Total Cost of Ownership and Return on Investment model for Software Licensing

A discussion document about the real costs, risks and issues associated with Software

License Management solutions. Designed to assist in business decisions about internal

development and 3rd party vendor selection.Written by:

Jon Gillespie-Brown, CEO, Nalpeiron

Sources: IDC Research, Gartner Research, Software CEO and LinkedIn forums, Proformative, NetSuite, Sand Hill Group, Intacct

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In today’s economy, Software ISVs are suffering from variable demand, tighter operational controls and shirinking IT budgets and resources

Evaluate the TCO of the various options in choosing a Software Licensing Vendor including comparing the costs of in-house and outsourced options

A detailed review of the associated and hidden costs of a Software License Management System

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A look at just some of the reasons that customers have chosen Nalpeiron over our competitors

The Nalpeiron Licensing Service™ has been built so you can deploy it fast, with everything you need “out of the box”

Remove the distractions of trying to beat casual software theft and your team can get on with making the best software on the planet.

11 12 13

cont

ents

ISVs today face profitability challenges from both internal

and external sources.

Factors such as variable market demand, rampant

piracy, new business models and increased competitive

pressures cause huge stresses on your business and cost

the industry billions of dollars each year.

At the same time, your customers are demanding new

ways of managing, understanding reporting on software

licensing usage. This in turn pressurizes ISVs to offer new

flexible business models such as usage, subscription and

software as a service to meet customer needs.

Software ISVs that embed software in the products using

hard-coded licensing terms and inflexible pricing models

have are having real difficulty responding to these

changing market demands.

One implication of shrinking resources is that it has never

been more timely or critical to understand the Total Cost

of Ownership (“TCO”) of software purchases. A TCO

analysis helps an organization understand and manage

the many inter-related direct and indirect costs involved

in managing and licensing a ISVs Software Assets.

A thorough analysis considers not only direct costs,

such as software licenses, maintenance, and required

hardware, but also indirect costs, such as software asset

management, desktop administration and end-user

support.

In addition, there are many “soft” costs that need to be

factored in when considering the licensing landscape

such as revenue recovery from piracy or overuse,

competitive issues and speed to market along with simple

opportunity costs from developing in-house licensing vs.

outsourcing.

In today’s economy, Software ISVs are suffering from variable demand, tighter operational controls and shrinking IT budgets and resources, prompting them to look for aggressive ways to cut costs and make their IT operations more efficient.

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The shifting economic climate

A TCO Comparison

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The purpose of this paper is to help readers evaluate the TCO of the various options in choosing a Software Licensing Vendor including comparing the costs of in-house and other outsourced options vs. the hosted Nalpeiron Software Licensing Service™.

TCO Expense Areas

Capital ExpensesOne important point is that

when considering the

investment required for

building a platform internally,

publishers often

underestimate the cost

unless they have already

tried this approach.

Source: IDC

Software Licenses

Direct costs for software license purchases, per user and/or per workstation, CPU, server, etc.

Software maintenance

Traditional annual maintenance costs for acquired software. Software maintenance costs are estimated at 25% of the

original purchase price per year for a three-year period.

New Hardware

Purchase costs for new hardware.

Hardware maintenance

All costs associated with acquiring and maintaining hardware servers and other infrastructure components necessary to

deploy, maintain, and manage the software. Hardware maintenance costs are estimated at 25% of the original purchase

price per year for a three-year period.

IT software

Includes all the software needed to run and maintain the IT systems.

To compare the TCO of the traditional Software License Management vendor and In-house development

with Nalpeiron Licensing Service ™, there are three main expense areas and additional strategic costs to be

considered:

• Capital Expenses

• Operating Expenses

• End-User Expenses

• Other “soft” costs

The following are the qualitative descriptions for each of these three areas.

It will provide readers with a guideline for developing a TCO comparison that will help them determine which model is the best financial and strategic value for their application licensing needs both near-term and longer-term.

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Operating Expenses

Tier 1-3 support IT and Help Desk Operations associated with Tier 1-3 support.

