Understanding ERP Software Licensing and Subscription

ERP software is not bought or sold, at least not in the traditional sense. In the past, it was always licensed for use, and that practice continues today for on-premises deployments and many hosted ones. However, often today, particularly when software is delivered as a service (SaaS), those licenses are replaced with subscriptions, such is the case with cloud ERP systems.

Licenses and subscriptions grant your company the right to use the new ERP solution under specified terms and conditions, which outline what, who, and when it can be used. We delve more deeply into how different licenses and subscriptions are priced in our post ERP Pricing Models: How You Pay for ERP Software.

Even back in the day when the system was delivered on a tape or disc, the software product itself was much more than the media on which it was delivered. Yes, you might own the tape, but you never own the software delivered on it. You’ve now entered the world of intellectual property. While it might sound simple enough, understanding the various terms and conditions of the license or subscription can be pretty complicated. It is worth the effort to fully understand because it is important to know exactly what you are paying for.

Even for seasoned enterprise application buyers, terminology can be confusing. Perpetual license. Term license. Subscriptions. Concurrent users. Named users. Enterprise licenses. What about support and maintenance? Do you know how these are different and where they share similarities? If you are uncertain about all that fine print, read on to get a better sense of all your options and give yourself a competitive advantage.

While subscriptions are quickly becoming the de facto standard in software today, we begin with ERP software licenses because unless you are running a SaaS product, this is likely what you currently have. Understanding where you are today is essential in smoothly transitioning to a new solution.

Perpetual Licenses

An ERP software license can be perpetual. That means you pay for it once, and you can use the enterprise application forever. Maybe. This used to always be the case, but more and more often today, a perpetual license agreement might stipulate that you have the right to use that system only for as long as you continue to pay maintenance to the ERP software vendor that provides the product. So be careful to read all the fine print in the contract. This becomes very important under several circumstances, but most critical when your system is nearing its end of life.

As an ERP software system ages, it might still be ​“supported,” but the vendor is no longer providing any innovation beyond what is required to meet regulatory requirements. Yes, someone will pick up the phone if you call for support, but don’t expect any new features. Eventually, you might find your new business functions aren’t adequately supported. Meanwhile, you are probably still paying the same price for support and maintenance as you were when they were actively developing new features and functions. This is most likely to happen when your original software solution provider is acquired but may also occur when the vendor has developed a newer product and no longer views your solution as ​“strategic.”

Either way, you may prefer to use a less expensive third party for maintenance or even self-maintain. If you have a genuinely perpetual license with no strings attached, you could choose either of these routes. But if you have a conditional perpetual license that requires you to stay on maintenance, you may not be able to do so without violating the terms of your contract. And before you violate those terms, be sure you know how likely your vendor is to litigate.

Many ERP vendors that still ​“support” older legacy products will assure their customers they will never ​“sunset” a product. But several very prominent vendors have now set dates for a declared end of life of their older products. At that point, they will no longer support it. These end-of-support dates are quite common in terms of supporting specific versions (releases) of products, but until recently, have been relatively rare in declaring the end of life of the product itself. These vendors typically give you at least a year (usually more) notice before you are forced to take some action. 

If your solution has a declared end of life, and you have a perpetual license that requires you to remain on maintenance unless you take some action to upgrade, migrate or replace it, you are stuck between a rock and a hard place. 

Term Licenses

While perpetual licenses were once the norm, they are becoming obsolete. More likely today, your license will be valid for a specific time period. This is generally referred to as a ​“term” license. At the end of the term, you must either renew the license or discontinue using the ERP system.

The application might have the equivalent of a kill switch that will disable it and prevent you from continuing to use it at the end of the term. This requires some license management code to be embedded in the solution and is not always done, particularly in older ERP solutions. If it is not, and you don’t renew, you might find some software auditors on your doorstep.

Maintenance Agreements

While perpetual and term licenses grant you the right to use the software, neither includes support and maintenance beyond any kind of warranty period.

A maintenance agreement, which is a recurring cost, typically provides both technical support and certain innovations. Some of those innovations will be included in your maintenance fee (bug fixes, upgrades, new releases), and others (new modules or extensions) might require additional purchases.

At the very minimum, your maintenance agreement is an insurance policy. But as long as your solution provider actively develops new features and functions, it can be much more.

Subscription-based pricing is a form of a term license. You are allowed to use the system as long as you renew your ​“subscription.” This is generally the way cloud ERP works. We see more companies making a move to cloud ERP than ever before. Deployment options differ, and one big difference (and advantage) of a subscription over a perpetual or term license is that maintenance is included in your subscription. But this is where some confusion starts to creep in. Often people equate subscription to SaaS. Generally, most applications delivered as SaaS are cloud-based ERP paid for through a subscription model, but not all subscriptions are delivered as SaaS. 

SaaS & Cloud ERP Software Subscriptions

With a SaaS (software as a service) subscription, not only are support and maintenance included, but your SaaS provider takes on the responsibility of maintaining the system and will monitor performance and uptime of their own cloud hosting. This relieves you of the burden of applying any bug fixes, upgrades, and new releases and also assures you remain current and up to date. You will never have to worry about aging software putting you between that rock and a hard place, and ongoing expenses can often be reduced with SaaS.

Many small businesses and large companies are finding benefits from the successful implementation of modern cloud ERP solutions. The latest solutions include all the features a business will need, such as customer relationship management, financial management, business intelligence, supply chain management, and many other helpful modules. They also often include user-friendly mobile ERP user interfaces as part of the package. Mobile devices are a critical tool for employees needing to be productive on the go. Be sure your subscription includes a mobile cloud ERP solution if your business will benefit from it.

Non-SaaS ERP Subscriptions

More and more ERP vendors are offering subscriptions for on-premises or cloud-based software in the current subscription economy. A subscription-based license may be offered to reduce up-front costs and therefore knock down barriers to entry. However, while the subscription model includes support and maintenance, if you are running the solution on-premises or having a third party host it, even though you will be entitled to upgrades (bug fixes and new releases), you are responsible for applying them. If you don’t, you still run the risk of obsolescence. 

ERP is a substantial investment. Regardless of whether you license or subscribe to the enterprise resource planning system used to run your business, it is vital decision makers understand the various terms and conditions of your agreement and how they affect ongoing ex. Hopefully, this has helped you better understand license and subscription ERP options and what to look for when comparing enterprise resource planning systems that best match your business operations. These are factors to consider in the decision stage before you start an ERP implementation so that you can maximize ROI when implementing a new ERP system.

Always read the fine print because it is important to know precisely what you are paying for. And speaking of that, see our in-depth ERP price guide that will allow you to maximize the ROI of your ERP investment.

Once you have a handle on ERP licensing, you’ll want to become familiar with the different ERP deployment options and how they impact pricing.