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W H I T E PA P E R

Software Business Impacts from Machine Virtualization
Protecting Monetization in a Virtual World

Software Business Impacts from Machine Virtualization
Protecting Monetization in a Virtual World
Overview
Virtual Machines With virtual machine technologies, each operating system instance on a physical machine functions as if it is the only operating system running on that physical machine. These technologies do this by virtualizing (abstracting) the machine’s hardware components, one virtual machine instance per operating system instance. This type of virtualization technology is the focus of the remainder of this whitepaper. Application Virtualization / Application Isolation With application isolation technologies, each application instance running on an operating system instance functions as if it’s the only application running on that operating system. These technologies do this by virtualizing the operating system’s file system (and registry on Windows), one virtual file system (and registry) instance per application instance. Some application isolation technologies also isolate the operating system’s global namespace, so objects like semaphores are not shared between application instances. All other operating system services are shared between isolated and non-isolated application instance. Presentation Virtualization With presentation virtualization (also known as terminal services), one terminal server machine supports multiple user sessions. Each user session encapsulates the desktop environment of one remotely logged-in user. The user experience is such that each user believes they are the only user on that machine. Remote Control With remote control (also known as KVM over IP), one person can control the host computer at any one time. The keyboard and mouse connected to the host computer and to each of the guest computers can be active simultaneously and thus compete to be the source of input. Keystroke and mouse events from these different input sources can be interleaved. Also, the video of each computer displays the same single desktop. Therefore, these solutions are not intended for multiple guest computers to share the resources of the host computer at the same time. Machine virtualization has swept through enterprises, big and small – creating significant issues for both software producers and enterprise customers – and a wide “vendor-customer gap” in customer desires and application vendors’ practices. Specifically, the way that enterprise IT organizations install, provisions administer and use application software is likely decoupled from how application vendors build, license and support their software. Application vendors traditionally have placed the burden on customers to close this gap; today it is shifting back to application vendors. Some application vendors have addressed tactical issues that have arisen from machine virtualization, but the industry has not, for the most part, recognized the transformation that is underway. Leading software providers are now recognizing the vendor-customer gap that exists between the way enterprises want to use software in their virtualized environments, and the way application vendors want to derive revenue in this new world. Many application vendors are closing that gap and using their progress as a means to increase their value, create competitive differentiation and grow revenues – all the while driving down costs. This whitepaper reviews the current market situation, outlines at the events that created it, and details steps – with an emphasis on new consumptive licensing models – that application vendors can take to create positive outcomes in today’s virtualized software environments.

Introduction: The Virtualization Landscape

The topic of virtualization covers many different technologies. A quick review of the space sets the stage for discussion on the specific impact that Virtual Machine solutions are having both on application vendors and the customers they serve. The most common virtualization technique is virtual machine technology. However, there are other types. Below is a partial inventory of related virtualization types, and the vendors that supply the technology.

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Virtualization Technology Virtual Machines

Vendor/Products VMware: Workstation, ESX; Microsoft: Hyper-V, Virtual PC/Server; Citrix: Xen Server, Desktop; Parallels: Desktop and Server (Mac), Server (Linux), Workstation (Windows and Linux); Sun: Zones; IBM pSeries: LPARs; HP: VPars, Integrity Microsoft: App-V; VMware: ThinApp; Microsoft: Terminal Server; Citrix: Presentation Server; Sun: Secure Global Desktop GoToMyPC, PCAnyWhere, VNC