Security

Costs associated with keeping the applications and data secure.

Desktop management Costs to manage the desktop operations, including:

License Allocation/Provisioning – administrative costs associated with allocating, de-allocating, and re-allocating licenses as project and staffing needs evolve.

Compliance – administrative costs related to license compliance: inventory, internal & external communication, true-ups, etc.

Administration

FTEs and hours dedicated to deploying and administering the system, including the cost of packaging and deploying the software, and keeping it current with the latest updates. Also include costs for unscheduled maintenance and outage recovery of systems.

Management FTE costs to evaluate and acquire new software as well as managing upgrades and vendors. This includes:

Evaluation – cost of searching for the right software, conducting the requisite due diligence on vendors and products and comparing candidate solutions, vetting vendors and products with corporate architecture standards, etc.

Procurement – costs of processing an order, including negotiating a contract (legal), budgeting, order processing, accounting, etc.

Vendor Management – costs related to the initiation and ongoing cultivation of a vendor relationship, including administrative, legal, and operational: managing contracts, maintaining approved vendor lists, adapting to each vendor’s support procedures, etc.

Budgeting

Costs to optimize allocation of new licenses and licenses under maintenance to projects, departments, and business units. Also includes the cost of making special purchases outside of standard budgetary cycles.

User & IT Training

Costs of ensuring that the personnel responsible for managing the software are equipped with the right knowledge. This primarily includes the groups responsible for first-tier support within the organization (Help Desk) and those groups responsible for deploying the software.

Disposal Costs to dispose of systems.

/Continued on the next page.

Benefits of using SAAS software survey

The savvy CxO will want to bridge the future rather than jump in and take the massive risks associated with changing business models.

This means mixing old and new licensing

systems, and the need for a careful research

project on what works for existing and new

customers as well as the organization as a

whole.

As a first step to the future, one option is

to switch your licensing to a SaaS provider

so that you can start to see the benefits of

Saas yourselves! This may seem obvious but

many CxO’s don’t even know that they can

stop using outdated, inflexible and extremely

costly in-house or legacy software licensing

technologies as these have become so

embedded in their older processes.

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End User (Internal) Expenses

End-user training

Cost of user training. (Noting that a proper training plan will ensure that the various benefits – primarily productivity – that result from

training substantially outweigh the direct and indirect costs of training.)

Fixing

Costs associated with support, trouble-shooting, and fixing applications. This relates primarily to custom applications, where the

company is responsible for maintaining its own software. This area is where the productivity benefits of software tooling are counted,

together with the time spent troubleshooting software configuration issues in the tools themselves, which tends to increase with the

number of tools and vendors.

Downtime

Cost of downtime, including considerations for:

Time – costs of lost productivity while software evaluation, license allocation, and other parts of the process are taking place.

Other Inefficiencies – companies often pay a great deal for each tool, but are not able to maximize its use for a variety of reasons,

including sub-optimal or infrequent use.

Summary other forms of Costs

Opportunity costs

These can be very large indeed, but very hard to easily calculate. Indeed, these are really about strategic thinking behind focusing on core competency and growing that way rather being a “jack of all trades”. There are some easy to show hard costs like engineers dedicated to the licensing but this category should also include how well you could do if you avoided non-core activity.

Speed to market costs

This breaks into several areas; one is the time it takes for your own team or an outsourced one to respond to your initial requirements and then any changes in market needs. When considering outsourcing you need to consider the on-premise vs. hosted models as relates to speed along with the initial setup times – these vary wildly and increase PS costs significantly. For your internal development there is not only the fact you are likely to have limited resources to make changes, they can also slow down the business as you wait for licensing work to complete – a big downside to competitiveness.

Piracy and security costs

These relate to your markets and customers and could be very high if you are working with the consumer/international or very low if you are mainly US enterprise focused. A look at the audience will help judge this but in general outsourced vendors have far better technology for protection and show anywhere up to 10% revenue gains if piracy is an issue.

Build versus buy decisions often

come down to cost. Either

approach is going to require an

investment.

