Decision Maker

Don't Buy Your Software, Rent It!

Not knowing how many licenses for a particular product you would need in the future is just one of the many reasons why you should go the lease route.

It's pretty clear Microsoft is trying to move both businesses and consumers to a license-rental model instead of a license-purchase model for software. Office 365 subscribers in higher-end plans get their Office desktop software included for the duration of their subscription. This is clearly a rental tactic.

Enterprise software, including the Windows OS, is moving to tighter release schedules. It makes less sense to buy that software outright, and more sense to pay a subscription fee to ensure that you have the latest version. In fact, Software Assurance started as something of a rental-plus-purchase plan (any "maintenance" plan that promises free updates is essentially a rental).

Microsoft is hardly the first company to go down this path. Adobe's new Creative Cloud product is an outright rental program. You pay a monthly fee to use the software. In return, rather than massive new versions, Adobe sends out periodic "minor updates" that introduce new functionality and bug fixes. This is akin to service packs in the Microsoft world (you're still operating under the misconception that service packs don't include new features?).

Not every company is as excited about the rental model. Many IT decision makers are pushing back. Some are doing so for valid reasons and some not so much. You know who's almost never pushing back, though? The CFO. That's because the CFO has a special tool IT decision makers often lack -- a calculator.

Aligning IT Costs
During the economic meltdown of 2008, many organizations found themselves downsizing staff. Those efforts were complicated by the fact that IT had numerous capital investments to support those employees. Even when those investments were no longer needed, they still had to be paid for.

If you're laying off 5,000 people, you don't need the same amount of Exchange servers, file servers and other systems. If you bought them, though, you're still paying for them. So if your goal was to reduce costs, you end up having to lay off more employees to hit that number. Your only avenue for savings is their salaries and hard benefits.

Renting software fixes that. If you do end up laying people off, you also cancel that portion of the subscription they were using. This saves you incrementally more per person. Renting software also helps the company make better decisions. Today, few organizations can point to the overall cost of a single employee. Overhead like office space rental and utility expenses aside, IT is typically a giant bucket of overhead that's tough to quantify.

Moving some of that IT investment to rental makes it easy to get a better idea of how much each employee costs. In many ways, renting helps accomplish something IT should have been doing all along for cost allocation. If we rented everything, IT wouldn't be overhead anymore. It would be a break-even proposition, with costs easily allocated to actual production expenses.

CapEx Versus OpEx
There's also the matter of depreciation. That's something financial folks live with as a necessary evil. Buy a piece of software and in most cases you can't write off the expense as a capital investment right away. You have to depreciate it over five years. With rentals, you write off the entire amount in the same year you make the payment. Your bookkeeping becomes slightly easier. You're no longer sitting on capital investments that have yet to be depreciated. There's less financial resistance to upgrading software when the time comes.

Renting is better for the vendor, too. Instead of having to build up to a massive new release every few months hoping customers will get on board, vendors can ship features in a more agile, customer-responsive fashion. They don't need to worry about customers perceiving value and deciding to upgrade. They're already paying for it.

People bemoan buying a new car. The minute you drive it off the lot, its value drops well below its purchase price. Many people turn to leasing for that exact reason. You don't actually pay for the full value of the car by the time you turn it in. Software loses 100 percent of its value the minute you buy it, because you typically can't ever resell it. So why buy it?

About the Author

Don Jones is a 12-year industry veteran, author of more than 45 technology books and an in-demand speaker at industry events worldwide. His broad technological background, combined with his years of managerial-level business experience, make him a sought-after consultant by companies that want to better align their technology resources to their business direction. Jones is a contributor to TechNet Magazine and Redmond, and writes a blog at ConcentratedTech.com.

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