From On-Premise to Cloud: Navigating the Transition in Software Licensing Costs

As more and more companies begin to migrate their workloads to the Cloud, the way we purchase and consume software from a licensing perspective is changing. We are witnessing the end of an era. The era of “pay for the privilege to use” into the era of “pay as you use”. I am talking about the shift in cost structures. Historically, software licenses are purchased in advance at an upfront cost. Some pay-as-you-go models do exist but the recurring rate is typically higher than if you had paid upfront, or in a few installments. Oftentimes, licenses are purchased for one year or three years, or in some cases, much longer.

When companies migrate their workloads to the cloud, they may find that they want to transition to a new pricing model, and they may need some help in understanding how and why. 

Traditional on-premise software is software that was either purchased from a vendor or was developed in-house and is installed on servers in a data center that the company owns. The key distinction here is that servers were purchased and placed in a physical location and the software was then installed onto those servers at the physical location.

Companies such as Microsoft, Oracle, and many others, have sold software and operating systems via licensing models. Once a company builds a data center, it needs server operating systems or hyper-visor software to install on the bare metal machines. They pay for licenses for every copy that they install, and in some models, for every single user that accesses the system. Depending on the company's needs, there may be additional software that is purchased and installed on top of those operating systems. 

There are some clear and present advantages to buying software this way and running it in your data center. For one, you have complete and total control over your infrastructure. This can be a huge advantage for companies that are worried about security or data sovereignty. Another pro is the ability to integrate with legacy systems that you may also have on-premise. There is also a relatively predictable nature when it comes to the upfront and ongoing cost. For most companies, however, the downsides drastically outweigh the benefits. 

That same upfront cost may be too high for most organizations. The cost of ongoing support and maintenance is also pretty huge! And when companies kick the maintenance burden “can” down the road, the cost to fix everything balloons quickly. Other drawbacks include limited scalability, limited accessibility and flexibility, complex implementation and management, limited disaster recovery and business continuity controls, and difficulty meeting compliance needs. 

The Rise of Cloud-Native Solutions

Cloud-native software refers to applications and services that are specifically designed and optimized to run in cloud environments. Benefits over traditional on-premise hardware include scalability, flexibility and agility, high availability and reliability, increased accessibility, and cost-efficiency. 

Where do these cost efficiencies come from you may ask? Mainly the cost savings are wrapped up in the “pay as you go” model. The idea is, that when your customers are not consuming your product, you are not paying for infrastructure that runs the product to sit idle, or software licenses for users. The other efficiencies mentioned may be a bit more difficult to unlock. For instance, leveraging serverless technology for your existing monolith may require a substantial investment in modernization efforts.

My main point here is this. It’s not just a change in how we buy software and pay for infrastructure, it’s also a change in how applications are developed and delivered. It’s all about the economies of scale.

Transitioning License Costs: What to Expect

So, you are finally migrating to the cloud, and want to know what you are in for on the licensing front. First and foremost, it’s important to remember that you must continue to be compliant with your existing licensing agreements. You cannot just let your licenses expire and say “I won’t renew because we are going to move to the cloud”. The problem with this, especially if your software or operating systems are a little dated, is you may lose the ability to upgrade in place. 

Why is this such a big deal? Let's say you are running Microsoft SQL Server 2014, but your license is expired. You cannot upgrade to SQL Server 2019 or 2022. So you decide to migrate. The issue is most of the really great tools that can help you move to the cloud, depending on later versions. You may find that not only should you have upgraded and kept your licensing up to date, but that you now have a costly migration effort with added complexity on your hands. The devil always gets his due. 

In a perfect world, you can line your renewal up with a migration or modernization effort. Maybe you are coming off of a 3-year license contract just in time to move into cloud native VM instances and can switch to the Pay as You Go licensing model where sometimes, licensing costs are wrapped up in the hourly rate for the machine you are running. If you do modernize your workloads, there are lots of cloud services that are pay-per-request. With these models, you truly only pay for what you use. 