Oftentimes, the decision comes

down to whether it makes more

sense to continue spending

money on maintaining a

homegrown system or outdated

product that isn't meeting the

need, or if investing in a third-

party solution that meets current

and future needs is a better

approach

Source: IDC

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Detailed review of the associated costs for a Software License Management system

Software License solution costUsing the Nalpeiron Licensing Service switches the high

perpetual % revenue based costs of others to a lower annual

operational cost. Those costs are also fixed and transparent

vs. the constantly increasing % costs of the competition.

Capital Expenses

Software Maintenance & UpdatesAll the costs for maintenance and updates are included in

the annual fee structure of a hosted service saving a large %

cost of the license fee. On-premise solutions require ongoing

maintenance and those costs are usually over 18% of the

initial system cost.

New HardwareNo need for a capital expense for new hardware (servers,

switches, firewalls, load balancers etc.), all of which you will

need with competing on premise solutions. These costs can

easily run $100K per year. This also removes this cost from

your users and the overhead on your own sale costs making

you more competitive.

Database licensesLicensing servers run on databases such as SQL server

and Oracle, you will need to provide for these license costs

unless you use a hosted service where this cost is included.

Again saving $10Ks per year.

Installation & TrainingIn the first instance your engineers will need training and

installation professional services to take delivery of the

licensing system if it’s an on premise based solution.

Nalpeiron’s solution is easy to use and cloud based so very

little training is required. There is no associated training fee.

Project Consulting ExpensesMost on premise solutions require some 3 months of

planning, consulting and related professional service costs,

often adding 30%+ to the base costs of the licensing

solution, often over $100K.

Development costsIf you choose to build your own solution, you will need the

above costs plus the time and cost of internal development.

This is usually in the region of $250-500,000 for the initial

cost for an enterprise solution.

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IT and Help Desk operations support costsSupporting your own or a 3rd party licensing solution has

ongoing costs. The great benefit of a hosted, easy to use

system like Nalpeiron is this cost is reduced significantly due

to lack of hardware or software required – it’s all in the cloud

and available 24x7x365.

Operating Expenses

Desktop Management and AdministrationCosts associated with deploying, provisioning, re-

provisioning, inventory tracking and license

compliance efforts can be surprisingly high. Once again the

basic concept of a hosted service is that is removes this

complexity and has the added benefit of being always up to

date (with no need for staff to install updates and patches)

and its scalable on demand.

Software License ManagementThis can be a complex and demanding task to manage the

licensing of your own and then your end users licenses.

Nalpeiron removes this headache by providing instant

analytics and reporting for both you and your users licensing

and time you need it with a simple button click.

Internal User and IT TrainingNalpeiron uses a simple and standard API across platforms

and technologies making the internal user training overhead

as low as possible and far easier than competitor’s solutions.

The same goes for your end users, our “one click” processes

make end users lives easy and the UX is in 8 languages.

Data center costs (Bandwidth, backup, etc)If you choose to host your own or a competitive solution

you need to consider the costs associated with a data center

as well as your own staff. These can easily run $100K per

year per server install. All included in the Nalpeiron hosted

service.

User Management Expenses

End-user Training & SupportNalpeiron uses a simple and standard API across platforms

and technologies making user training overhead as low as

possible and far easier than competitor’s solutions. The

Nalpeiron “one click” processes make end users lives easy

and the UX is in 8 languages. Additionally, your end users

get access to a variety of self-service materials helping to

reduce costs associated with end-user training.

DowntimeCloud software architectures are designed from the ground

up for maximum network performance, so they frequently

deliver better application-level availability than conventional,

on-premise solutions.

End user license supportThe Nalpeiron hosted service has been designed to be the

most user-friendly solution today offering two offline and

self-service methods for licensing radically reducing user

license costs that are generally far higher than the solution

cost itself. Additionally, Nalpeiron provides you with a call

center UX so you do not need to develop an internal system

for your own staff to manage your users.

FixingNalpeiron relieves internal staff with the constant need for

fixing your internal licensing solution; we do that for you,

freeing your staff to focus on your core products. This is

especially important with licensing as the environment is

hostile and crackers are a constant drain on resources to

counter their activity.