Software Licensing Issue? Affects licensing

Application Virtualization

Affects licensing

Terminal Services

Affects licensing

Remote Control
Figure 1: Partial List of Virtualization Technologies

No affect on licensing

Fully Embraced in the Back Office

Machine virtualization is today widely used in back office environments. The numbers published by multiple organizations reveal that there are strong drivers for use of the technology within the back office. The reasons for the broad acceptance become clear when one examines the benefits that IT organizations can receive from machine virtualization. IT Benefits IT organizations have moved rapidly in adopting machine virtualization in the back office. The most visible and oftcited motivations to adopt virtualization are tremendous costs savings, operating flexibility, improvements to governance and the importance of green initiatives within corporations. At the end of 2009 Gartner reported that 18% of all server workloads were running on virtualized servers -- a remarkably high penetration1. However, Gartner’s forecast for 2010 illustrates that virtualization technology is today fairly low on the adoption curve. Gartner predicts the share of server workloads running on virtualized servers to jump to 28%, a fifty percent increase over the 2009 number. In 2012, Gartner’s research has half of all workloads being virtualized. The rapid adoption of machine virtualization stems from three areas: • IT executives seeing real, easily verified cost savings from their peers • Support for governance and compliance measures • Delivering results to corporate efforts for green initiatives.
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Cost savings Stories of 10:1 server consolidation and server utilization moving from 20% to 60% or higher have been published for years. In 2008 and 2009, enterprise IT organizations saw a remarkable shift in the acceptance and use of machine virtualization. The technology quickly moved from something that had targeted use, to became widely acceptable for most back office applications. In the lead up to 2008, virtualization vendors continued to expand the capabilities in their platforms, analyst recommendations strengthened, and competitive pressure improved pricing. But the strongest push to general acceptance came from conversations. The seeds for this accelerated acceptance were almost certainly planted in 2006 and 2007, when IT executives shared from success anecdotes with their peers. These wordof-mouth marketing conversations focused on the dramatic cost savings that adopters were driving to their bottom line, compounding the advocacy of this technology and resulting in dramatic increases in adoption in 2008 and 2009. Flexibility Machine virtualization allows IT organizations to flexibly configure resources to adjust for variations in computing requirements, across time periods, departments and geographies. The ease with which computing resources can be allocated in virtualized environments allows IT organizations to flexibility allocate computing power, and thus maximize resource utilization.

Gartner: Server virtualization now at 18% of server workload - Ellen Messmer, Network World, October 20, 2009

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Software Business Impacts from Machine Virtualizat ion

Governance and Compliance Operating system (OS) and hardware diversity within an IT organization’s back office greatly complicates the governance and compliance requirements placed on enterprises. A single enterprise IT organization may be required to comply with over 100 regulatory and agency bodies (e.g., HIPPA, PCI, SOX, ISSA, ISO 17799 & 27001, and many more). The result is the rise of efforts such as the Unified Compliance Framework (UCF) that allow IT organizations to more effectively meet their governance and compliance requirements. Used in combination with emerging standards like UCF, machine virtualization is used by IT organizations to provide an effective framework for compliance and governance. Machine virtualization allows IT organization to standardize the native OS and hardware in a back office with no changes to the applications or impact to the end users. Machine virtualization also greatly simplifies patch and OS management. Using the management tools available from VMware, Microsoft, Citrix and many others, OS and application updates can quickly be applied in a sandbox environment, validated, and then merged into production. Green Initiatives Green initiatives are delivering cost savings to the bottom line, as well as creating goodwill with customers, employees and business partners. Earlier this whitepaper referenced the immediate cost savings from 10:1 server consolidation that an IT organization might receive; the cost savings also includes a multi-year green annuity that yields an immediate return. The annuity starts with the reduction in the electricity used by IT to service the enterprise, but in fact comprises much more. For example, the recommended temperature range for a data center is between 65F and 81F, while most run at 68F. With power density increasing every year from more blade servers, faster processors, and more networking gear shrinking in size; virtualization is the single biggest factor to reducing data center cooling demands. Over a period of years, the green annuity payout continues into the future by lowering equipment retirement costs. Furthermore, the hazardous materials and the disposal impacts of IT are tremendous. Reducing the amount of equipment needed to service enterprise IT needs also lowers the impact fees that enterprises pay at the time of purchase to offset the municipal burden when a CRT, server or switch is disposed. Finally, carbon credit offsets are widely available. When an enterprise can reduce it environmental impact, it can sell that reduction on the open market. For many organizations, machine virtualization can easily result in the entire deployment being paid for in just a few months from selling the carbon offset credits, in addition to the improved

“green” brand image, and increased profits from lowering yearly operating costs. In sum, machine virtualization simply makes good business sense for small, medium and large organizations. Exceptions are now the Exception There are exceptions that may preclude enterprises from adopting virtualization, but as time passes there are fewer and fewer. The most commonly cited examples of applications that should not be virtualized are databases and transaction systems. Applications with intense interactions with storage also have been historically been excluded, due to perceived performance delays caused by machine virtualization. The reality is that many large-scale, real-time financial systems are running today entirely on machine virtualization. With each release, vendors are closing the performance and management gaps in machine virtualization; without exception, all applications can be viable candidates for their technology. Many application vendors believe their application is an exception that their customers would not virtualize because the nature of the application would be a barrier. The published data, conversations that Flexera Software has held with thousands of software provider customers, and reports from many analysts strongly indicate the contrary. In fact, very few applications are excepted from virtualization. The likelihood that any application vendor would not have a significant portion of their customers using machine virtualization is extremely low. In the present or in the near future, no application vendor will be excluded from the shift in the market.

