Which enterprise software licensing model is right for your organization?
Today’s software licensing models have gotten very complicated. We’ll provide a brief explanation to the three main licensing models: rent, buy, and hybrid, to help you determine which licensing model is right for you.
The Rent Model
The rent model is becoming increasingly popular today. In addition to vendors wanting more money, the reason is that most of today’s software is hosted in the cloud, and the complexity of managing these software services in the cloud is beyond the capability (or interest) of most customers. Thus, continuous support becomes necessary which gives rise to the rent model.
Advantages
The rent model requires low upfront cost and time. Solutions are usually already available or are mostly available with minor customization required. There is no maintenance required on the customer’s side.
Disadvantages
One major disadvantage of the rent model is obviously that you don’t own the software. In addition, customization options are limited, and the vendor decides what and when to implement new features.
Who should seek to rent their software solution?
The rent model is acceptable when the software performs standard functions, e.g., ERP, productivity, and etc. However, when either the software requires a lot of customization or when it is critical to your competitiveness, the rent model is not ideal.
The Buy Model
Here the customer hires a vendor to build the solution, and the customer owns the solution, which includes all the code and IP developed for the solution.
Advantages
The clear advantage here is solution ownership and control. The solution is completely customized and features are added when needed, so the solution is optimized for the customer.
Disadvantages
An obvious disadvantage is the high upfront cost of building the solution. However, the main disadvantage of the buy model is the maintenance effort and cost. Software solutions require constant maintenance and iteration, so once you jump on the bandwagon, you will never get off.
This is exacerbated by the fact that most of today’s software is cloud hosted. So in addition to building the software, you also need managed services. Some vendors build the software but do not provide managed services. It is important to find out.
You may think you have control when you own the software, but in actuality, you do not have as much control as you think. This is because software has become so complicated that if one team implements the software, switching to another team for support is usually very time-consuming and expensive. Hence, it’s very likely you will get stuck with the original team.
Due to the complexity of the software code, you will not be able to evaluate its quality easily. When you encounter production or scaling problems down the line, it is too late.
Due to the complexity of the software development, production, and scaling processes, the software development schedule is difficult to control. The less experienced the software team is, the more likely this becomes. It is typical for a “6-months” software project to turn into 12-months or more.
Who should seek to buy their software solution?
You should consider the buy model if the software is critical to your business. However, in order for this to be successful, you either need a good internal software team who knows how to lead outsourced development, or you have a trustworthy external vendor that you plan to work with for the long term.
The Hybrid Model
The hybrid model is one where there is a low-code application layer above the software infrastructure layer, so that applications can be built on the low-code layer, while the infrastructure layer does the heavy lifting including production and scaling. This has been a popular model in the engineering industry, e.g. control automation, system simulation, hardware design, and etc., and it is gaining popularity in the software world as well. Traditional software solutions such as web applications, AI models, and data solutions are increasingly being built in low-code.
Advantages
The main advantage of the hybrid model is that it separates the application layer from the infrastructure layer. Customers can own the application layer without dealing with the complexity of supporting the infrastructure layer.
Because the application layer is low-code, this leads to significantly faster development time, reduced complexity, visibility and transparency, and sustainability. No expensive software development team is needed to support the low-code applications, which leads to reduced support cost for the long-term.
Disadvantages
The disadvantage is that if the vendor’s infrastructure layer is proprietary, then you may be locked-in. This is no worse than what happens in the rent model or even the buy model (because the complexity of the software code prevents you from doing anything with it), but if possible, it is advantageous to choose a vendor whose infrastructure layer is built on popular, open ecosystems.
Who should seek to a hybrid software solution?
For most customers whose main business is not software and who needs a customizable solution, the hybrid model is the right answer.
Summary
Picking a software solution vendor is getting more and more complicated these days. It is important to understand their licensing and support models because they directly affect the sustainability of your solution for the long term.