Suppose a routine business operation for an organization. Employees log in using a cloud-based communication platform, check emails using a SaaS-based email service, and perform operational activities using different documents and applications on a perpetual license model.
All these software applications must be tracked, managed, and licensed to help run smooth operations. One of the core monitoring aspects is software licensing, a legally binding agreement between the organization and the software provider to acquire and install software. The agreement states the terms of use, restrictions, and usage costs.
As technology evolves, different software license cost models are introduced to benefit organizations and vendors – meeting user requirements, protecting intellectual property, and maximizing returns to software development costs. The most popular models are perpetual, subscription, or annual licensing models.
What is a perpetual license?
Organizations opting for perpetual licenses are authorized to use the current version of the software indefinitely. The adoption of this traditional licensing method has declined over the years due to more convenient and affordable licensing options available in the market.
Perpetual licensing agreement
The perpetual licensing agreement is a legal contract between organizations and software providers to purchase a copy of the license at an upfront cost. Perpetual licensing agreements do not expire, and licensees can use the software with all modifications in the initial year, after which maintenance is charged separately.
The agreement comprises of:
- Name of the parties: This section states the name of the organization and its purpose of existence. Similarly, it also mentions software vendor names and their development details.
- Purpose of purchase: This section is important to mention whether the licensee will use the software for commercial or individual purposes.
- Rights of both parties: Licensor can grant exclusive, non-exclusive, or revocable rights to the licensee. The licensor has the right to revise, amend, or modify the current software version.
- Restrictions: Licensees cannot sell sublicense or create derivatives of the software whereas the licensor is solely restricted to upfront fees and has no right over profits generated by the organization out of this agreement.
- Termination: Both parties decide on termination mutually.
Types of perpetual license software used in organizations
Organizations use different types of software based on their operational and strategic needs. Some of them are:
Enterprise Resource Planning(ERP) Software
ERP software is a crucial integrated platform that connects organizations’ core functions such as production, and procurement with other supporting business functions such as HR, finance, etc.
Most organizations prefer ERP software licensed on a perpetual licensing model so they may have full control over their internal business processes, customize the software according to their business model, and decide when to upgrade software.
This type of licensing model provides stability. ERP software is a long-term investment for an organization to use for an indefinite period. Even if the software provider discontinues the product, the organization will have its copy of the software customized to its needs.
Encryption or other security software
Organizations with strict security measures require encryption and security software to be licensed on a perpetual basis. They have maintained software according to their security protocols, helping them fulfill compliance and regulatory requirements.
Perpetual licensed security software has low-security risks because dedicated software developers are allowed to make changes to the codes. Organizations can choose to make or not make these updates on their copy of the software.
Operating systems
Microsoft Windows, MacOS, and Linux operating systems are preferred to be licensed on a perpetual licensing model. Every laptop or computer requires its operating system with an individual license so a one-time purchase seems a favorable option for organizations.
Educational and research software
MATLAB, SPPS, Mathtype, or Endnote software are used for technical language, research, and teaching purposes, especially in mathematics and engineering educational institutions.
These are offered on a perpetual licensing model and are preferred by educational institutions. This is because they follow tight budgets and making one-time payments is more convenient than promising recurring payments. Also, the version is available to use for as long as they want without any restrictions.
Why do organizations choose the perpetual licensing model?
For most organizations, software applications are crucial for their day-to-day business operations. They’re accustomed to using the same features that work best for their workflows. This is why they find it easier to adopt changes to the same software rather than switching to an alternative software.
Adobe Acrobat is one such software licensed on a perpetual licensing model. It is still used as a default PDF solution and installed on every operating system for day-to-day operations.
Financially, organizations find it easier to make one-time payments and use the software for an indefinite period. The software provider also offers upgrades and modifications to software at a reasonable cost, which is lower than the cost of switching.
Challenges of using perpetual licenses
Perpetual licenses are getting outdated so it is hard for organizations to upgrade these software and even harder for vendors to create more revenue opportunities within the perpetual licensing model. Here are a few challenges:
For organizations: Stuck up costs and limited options
Paying a one-time hefty amount for perpetual licenses can incur a fixed capital expenditure for the organization. The cost is stuck until it is fully depreciated or the software becomes obsolete.
The organization as the licensee has limited or no rights to resell in case the software isn’t the right fit for their workflows. In cases of upgrades and maintenance, organizations have to pay an additional amount to the software provider.
This means updating patches for urgent tasks would first require communicating with the vendor and then waiting for the patch update before operations can resume.
Since the payment is upfront, organizations have fewer chances to get reimbursed even if they are not fully satisfied with the functionality offered. Limited perpetual license options available in the market are another challenge for organizations to switch to a similar model.
Alternatively, they can cancel subscriptions for cloud-based software and switch to other options conveniently.
For vendors: Limited revenue and flexibility
Perpetual license software vendors can enjoy lump-sum revenue in one go. But, this also means that they have one-time customers. Once the software access is given, the vendor can not update another version without negotiating a one-off agreement with the customer.
They retain original software which has limited flexibility in getting real-time insights into data usage. It is then difficult to offer improvements and create more revenue opportunities from an existing customer. Also, a lack of continuous support can result in outdated software, causing problems for customers, and hindering vendors’ reputation.
Shift to other licensing models
Due to the limitations of perpetual licenses and adaptation to more sophisticated software, other licensing models were introduced. The most popular alternative is the subscription licensing model and its type – annual licenses.
Subscription licensing model
An alternative to perpetual licenses is subscription-based licensing. The organization can access the software after paying recurring fees on a weekly, monthly, or yearly basis. They can continue using the software with updates and maintenance included as part of the subscriber’s package.
Software as a license (SaaS) is one example of a license on a subscription basis. Organizations access cloud-based software to manage IT infrastructure, saving time, resources, and their private data storage. According to the latest devsquad article:
Annual licenses
A licensing model allows organizations to license the software for a year. It is included as a type of subscription license because the organization can choose to pay monthly or yearly subscriptions.
If the organization wants to continue using the license for the next year, it can renew the agreement and pay the licensing fee for the second year. Microsoft 365 is licensed on an annual basis. Organizations pay an annual or monthly fee for using all Microsoft features with regular and substantial updates.
The need for perpetual license software
Whether the organization chooses a perpetual or subscription-based licensing model, the challenge is to manage onboarding software products. With the help of a proper perpetual license management solution, the organization can utilize various features to manage licenses effectively.
They can track the types of licenses, the number of licenses purchased, and the price of each license. Set up alerts for agreement deadlines and expiration dates to renew licenses before operations are impacted.
Additionally, get real-time visibility into how many employees have installed the software and analyze utilization via an agent. Accurate license usage can help manage over and underutilization and spend accordingly.
Overall, organizations following specific business processes, security measures, or IT devices prefer to use perpetual licenses. Regardless of these requirements, they can choose perpetual or subscription-based models as it is a compulsory regulatory requirement to license all software installed in an organization.
As they find the best-fit licensing model, it is also important to adopt robust perpetual license software to manage vendor relationships, compliance requirements, and license renewals and payments in real time.