The Vendor-Customer Gap

The way in which IT organizations are installing, administrating, and using applications are, in many cases, inconsistent with the way the application vendor had designed, tested, defined support or licensed the application. This gap between application vendors and their customers creates additional cost to the IT organization, increases the complexity of the application, reduces the perceived value, and increases the IT organization’s governance risks. This vendor-customer gap comprises a number of issues, described below. Product Features Reliability Rooted in the design tenant of cheap hardware that is easily replaced with no service impact, machine virtualization allows for trivial movement and cloning of applications. Planned maintenance on enclosures or emergency situations can be easily addressed. Commercial solutions like VMware High Availability (HA) and Microsoft’s Failover Cluster can detect impending hardware issues and shift applications to

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alternative hardware before the hardware failure, with no impact to service availability. In 2011, the industry will likely see offerings from major vendors in a recovery process called regenerative recovery. Rather than have duplicate resources standing by ready for the virtual machine to be re-instantiated, regenerative recovery allows the virtual machine to be dynamically regenerated on the remaining hardware resource while being actively used. This next generation of reliability will help IT administrators to reduce the amount of spare capacity currently required in data centers, allowing applications to be kept running on damaged equipment, albeit at lower performance. If performance falls below defined thresholds, the application can be shifted to spare resources. The virtual machine technology brings IT organizations a very robust, flexible and extensive foundation for highly reliable data center architecture, further driving adoption of virtualization. This underscores the gap between software vendors and customers, increasing the urgency for software providers to support virtualization. Scalability Virtualization gives IT organizations the ability to manage scalability swings that characterize today’s enterprise business environment: Accounting systems come under heavy load at the end of the month, quarter or year. Order management systems see strong spikes for the first few days or weeks with new product introductions. The first two months of a year have HR systems under load with employee review and goal setting processes. Traditionally, IT organizations accommodate computing spikes by architecting systems to handle between 70% and 90% of the expected load. However, this compromise means that most of the time the systems are significantly underutilized, yet when the demand is greatest, the system is unable to service the users. Virtual machine technology allows IT organizations to respond to demand by dynamically growing or contracting system capacity. In addition to providing a strong foundation for reliability, virtual machine technology equally establishes a robust platform for scalability. As loads increase on a given application, additional virtual machines are easy brought on to service the load. The physical machines could be maintenance spares, excess capacity on other machines, or a group of systems designated to meet the capacity needs of any application. The tool set from virtual machine vendors allows load monitoring on applications and, when thresholds are exceeded, the tools automatically deploy additional instances to service the load. To close the gap between customer desires and traditional industry practices, forward-

thinking application vendors today are delivering solutions that embrace virtual machine scalability. Provisioning / Administration Enterprises begin with clear and well-established virtualization environment. But because machine virtualization provides such an easy path for customizing and making changes, enterprises can quickly fall out of compliance. The next phase of the evolution of virtual machines is about control. IT organizations currently are faced with what is best described as “sprawl.” The core capability of machine virtualization is abstraction from the hardware. All the advantages of machine virtualization spring from this key capability, but this is also the biggest complication. Applications can dynamically come into existence and disappear just as quickly. The focus of all the machine virtualization vendors is therefore on refining the provisioning and ongoing administration of the virtualized environment. Provisioning and administration is the one area where IT organizations have not seen any savings from virtual machine technology. In fact, the current studies indicate that the costs have increased. An IT organization that is in compliance can just as quickly become non-compliant. Application vendors delivering solutions that complement virtual machine provisioning and administration solutions are clearly desirable to IT organizations. Software Licensing Software is a unique enterprise purchase because the value the software delivers can be increased by simply increasing the organization’s use of it. The role of software licensing is to match the value between the application vendor and the enterprise. Creating the alignment in value allows the enterprise to extract the maximum value from the application, while at the same time giving both the enterprise and the application vendor assurance that the software is not being used in excess of the agreed-upon value. Traditional methods to measure or cap software utilization have been tied either to the capacity of the hardware the software employs (hardware capacity licensing), the number of users accessing the application (user licensing), or to the number of machines that can use the software (machine licensing). Hardware capacity licensing is based upon the idea that the software running on a more capable machine is able to perform more work. From that additional work, the enterprise gains additional value. With user- / machinebased licensing, the more users who are able to access the system, the more value is being delivered to the enterprise from the application. All the traditional licensing and the