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Opportunity costsISVs grow revenue and stay competitive by delivering new features and functionality to meet customer demands.

When ISVs dedicate technical staff resources to development of an in-house licensing system, they can drain their core development efforts and delay time to market for new products.

Most likely, any money perceived as saved by building a software licensing solution internally will be more than offset by the diversion of key resources away from the core business.

The best way to optimize productivity is to keep development resources focused right where they should be: on differentiating products in the marketplace.

These lost opportunity costs are the highest of all, often running into $M’s. In addition, Competitive Differentiation Costs relative to a home grown solution can be hard to measure but also critical to the business.

With a home grown solution you will likely be losing the flexibility to respond on a dime to market/customer demands to be able to flexibly price & package your products the way the end users want to buy them and this means losing the leverage to beat out the competition.

Using outsourced licensing gives you the ability compete more effectively and removes the lost opportunity cost.

Other forms of Costs

Speed to market costsIn today’s highly competitive market speed is of paramount importance, delays to projects mean delays in revenues. Worse, they drive up costs and open the market to competitors – you need to get your best products in the customer’s hands as fast as possible.

Many things cause delays - don’t let one of those is the non-core activity of licensing that is often left to the end of the project and has inherent risks of internal staff failing to deliver or leaving with their expertise and holding the rest of the development team up.

Also, the difference between a premise-based license solution and a hosted one is usually more than 3 months of additional time lag and extra professional services cost.

Piracy and security costsRampant piracy and unlicensed use cost the industry billions of dollars every year, making this one of the top challenges that technology companies face.

The Business Software Alliance estimates that worldwide $30 billion worth of software is pirated annually, with rates in the U.S. and Western Europe estimated at 23 percent and 36 percent, respectively.

Piracy tactics are constantly becoming more and more advanced, requiring vendors to stay continuously on top of their anti-piracy measures.

Remaining abreast of current piracy methods, protecting against them, keeping in-house licensing systems updated and legally enforcing compliance can add considerably to the piracy-related expenses, which can be a significant hit to the bottom line.

Nalpeiron customers who have switched from home-grown licensing have reported gains of 10% of revenues or more.

Source: IDC

A software publisher's understanding of its core competencies with

regards to building and maintaining a licensing technology platform

is often a key driver in the build versus buy decision. Some

publishers may believe that since the company's core business is

developing software, this capability can and should be extended to

software-based licensing technologies. Executives at other publishers

may come to the conclusion that although developing software is a

core competency, developing and maintaining a platform of licensing

technologies is not.

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Capital ExpensesInternal Costs 3rd party vendor

Software License Solution Internal development

costs and support

1-2% revenues

Software Maintenance &

updates

Internal development

costs and support

% of license fee

New hardware $100K+? $100K?

Database licenses $10-100K? 1-2% revenues

Installation & Training N/A % of license fee

Project Consulting Expenses N/A % of license fee

Development Costs $250-500K+? N/A

Operating ExpensesInternal Costs 3rd party vendor

IT and Help Desk operations

support costs

Higher, not cloud based

Desktop Management and

Administration

Higher, not cloud based

Software License Management Higher, not cloud based

Internal User and IT Training Higher, not cloud based

Data center costs (Bandwidth,

backup, etc)

$100K+? p/year N/A

User Management ExpensesInternal Costs 3rd party vendor

End-user Training & Support Higher, not cloud based Higher, not cloud based,

poor offline support and

user technology

Downtime Higher, not cloud based Higher, not cloud based

End user License Support Higher, not cloud based Higher, not cloud based

Fixing $100K+? p/year N/A

Other forms of costsInternal Costs 3rd party vendor

Opportunity costs Very high No costs

Speed to market costs Very high Higher, not cloud based,

old technology

Piracy and security costs Variable, 10-40% loss >10% revenue

Nalpeiron

Nalpeiron

Nalpeiron

Nalpeiron

Fixed based on

product subscriptions

Included

No costs

No costs

Not required

Not required

No costs for licensing

Very low

Very low

Very low

Very low

Not required

Very low, easy to use,

lots of offline and cloud

based options

99.999% uptime

Very low

N/A

No costs

No costs

>10% revenue

Higher, not cloud based

Higher, not cloud based

Higher, not cloud based

Higher, not cloud based

TCO worksheet to compare costs of various options Conclusion

While it’s hard to quantify every cost in this simple analysis this documents purpose is to highlight the very many often overlooked costs associated with selecting the most cost effective path.