One last key piece of information to make sure you are aware of is Cloud Service-Level Agreements (SLAs). Depending on your level of required uptime and availability, there may be different pricing tiers that you can buy into. Some SLAs depend on the volume of usage, so a heavily leveraged service may be promised to be up more consistently. These are just a few things that would not have been possible to implement in the data center. 

There are a few other things to consider when it comes to transitioning licensing costs that I will touch on just briefly. Commercial off-the-shelf software. Sometimes, these products can move to the cloud or have even been adapted by the cloud and have a managed version. Often though, there is no easy way to move a piece of COTS to the cloud, and it simply must be retired, or maintained in place.

Factors Influencing Cost Transitions

How do you know when the right time to move to the cloud is? Or maybe what is the right time to move just a piece of your business to the cloud? There are several factors to consider. First and foremost are Business size and Scalability requirements. A very small business that is growing quickly and trying to compete may not have the ability to build a whole data center. On the flip side, a huge organization looking to modernize their business and technology, or perhaps lower the ongoing cost of ownership and maintenance of a data center could also benefit from the scalable nature of the cloud and how costs are broken down.

Other times, there is some industry-specific consideration. For instance, lots of healthcare companies that are looking to leverage the power of artificial intelligence may find that having their data as close to the compute where these services are offered is the most cost-effective way to delight their customers. Other times there is a regulatory or compliance reason.

One factor that we witness time and time again is technical complexities and integration challenges. Most on-premise data centers simply don’t have the technology and ease of use when it comes to connecting systems and moving data around that are present in the cloud. We sometimes say “they have missed out on a lot of innovation”, by staying in the data center. As time goes on, more and more systems will be purpose-built to work in the cloud, and fewer and fewer comparable options will be available in the data center. It doesn’t matter if you don’t like it, it is a plain and simple truth. 

Strategies for a Smooth Transition

The first thing a company should seek to understand in the licensing cost and general total cost of ownership topic is that planning is key. Before any migration initiative is undertaken, a comprehensive cost analysis should take place. It is very important to not only understand the cost of running a system in the cloud but also to double-check and make sure you understand the cost of running it in your current setup. Frequently, the perceived cost and the actual cost are different. Did I mention that understanding what money pays for in the cloud is much easier than in the data center?

As part of the planning process, it’s important to ask the question, which workloads need to move? You may find during your cost analysis that some software is just no longer as profitable as it used to be. It may be time to put that system to bed or to plan a modernization effort to get it back to a performant level that meets current-day users' demands and expectations. Seek to understand what software you actually need to do good business, and what the compatibility requirements are for everything.

Last bit of advice, don’t be afraid to negotiate with the cloud service providers and vendors. Sometimes, you can get great deals, especially if you can guarantee usage over a period of time (which, come to think of it, is kind of like signing a year-long or longer contract…). When you do go to execute your migration, do it in phases. One change at a time. And focus on your organization evolving to meet the changing environment.

Realizing Long-Term Value

It’s a long road, but eventually, your effort will be paid back in spades. Once you have moved to the cloud and modernized your workloads, you will enjoy all of the rumored benefits. Being a forward-thinking and innovative company, you embrace the newfound level of agility and high experimentation, and you crush the competition, all while only paying for exactly what you used. In the cloud, you have access to services that you never even knew existed, and new ones are always being released. You begin to understand the value of a managed service and start appreciating the SLAs that come with them. After all, you know from experience how hard it is to maintain a database cluster, or scale web servers based on traffic trends because you did it in the data center for years! 

In addition to all the shiny new features and cost savings, you realize that you have total insight into where your cloud spend is going. You can start initiatives with crack teams and see the exact amount of spend, and therefore calculate a highly accurate ROI. You begin to optimize everything, and your business adapts and evolves based on needs and market trends. You secretly do not miss license renewals. :) 

Conclusion

If you or your organization is at any part of this journey to the cloud and want to consult with us, please drop us a line at sales@ipponusa.com. If you like what I had to say in this blog post, be sure to check out our new eBook- it’s all about cloud maturity! Still want more? We also have a webinar all about cloud migrations - check out episode one here.