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subsequent pricing models are rooted in either the capacity of the system to do work (hardware) or the capacity of the workforce to do work (users / machine). Virtualization technologies have changed the landscape of hardware capacity licensing, making it very easy to create multiple virtual machines on a single physical machine, or make a very capable machine appear less capable. While the advantages of machine virtualization are obvious and enticing for the enterprise customer, this technology poses challenges for the software producer using traditional hardware capacity license enforcement. This is because virtual machines can be configured to have the same attributes (e.g., MAC address, port number, IP address, etc.) that match the details of an existing license. This situation is depicted in Figure 2 below.

Software vendors need to accept that hardware licensing models and machine-based licensing can breakdown entirely in a virtual machine environment if not properly addressed. User-based licensing can remain effective depending on the nature of the application. Tracking and approving expense reports, for example, require that the user’s identity be an integral part of the application. A spreadsheet application can deliver all its value without ever knowing the identity of the user. Virtualizing the expense tracking system would not impact a user-based licensing method, but the anonymous nature of spreadsheet users would. While software providers struggle with historical licensing methods, virtual machine technology opens up new software licensing models that center on the idea of consumption. The software is licensed to perform a volume of work, with the enterprise paying up front (pre-pay) or after the fact (post-pay). Consumptive licensing is perceived as more attractive to enterprises, and software vendors looking for market advantages are embracing the idea. Machine virtualization makes consumptive licensing far more practical and is being used as a platform for this new license model. Regardless of an application vendor’s position on the topic of machine virtualization, enterprises require clear rules, presented simply, that specify how many times an application can be installed, deployed, and used. Unfortunately, many application vendors do not have end user license agreements (EULAs), contracts and support policies that keep pace with the realities of today’s IT deployments. Support Technical support presents particularly delicate issues in today’s virtualized environments. When customers call with software support issues, application vendors can escalate an already stressful situation by trying to sort out virtualization issues concurrently with software performance problems. Even more off-putting is a stance that vendors can take when a support or engineering organization simply refuses to move forward on a support issue that involves machine virtualization, since it is “not supported.” If a customer perceives that the support policy is being used as an easy method to reject or de-prioritize their issues, then an already difficult situation can easily escalate into rancor.

License Server Bound to Physical Hardware is Hard to Replicate

License Server Bound to Virtual Hardware is Easy to Replicate

Guest OS VM Hypervisor Operating System

Guest OS Guest OS

LICENSE SERVER

LICENSE SERVER

Guest Gues Gue t OS Guest O ue Guest OS Guest OS st t LC LIC N LICENSE CEN Guest OS SERVER SE V ERV E
LICENSE SERVER

LC LIC N LICENSE CEN SERVER SE V ERV E

Figure 2: License Server Instances Bound to Physical or Virtual Hardware

User-based licensing can remain intact, but machine-based licensing can be entirely ineffective in a virtual machine environment. In order for a given application to quickly deploy on any machine in the data center, the technology must make any given machine appear to have all the characteristics of the original base machine. So changes in CPU, memory, video capabilities, and network adapter configuration are reported to the guest OS as being just like the original machine. Attaching the right to run to the identity of a given machine is pointless unless the licensing system is aware of the virtual technology and accounts for the abstraction of the hardware.

