From computer-aided design (CAD) and customer relationship management (CRM) tools to digital communications and payment applications, productivity software has long been integral to business operations for multinationals and small businesses alike. However, the distribution of and access to software has changed dramatically over the last few decades, from the origin of disk-based content to the emergence and rapid adoption of server- and cloud-based services. Ninety-nine percent of software acquisitions are now license-based, allowing corporations to digitally scale from individual-level user access to enterprise-level solutions. From an IT procurement perspective, there are two primary licensing models: perpetual and subscription, both of which will be explored in detail.
Perpetual licenses are typically one-time, upfront purchases (capital expenditure or CAPEX) with an indefinite license duration. Any technical support and maintenance needs, software updates and feature upgrades are considered extras and charged as a percentage (typically between 8 and 12 percent) of the initial license cost.
Benefits of perpetual licenses include:
- Lower lifetime costs. After a break-even point of three to four years on average, the total cost of ownership (TCO) of a subscription license exceeds that of a perpetual license due to the premium that vendors charge for the value-added services and flexibility that a subscription model can provide.
- Perpetual licenses do not rely on the vendor for ongoing support of the software. If the vendor discontinues the service, the customer always has access to it through his or her perpetual license.
- Companies with annual budgets that are unpredictable or constrained prefer to obtain software through a one-off purchase, as they cannot be sure that there is room in future budgets for recurring renewal payments.
- Companies with larger capital budgets or capital spending requirements typically prefer the upfront investment of a perpetual license, as they can offset taxable income with deferred tax benefits on capital purchases.
- License ownership. Some companies prefer to own their software licenses rather than rent them under a subscription model.
Subscription (or term) licenses are recurring, periodic costs (operating expenses or OPEX) with a defined license duration, typically per year of subscription renewal. Technical support, maintenance, software updates and feature upgrades are bundled in with the subscription cost.
Benefits of subscription licenses include:
- Cash-flow advantages. Subscription licenses require considerably less initial cash outlay, and are thus more appropriate for many companies with relatively stable annual budget allocation policies and do not allocate for larger capital investments.
- Access to latest features and services. Subscription license costs are all-inclusive of the latest version updates and security patches, so companies can ensure that all their employees have up-to-date software. This also reduces the need for companies’ internal IT teams to learn multiple versions of the software for support purposes.
- Greater flexibility. Companies can subscribe on a pay-as-you-need basis, with the option to scale their user base and access up and down as required.
- Operation on a trial basis. Indecisive buyers can use a short-term subscription as a trial period to test out new tools without making a substantial capital commitment.
- Software availability. Vendors are more inclined to offer their products and services on the subscription model, since it both ensures a steady, continuous stream of revenue and eclipses perpetual license revenue over time.
Perpetual Vs. Subscription
For IT procurement specialists, the choice between perpetual and subscription licenses boils down to the expected use case, any cash flow or budgetary constraints, and the value of software updates and ongoing vendor support. The advantages of one licensing model are largely reflected in the disadvantages of the other. Generally, however, the market is moving toward a preference for the subscription license over the perpetual, largely due to the cash flow benefits, inclusion of value-added features and services, and flexibility of a pay-as-you-need model.
Beyond the perpetual vs. subscription discussion, there are other aspects to consider when procuring software licenses, such as the decision between hosting externally and on premise, which warrants its own discussion on network reliance, security concerns and the degree of user control. It is ultimately up to purchasing specialists to navigate the complexities of the modern IT procurement landscape and exercise best judgment while making sound purchasing decisions to fulfill their companies’ needs.
David S. Yin is an associate consultant at GEP.