AHEAD’s message to the marketplace regarding cloud transformation has been resonating with our clients and prospects in very exciting ways. We have been focused for the last eighteen months on helping our clients figure out ways to analyze, adopt, and accelerate projects which are fundamentally changing how IT is delivered. As a Solutions Principal at AHEAD, one of my roles is to help our clients find new ways to achieve their technical, operational and financial goals as part of their transformational activities. One tool that I have consistently noticed many organizations adopt to help with the acceleration of technology transformation is the use of Enterprise License Agreements. Experience indicates that leveraging these types of acquisition vehicles can really help accelerate technology innovation and adoption.
There are many reasons for the growing consumption and value of Enterprise License Agreements (ELAs) in areas of traditional IT that don’t have a history of using these vehicles. This is the result of multiple drivers, including new vendor offerings, a general industry shift to consumption-based pricing, and customer interest in cost control and predictability. This post will be an introduction to some of those drivers, and AHEAD’s perspective on them. In subsequent posts, I will provide some more detailed posts around the specifics of various license agreements available from traditional vendors such as Dell|EMC and VMware, as well as what we see coming in the way of license agreements from cloud vendors such as Amazon Web Services. If you are interested in new potential acquisition strategies that could help accelerate the transformation of your enterprise – read on!
What is an ELA?
Traditional software licenses are perpetual, or in the case of software associated with a hardware purchase, usually associated to the life of the hardware asset (frame based). After the purchase of the license(s), the customer will typically pay an annual service and support fee to continue to receive updates and to be able to call for assistance if needed throughout the life of the maintenance period.
An ELA, in contrast, is a contract between a customer and a manufacturer that provides an up front bulk purchase of perpetual software titles, as well as support for the duration of the contract, typically three to five years. The volume and diversity of included titles will vary by customer use case and technology platform(s), so every ELA will be unique, though there will be common elements across the industry. At the end of the contract, the customer usually has the option to extend maintenance for an additional year at the discounted ELA price (typically called an “out year” or “grey year”). After that year, the software titles revert to full price support renewal costs, or the customers can sign another ELA for a new term of use.
ELAs have been around for a very long time for traditional software providers, but recently a number of hardware manufacturers, including Dell|EMC and Cisco have started to leverage this method as well. This is reflective of both the increasing amount of software in those companies’ portfolios, as well as market drivers we will discuss in further detail. The hardware manufacturers have introduced term based offerings, as opposed to the traditional perpetual licensing structures, with the option to convert the licenses to perpetual at the end of the ELA, for a fee.
What are the benefits of an ELA?
ELAs are effectively a pre-buy of rights to all software the company intends to use during that term. As a result, the manufacturer is willing to provide a discount on the price of that software relative to the traditional purchase price. Depending on the client, scale of the ELA, and overall technology investment, AHEAD has seen savings of up to 25-30% for these agreements off of normally discounted software and maintenance costs. In addition, since the ELAs are typically an unbudgeted event, the manufacturers will also usually offer generous financing terms for the agreement. ELAs can also simplify customer operations, as they consolidate multiple purchase and support contracts, providing a single, co-terminus agreement, with reduced overhead.
ELAs from hardware manufacturers can also help organizations seeking to move from a CapEx to an OpEx purchasing approach. From an accounting perspective, this type of agreement will typically reduce CapEx, as it moves software that was traditionally capitalized (since it was tied to a frame) to an operating expense. This is especially important given recent accounting changes regarding operating leases. Finally, many of the agreements will have the ability to substitute license titles during the agreement, so that they have flexibility depending on how they grow.
There are benefits for the software and hardware providers as well. These agreements give them visibility and predictable revenue streams for the duration of the contract. In addition, for software titles the customer already owns and was paying maintenance for, the ELA allows the supplier to recognize that conversion as new license revenue, rather than maintenance extensions, improving their revenue mix. Given that most ELAs include “growth” for software titles over the term of agreements, it is likely that the manufacturer will be able to sell more licensing through an ELA in one event rather than waiting for future agreements. Finally, these vehicles allow the manufacturer to bundle in additional titles, driving consumption of other product lines.
ELAs are often a good fit for customers who expect to grow during the term of the contract, but it would be misleading to make a blanket statement that they are right for all customers. There are nuances that must be understood in terms of how that growth is expected to manifest, the optimal term of the contract, and how the organization accounts for costs that must be analyzed in order to validate the potential benefits. In addition, due to the variances between manufacturer terms and ELA structures, it is possible that an ELA will make sense for one technology area, but not for another. At AHEAD, we have built a strong financial services team who can help customers wade through these details, and make the best decision possible. When creating a financial strategy and roadmap for your data center, or for your aspirations to move to a hybrid model including data center and public cloud, it is critical to include analysis of acquisition models like ELAs to help maximize your spend, reduce your cost, and determine if they are feasible and suitable for your organization.
For more information about ELAs, contact us today to meet with our team of experts.