It’s often tempting as a Software ISV to consider building the non-core licensing functionality yourself when looking to control your Software assets. In many ways it appears to make sense, you are an expert in Software development and this is an important part of your product requirements. However, often many of the issues of building in-house are overlooked.

In particular the costs and business risks are under estimated according to Gartner. In our estimation any internal development project will cost $250-500,000 per year if you include all the engineering, support, licensing, server and related support costs vs. outsourcing usually at a fraction of this cost.

If you discount an internal build and look to find a vendor then these considerations may help you choose between the options.

Since adding the Nalpeiron

protection we have

experienced a 15% growth

in international markets, 8-

10% of which we attribute

to having the Nalpeiron

protection in place.

Thomson

Reuters

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Just some of the reasons that customers have chosen Nalpeiron over our competitors...Technically superiorIn many cases our Customers simply find our platform offers a far superior technical solution to their needs. NLS covers all major platforms, 8 languages, an extensive API to connect everything and totally flexible way to sell and manage your software.

Nalpeiron offers a faster ROISaving engineering, operational and capital costs over an in-house or competitive solution usually shows ROI in months not years. Our hosted solution also offers a transparent and cost effective pricing plan.

Nalpeiron drives revenueAs well as offering the obvious means to control licenses and boost revenue that way, Nalpeiron also offers a complete range of marketing tools that focus sales on hot leads, offer product marketing useful reporting and allows marketing to create new sales from automated systems to tap revenue leakage and more.

Modern way to license your softwareNalpeiron offers you the choice to outsource all of the difficult and expensive infrastructure associated with licensing; this is the modern way to run a Software ISV, allowing you to focus on your core business while Nalpeiron hosts the licensing.

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Our 20 year Software Licensing Industry pedigreeNalpeiron was the first to offer a cross platform, cloud-based, licensing service that allowed our Customers to remove the need for all the costs, time and hassles of setting up their own licensing infrastructure. Today we have expanded our offering to encompass not only basic licensing but also extensive marketing and reporting functions that add even more value to our Customer’s business - driving new revenues from Software Copy Protection, trial optimization, piracy revenue recovery and sales tools.

About Nalpeiron

...it is no coincidence that the Nalpeiron Licensing Service™ is the choice of 100s software developers worldwide including Reuters, Unisys, Symantec, Zebra and Texas Instruments.

Nalpeiron was the first to offer a cross platform, cloud-based,

licensing service that allowed our Customers to remove the

need for all the costs, time and hassles of setting up their own

licensing infrastructure.

At the time outsourcing to hosted services like ours was in its

infancy and we lead the charge to lowering costs and speeding

time to market for Software ISVs.

Nalpeiron today leads the way not only advanced cloud based

licensing but also in extensive marketing and reporting features

that drive revenue growth for our customers like nothing else

available.

Nalpeiron has also spent years with millions of end users

perfecting the most robust but user friendly activation process

available today – it offers users ease of use and access to their

records, while offering you the ISV the lowest operational

costs.

With 100’s of Software ISVs, large and small, across the world

we are the partner of choice for anyone looking for modern

licensing solutions in the cloud.

Nalpeiron is a privately held corporation based in the US and

the UK.

To be clear, the Nalpeiron Software Licensing Service is a ‘pure’ cloud-based solution. This means first of all

your customers software activations are taking place and being kept securely in the cloud, freeing you from the

cost and hassle of server deployment and its associated on-going maintenance overheads to your business.

