Mitigating licensing challenges during cloud migration

A blog post by Brett McCoy, principal, Deloitte Consulting LLP; Jayanta Ghosh, senior manager, Deloitte Consulting LLP; Abhinav Gupta, manager, Deloitte Consulting LLP; Kanika Dhingra, senior consultant, Deloitte Consulting LLP; Pratima Patil, senior consultant, Deloitte Consulting LLP; Naman Gupta, Analyst, Deloitte Consulting LLP

Public cloud adoption has surged over the past few years, and while it has brought enormous benefits to companies that have migrated to cloud, it has also produced some unexpected challenges. For example, many companies that have moved to cloud have incurred complex software licensing issues—and costs—that have impeded their cloud journeys.

Recent financial estimates by Deloitte¹ indicate that overall licensing costs can reach as much as 24 percent of total information enterprise technology spend, thus driving home the need for organizations to properly evaluate their application portfolios for potential licensing issues before migrating applications to cloud. In the initial stages of cloud migrations, organizations often perform a quick analysis of the application portfolio and the total cost of ownership (TCO), to assess potential costs. However, many organizations still encounter a cost explosion when the actual migration begins, in part because they were unaware of the licensing requirements for cloud, which can include licensing transfer, purchasing, and visibility issues.

Common licensing challenges

Most organizations are unaware of the intricacies of license deployments, policies, and rules, and they may encounter several challenges as they embark on their cloud migration journey.

Limited portability of licenses without software assurance

An article published in 2019²  by a leading cloud service provider stated that on-premises licenses that were purchased without software assurance and mobility rights would most likely be disqualified from being deployed with hosted cloud services offered by prime cloud providers from October 1, 2019. Avoiding this scenario would either require the purchase to have been made prior October 1, 2019, or added as a true-up under an active Enterprise Enrollment.³

Compliance gaps from the transfer of on-premises licenses to cloud

Typically, organizations assume that all on-premise licenses will transfer to cloud, and they calculate savings accordingly. However, that’s not always the case, and many companies will need to purchase additional licenses or cloud entitlements. This issue often stems from cases when companies run workloads with the help of OS data center licenses that can accommodate innumerable VMs provisioned to a single server. The total number of licenses required for scenarios like this under a typical “bring your own license” (BYOL) program would need to be calculated based on the number of cores used by right-sized instances.

Contractual responsibilities for a third-party license

Companies with large inventories of third-party-licensed, commercial, off-the-shelf applications may find that some third-party vendors restrict the movement of licenses to cloud due to their software license agreements. Therefore, many companies have to eliminate from consideration for cloud migration those applications that would otherwise be migrated due to contractual obligations.

Sunk costs because of contract cancellation and modernization

Companies often register for multiple long-term contracts with third-party software providers that provide lower costs compared to market rates. However, if a company plans to either modernize or sunset the software, it is often unable to due to significant early-termination penalties in the long-term licensing contract. If the company does decide to go through with its plans, it often must retain unused licenses without any return.

Lack of unified license management system

Many times, companies will purchase software licenses on an ad-hoc basis during migration to cloud, and managing the rights to those licenses can become challenging in the chaos of the migration process. Often, simply identifying acceptable licenses and their associated contracts is a challenge for migration teams—with over-licensing often the major issue. Licensing management systems are also frequently overtaxed, and the complexity can have an adverse effect on software license administration. 

Opportunity loss from the discount offered by the dominant provider

When there is a broad portfolio of on-premises licenses acquired from a single provider, companies often receive substantial discounts on licenses under BYOL arrangements. If the company then wishes to acquire other strategic partners to provide services, it may lose its discounts, and its licensing costs may increase. And if strategic priorities change, the company may move further away from its original, dominant provider and possibly lose out on potential benefits from that provider. 

Key mitigation strategies

Having a well-defined strategy

The importance of licensing strategy in tandem with developing cloud migration strategy should not be underestimated. Defining a licensing strategy upfront will go a long way in mitigating or eliminating many migration pitfalls.

Analyze license portfolios prior to migration

To negotiate competitive offerings and take advantage of cloud service providers’ strategic initiatives, a detailed assessment of existing contracts should be done 18 to 24 months prior to license renewal date. This assessment should consider various factors, such as IaaS versus PaaS , sizing, pay-as-you-go versus BYOL, support for different product editions, etc. Requirements including low-code automation platforms, analytics capabilities, and cloud infrastructure will play a pivotal role in defining analytical parameters. 

Optimize on-premises license portfolio before migration

To avoid cost surprises, it’s necessary to conduct a TCO assessment on the target cloud to identify cost-saving levers for licenses with workload optimization, such as identifying surplus licenses that have been inactive for a long period. It’s also a good policy to leverage automation to determine how many requisite licenses and unused license rights can be repurposed to avoid additional license purchases.

Renegotiate contract terms or find alternatives before selecting the target platform to minimize the financial impact

Before choosing a strategic partner for migration, it is important to consider termination fees, rights across various cloud service providers, and conversion of on-premises licenses to cloud licenses. This process helps in updating the present contracts, terms, and use rights for both current and new licenses and helps avoid unexpected, costly repercussions. Companies should also take into account the sunk costs associated with the non-portability of licenses. It’s also worth remembering that increased licensing expenses may also result from a switch from pay-per-device to pay-per-user licensing. 

Align license and service purchases with current strategic priorities of cloud providers

Organizations can maximize available incentives by coordinating license purchases with strategic initiatives (such as utilizing their ongoing strategic services and products) because cloud providers typically offer strong incentives and frequently package their services to provide more affordable pricing. A like-for-like license renewal could potentially raise costs during renewal cycles, but additional cloud investment could also result in higher savings. 

Conclusion 

The importance of establishing a strong licensing strategy and renegotiating contract terms before migration cannot be understated. Not doing so could lead to challenges including restricted license portability, contractual commitments, and penalties due to early contract terminations—which could result in organizations ending up overpaying in the long term and hobbling their cloud journey from the outset.

To learn more about mitigating licensing challenges when migrating to cloud, download our latest paper:  “Key mitigation strategies to overcome licensing challenges during migration.”

Please reach out to Brett McCoy and Erwin Yuen to learn more about our cloud and licensing capabilities.

Endnotes

1 Deloitte conducted financial estimation exercises across internal engagements to estimate average licensing costs as percentage of total IT spend.

2 Microsoft Licensing Update, https://www.microsoft.com/en-us/licensing/news/updated-licensing-rights-for-dedicated-cloud

3 Amazon Web Services and Microsoft FAQs, https://aws.amazon.com/windows/faq