rather than a $23 per-device add-on.

However, customers who haven’t purchased Software Assurance can still virtualize desktops by purchasing Windows Virtual Desktop Access (VDA) licenses, which now cost $100 per device per year, down from $110.

While Software Assurance prices vary widely, in general Microsoft officials say it will be less expensive for company-owned PCs to be covered by Software Assurance than VDA licenses. Microsoft says the VDA license is mainly intended for thin clients and computers used by contractors, rather than full-time employees.

VDA includes the same benefits as Software Assurance, and features such as unlimited movement between servers and storage, use of any version of Windows, and access to up to four virtual machines on a single device.

One other licensing change may improve the ROI case of desktop virtualization. Starting this month, Microsoft is offering more generous roaming rights, meaning that users can access their corporate desktop images from any device without incurring extra licensing charges.

According to Directions on Microsoft, the move “alleviates a longstanding VDI licensing conundrum and lets customers realize a key VDI advantage — user access to a centrally managed environment from any device.” The extended roaming rights are available whether a customer has purchased Software Assurance or the alternative Virtual Desktop Access license.

Don’t be afraid to negotiate

“The biggest, most pervasive mistake that I see organizations of all sizes make is they don’t even try to negotiate,” DiDio says. In some cases the people tasked with purchasing new licenses are not skilled negotiators, and in many cases the person who handled the previous negotiation has moved on to another job. Knowing what happened in the previous round of negotiations would help, but “companies are notoriously bad at keeping records,” DiDio says.

The best time to negotiate is typically at the end of a quarter or fiscal year, when salespeople are desperate to make their quotas and boost commissions.

Microsoft needs customers as much as customers need Microsoft, so there’s no reason not to ask for price discounts, or even just free training vouchers and other extras.

“It really depends on your sales rep. It’s a company made up of humans,” Farren notes.

Once you’ve got your contract signed, unfortunately the work isn’t over. Complying with licensing terms isn’t always easy — DiDio says most organizations in her surveys admit to some noncompliance, most of it unintentional.

The real danger comes from incurring unexpected charges due to improper use of licenses.

Farren says one hospital she consulted for a few years ago was running PeopleSoft with SQL Server, and didn’t realize all its PeopleSoft users had to be licensed for SQL as well. The hospital ended up having to pay $100,000 in licensing charges it hadn’t budgeted for.

Bottom line: Read the fine print.

Network World (US)

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