Not only this but all your access and control is done anytime, anywhere, by your staff via an intuitive web-based

user interface. The same goes for your reseller channel and end user support, no need for you to setup or

maintain any of these important services.

Nalpeiron was responsive,

professional and fully understood

business and enterprise software

requirements. What would have

taken three weeks for our previous

licensing provider to achieve is taking

Nalpeiron one day.

John SafaDevelopment Director. SDL PLC

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Why use a Cloud-based Licensing Solution?

Rapid time to value: The Nalpeiron Licensing Service

lets you get up and running quickly. The suite provides

multiple editions, pre-packaged reports and dashboards,

free source code, and a out-of-the-box solution based on

20 years of industry experience. No need to setup, deploy,

manage or maintain licensing servers. You can be up and

running within days not months.

Bullet-proof security: The Nalpeiron Licensing Service

Cloud provides an industry leading security infrastructure

for ensuring physical security, data encryption, and

application security.

Subscription-based pricing: Pay as you go, on an annual

basis, unlike conventional systems where you have to

make a major up-front investment in licenses, hardware

and software. You benefit from better cash flow and far

greater IT flexibility.

Focus on your competency: No need to keep up with the

crackers and hackers, or the constant technology changes -

let Nalpeiron take the burden of software licensing, freeing

you to focus on your business instead.

Lower risk: Licensing is integral to the success of your

Software business and therefore getting the right supplier

to support your long term objectives is critical to reducing

risk to your business. Nalpeiron reduces the risks of

licensing staff leaving and lack of in-house licensing agility.

Low cost and time overhead: Lower capital costs and

switching CAPEX to OPEX to smooth the cash flow

requirements. No need to keep expensive resources in

house for non-core functions. Upgrades, maintenance

and system administration take place in the cloud and are

managed by Nalpeiron, so you don’t have to spend nights

or weekends supervising a new version upgrade or a failed

server.

High availability: Cloud software architectures are designed

from the ground up for maximum network performance, so

they frequently deliver better application-level availability

than conventional, on-premise solutions.

High performance: Supporting millions of users and 100’s

world class clients Nalpeiron’s cloud licensing architecture

delivers virtually unlimited performance scalability. There

are practically no limits to how many users you can have or

the number of licenses that can be activated.

Ease of access at anytime, and from anywhere: Cloud

computing is “always on,” making it easy to grow your

business and support remote workers and locations, or

support a highly mobile sales or service team, because

people can access the cloud any time, day or night,

from any browser, desktop or mobile device. You, your

distribution channel and your end users can all access the

service 24x7x365, anywhere in the world.

Measure and report license activation and usage: Get a

clear picture of the products and features actually being

activated and used. Use the extensive business intelligence

tools to get an edge over the competition, analyze metrics

and performance.

Nalpeiron Software Licensing™has been built so you can deploy it fast, with everything you need “out of the box”, so you can

transition as painlessly as possible and start reaping the benefits right away. As it’s a hosted license management service, you don’t

have to worry about the time, cost and hassle of server deployment nor the complexity of connecting the client/server architecture.

With outsourcing your non-core activities like Software Licensing come many benefits. Now you can remove the distractions of trying

to beat casual software theft and your team can get on with making the best software on the planet. Focus your R&D resources on

what they do best, leave targeted marketing of trial users, licensing, activation and license management to Nalpeiron.

All the benefits of a hosted cloud-based solution:

Want to know more?Don’t hesitate. Get in touch...

Toll free:+1-888-800-8818 (US only)

www.nalpeiron.com

+1-650-799-3479 (Canada/World) +44-207-788-7843 (EMEA) +1-650-352-9046 (Fax)

The Nalpeiron Licensing Service™ is a comprehensive platform that enables software publishers to create a range of flexible ways to sell and

market their software, with coverage for all the major platforms and the ability to choose whether to deploy software licensing infrastructure in

the cloud or on-premise. Nalpeiron is one of the strongest and most robust complete solutions on the market that supports millions of end users

with strong but friendly ways to monetize your software.

What is the Nalpeiron Software Licensing Service?

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