Take Steps to Close the Vendor-Customer Gap

Many application vendors have realized that there is a gap between what they had been building, selling and supporting versus what their customer has been installing, using and administering. These vendors are achieving remarkable success, and effectively closing the vendor-

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customer gap, by more closely delivering what their customers need. Answering a few questions is the first step in determining where an organization / application is and the reality of the gap that exists between customer demands and application vendor reality. However, it is easy to establish both the long-term and quick efforts that can deliver the results that can improve software providers’ customer relationships, and revenues. 20 Questions Software Producers Should Answer Based on input from application vendors attending two recent Flexera Software-hosted virtualization summits, software providers should answer, at a minimum, the following questions: General 1. How many of our customers are using virtualization today? At what rate is this growing? 2. What virtual platforms are our customers using and in combination with what OS platforms? Software Licensing 3. Have we defined a virtualization policy and has this policy been communicated to our customers? Support statement, EULAs, contracts, customer communications, etc. 4. Can we use the same policy as we do for the physical hardware environment? 5. Is there a compliance problem in our install base and can it be quantified? 6. Are there new markets or new ways to serve markets because of virtualization (e.g., time rental via SaaS, virtual appliance)? 7. What specific problem do we want to solve? Are we concerned with intentional overuse (piracy), unintentional overuse (compliance), or both? 8. Should pricing be based on physical or virtual resources (sub-capacity pricing)? 9. Should alternate pricing models be defined to license in virtual environments? (e.g., consumptive models like pre- or post-paid) Should we charge more based upon the additional virtualization test matrix involved? Is there a market to charge less for limited capability? Reliability 10. Can the application tolerate being rapidly moved from one machine to another? 11. The application has a strong set of reliability features, but do those features duplicate or even worse interfere with reliability capabilities present in virtual machine technologies? 12. How does the application report error conditions and can that notification be easily directed and interpreted? 13. Beyond just error conditions, are notifications for current status, application load, and application health easily directed and interpreted?
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Scalability 14. Does the application manage state in a manner that allows user and transaction processing to float over constantly changing application architecture? 15. Does the application allow additional components or entire additional copies rapidly coming into existence or just as quickly disappearing? Administration / Provisioning 16. Does the application allow for remote management without local “super-user” access? 17. Does the application provide detailed reporting of which users perform which administrative functions from where on the network? 18. The traditional roles of server, networking, storage, and application administrator are becoming blurred. Does the application account for the blending of these roles for administrative and provisioning tasks? Support 19. Does our support policy include machine virtualization? 20. Though machine virtualization does a remarkable job masking hardware changes, subtle differences can leak through (e.g., hardware ID values becoming significantly longer). Are we testing and documenting the use of the application on the popular machine virtualization packages? These questions will give application vendors an accurate view of the gap between their virtualization-related practices and market demand.

Software Producers Respond to Licensing in a Virtual Environment

At Flexera Software’s virtualization summits, participating application vendors responded to a survey about their virtualization practices. The survey results below focus on the software licensing challenges a virtual environment creates; as the numbers indicate, most of the respondents’ organizations have not defined and communicated their virtualization policy. While most have not quantified a specific compliance problem around virtualization, they recognized the potential for overuse – a problem that must be solved. Finally, the results indicate that most customers intend to initially apply traditional software licensing and pricing models to virtual environments.

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Survey Results
Question 1: Has your company defined and communicated your virtualization policy? Yes We are in process of creating a policy, but it is not complete. We have not started on a virtualization policy. I don’t know. % of Votes 21% 21% 42% 14%

Question 2: Have you quantified a compliance problem around virtualization? We have quantified a compliance problem and need to solve this problem. We have not quantified a compliance problem, but we want the ability to enforce our license policies in virtual environments. We don’t care about enforcing or monitoring compliance around virtualization. I don’t have an opinion at this time.

% of Votes 20% 60% 6% 13%

Question 3: Have you defined new ways to monetize your software around virtualization? No, we will use existing licensing and pricing models. No, but we have started to discuss this. Yes, we have defined new models to better match our software usage within virtual environments. I don’t know.

