Cloud providers push for new software-pricing model

As some federal agencies take on the role of cloud service providers, they are asking software vendors to price their products in a pay-per-use model. But many vendors have thus far been reluctant to consider this approach, according to Doug Bourgeois, director of the Interior Department's National Business Center.

"The traditional enterprise license agreement that software providers want to bring to the table requires the service provider to outlay the money up front for the entire enterprise license, and then you have the ability to provision those licenses as clients accessing your system," Bourgeois said. "That just doesn't work in a cloud model. The service providers are taking all the risk and paying up front" for services that may or may not actually be used.

Within a few weeks, the NBC plans to introduce a set of infrastructure services for other federal agencies to use. The idea is that it can offer other agencies such infrastructure at a lower cost and with all the necessary government security compliance already in place. The center plans to offer infrastructure service on a pay-as-you-go basis at least, initially, in monthly increments.

But much of the software needed to supply this infrastructure-as-a-service — server software, databases, and such — can only be procured via old-fashioned enterprise licenses, which requires payment up front. This puts the NBC between the proverbial rock and a hard place: The licenses for all the software must be purchased, whether or not they are actually used.

This is especially problematic, Bourgeois said, insofar as the projected use of the NBC's cloud services, being not only a new service but a new type of service, can vary wildly. And because much of the cost-savings is based on a shared-usage model, charging full price for each copy of a program that might be used, and/or for every customer that might use that program, would cut into the cost-savings that cloud computing could bring about.

Oddly enough, hardware vendors seem to have come to terms with the pay-as-you-go route. For its own cloud services, the Defense Information Systems Agency hammered out an agreement with Hewlett-Packard and Sun Microsystems whereby each company would outfit DISA with fleets of servers within the agency's data centers, but only charge for those servers that were actually used. The NBC struck a similar deal with its own hardware vendors.

Yet many software companies seem reluctant to offer a similar deal, Bourgeois said, adding that the NBC currently is talking with a number vendors to see if any deals can be worked out.

While Bourgeois did not mention any specific software companies he has spoken with, a quick survey of the enterprise software market finds few companies ready to commit to such a pricing model now, though they might consider it eventually.

Consider Microsoft, for instance. Microsoft Federal's chief technology officer, Susie Adams, noted that Microsoft will often get requests for deals that ask the company to issue Client Access Licenses on a per-use basis. "They only want to pay the on-premise CALS for the number of users that actually touch the server in production," she said via e-mail.

This approach, however, is not really feasible for the company to manage, she said: "We don’t do this today and don’t have any plans that I know of. It would be almost impossible from a governance perspective."

Customer relationship management software provider RightNow does not offer usage-based pricing, but is open to the idea, said Kevin Paschuck, the company's vice president of public sector operations. In fact, the company already is in discussion with DISA about establishing a monthly payment based on actual consumption.

"Our typical contract aligns with the industry standard of an annual commitment with the opportunity to tune up or down the licenses at the end of the contract based on amount used," Paschuck said in an e-mail. "However, we are open to monthly usage based contracts."

Wayne Bobby, Oracle Public Sector vice president for finance and administration solutions, has spoken with Bourgeois about this pricing model. Bobby does see when it might be possible to move to such a model, although he cautions that will take more work to make happen—for both customer and supplier—than might initially appear to be the case.

"It opens up a whole bunch of questions that have to be examined before it can be done," Bobby said. For instance, Oracle's own business model is based to a considerable extent on upfront licensing. Asking for a new model of pricing is essentially asking a company to change its revenue recognition model—no easy task. How does income from a subscription service get reported to stockholders? To the Securities and Exchange Commission?

"It would change the way we do our books," Bobby said.

Likewise, on the agency side, the change in the way software is procured would require changes in the federal budgets. The flow of when money gets spent in individual program budgets will differ, for instance.

Overall, if these issues are not thought-out, this sort of pricing model could end up being a non-starter for vendors, in much the same way that Smart Buy, a federal procurement initiative, failed to gain widespread adoption because of the unresolved complications that it engendered.

Bobby added that, even though the company does not offer a month-to-month per use payment plan, it does offer other options close to the monthly subscription model that Bourgeois seeks. For instance, Oracle offers the ability to lease some of its software, which eliminates the large up-front costs for acquiring licenses. Oracle also offers its own cloud computing service, Oracle On Demand.

Bobby was clear that he was not discouraging the approach, just that it would require much work.

"Bourgeois' idea is a great one—he is a visionary. It's probably the model we're heading to. He should be that pioneer and push forward, and it will all get worked out," Bobby said.

Until the issues are worked out, however, the National Business Center and other government cloud providers will have to make do with traditional licenses, which could problematic for nascent government cloud offerings, Bourgeois said, adding,"The standard license agreement puts too much risk on the service provider."