% of Votes 64% 14% 7% 14%

The Gap Widens - New licensing models are appearing

Still, the vendor-customer gap is growing larger. Several new software licensing models are being talked about in enterprises. Stories of enterprises selecting vendors based on their ability to provide applications in these new models are being published. The virtualization trend will continue to grow and gain momentum. At the heart of the new licensing models is the idea of consumption. Enterprises are increasing requesting the ability to either pre-pay or post-pay for a quantity of work from the application. While similar to paying for user access, the core of the concept rests with the idea that as work is performed; some metric is consumed or used up. There are strong advantages for both the application vendor and the enterprise for these license models. Software as a service (SaaS) licensing models present useful lessons that can be easily replicated in addressing virtualization issues. The two core value propositions of SaaS to an enterprise are: 1) the software is not on-premise,

but is instead installed, maintained, and administered by the vendor,, and 2) most SaaS solutions are based on consumptive license models. Enterprises have realized that consumptive licensing is easily applicable to traditional software and, in a difficult economic and business environment, presents many advantages. Consumptive licensing makes it is easier to clearly identify and report the value an enterprise receives from a software application. For example, an expense reporting application that is licensed by the number of expense reports processed clearly articulates the software’s value. Consumptive licensing allows the enterprise to purchase in a way that better addresses the level of price risk they are willing to take. By making no commitment to the volume, the enterprise pays a premium; when the same enterprise is willing to commit to a minimum or floor, it receives a discount. Application vendors also can receive a number of benefits as well.

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Software Business Impacts from Machine Virtualizat ion

Using the same example from above, an expense application that is priced simply by user would be subject to debate and price erosion. In the past, application vendors have attempted to deal with this issue by creating different user roles and pricing them accordingly. The roles start simple but over time the roles get more granularly defined. It becomes more difficult to determine which features should be available to which role. There can even be a disagreement as to who in an enterprise should be in what role. In the end, application vendors end up discounting heavily to address the perceived disconnect. Consumptive licensing addresses the disconnect between how value is measured and how value is delivered. Machine virtualization brings the topic of consumptive licensing to the foreground. Licensing the software to perform an amount of work is a very attractive license model when applications are dynamically deployed, run for a period of time, and then disappear as quickly as they came. It does not matter if: • the applications run on one or fifty machines • the application can run once on a given machine or ten copies can run on the same machine • the machine has a single core / processor or the top of the line latest eight cores / sixteen processors. The desire at enterprises for consumptive licensing is growing rapidly, driven both by SaaS and by machine virtualization. Application vendors can reduce discounting and simplify their product by embracing consumptive license models. The role of consumptive license models is increasing and all indications are that this trend will continue.

Specifically, virtual machine technology opens up new licensing models that center on the idea of consumption. The software is licensed to perform a volume of work, with the enterprise pre-paying or post-paying. Machine virtualization makes consumptive licensing far more practical and is being used as a platform for this new license model. Consumptive licensing is perceived as more attractive to enterprises, and software vendors looking for market advantages are embracing the idea. Software providers can follow a straightforward decision path to determine whether consumption-based licensing models are appropriate for both customers and the provider. This new licensing approach makes it is easier to clearly identify and report the value an enterprise receives from a software application. It also allows enterprise customers to purchase in a way that better addresses the level of price risk they are willing to take. As a result, consumptive licensing effectively addresses the disconnect between how value is measured and how value is delivered. For more information about how consumptive licensing can benefit software providers and their customers in today’s virtualized IT world, please visit www.flexerasoftware.com.

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Conclusion

Virtualization technology is now firmly entrenched in many aspects of enterprise data centers; popular techniques range from virtual machines and application virtualization, to presentation virtualization and remote control. Machine virtualization, in particular, is widely used in today’s back office environments. The cost savings and flexibility (and IT, compliance and “green” benefits) of virtualization technology are strong drivers for its use within the back office. Today, however, the ways in which IT organizations are installing, administering and using applications are frequently inconsistent with the way the application vendor had designed, tested, defined support or licensed the application. This gap between application vendors and their customers creates additional cost to the IT organization, increases the complexity of the application, reduces the perceived value, and increases the IT organization’s governance risks. Fortunately, this “vendorcustomer gap” affords new opportunities for software vendors to evolve their licensing practices, and thus enhance revenues while improving customer satisfaction.

Flexera Software is the leading provider of strategic solutions for Application Usage Management; solutions delivering continuous compliance, optimized usage and maximized value to application producers and their customers. Flexera Software is trusted by more than 80,000 customers that depend on our comprehensive solutionsfrom installation and licensing, entitlement and compliance management to application readiness and enterprise license optimization - to strategically manage application usage and achieve breakthrough results realized only through the systems-level approach we provide. For more information, please go to: www.flexerasoftware.com

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