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WHITE PAPERMAKING THE CASE: TRANSFORMATION TO DIGITAL LICENSING

CONTENTSP AGEPART I: Transformation to Digital LicensingExecutive Summary 2Landscape of the Digital-LicensingInflection Point 3A Look Back 3Emerging Industry Trends 3Why Digital Licensing?Exploring New Business Opportunities 4Digital-Licensing Vision 4Current Leaders: Shifting theLicensing Business Model 6Tomorrow’s Operations 6Enabling Digital Licensing: Key Technologies 9Current Operations Challenges 11Why Digital Licensing Requiresa “Transformation” 11PART II: Managing for Success: Strategy, Governance,and Process in Enterprise Transformation ProgramsLessons Learned from ERP 12Defining Program Scope 13Measuring Business Value 13The Case for Change: Making the Vision Real 15The Burning Platform 15Evolutionary Approach 15Implementing the Plan: Mobilizationand the Executive Track 16Executive Track: Purpose and Process 16Launching Your Transformationto Digital Licensing 19TRANSFORMATION TO DIGITAL LICENSING 1

PART I: Transformation toDigital LicensingEXECUTIVE SUMMARYToday’s software companies are straining to maintainrevenue growth, reduce operational costs, and maintainor improve customer satisfaction and retention.The fast-paced growth of the late 1990s has given way to adownturn in product demand. There is neither the budgetnor the market demand for investment in minor improvementsto existing products. As a result, software companiesmust seek to capture new markets with their existing productofferings. The rapid growth of the early 1990s andmassive consolidation of the past few years have left manysoftware companies with a stitched-together infrastructurethat barely supports today’s business, let alone provides aplatform for future growth. While executives recognize theimportance of infrastructure, many are unsure as to wherethey should focus their efforts to ensure long-term growth.Finally, while products continue to evolve, many customershave grown dissatisfied with archaic methods for purchasing,receiving, installing, and managing softwareproducts. In spite of the innovation promised by theInternet and other technologies in the past decade,most software vendors are still shipping boxes, CDs,and manuals and leaving it up to the customer to stitchtogether a workable solution for their individual needs.Recent industry and market developments, however, haveled to the innovation of “digital licensing.” Companies thatsuccessfully achieve a Transformation to Digital Licensingwill be best prepared to compete in the emerging “softwareas a service” environment and take full advantage of theinflection point the industry is now facing.Defined by Andrew S. Grove, president and CEO of IntelCorporation, strategic inflection points are the major turningpoints that change the way an industry operates. Organizationsthat recognize inflection points reap the benefits, usually at theexpense of those that ignore them.By completing a Transformation to Digital Licensing,software vendors will be able to successfully address thefollowing five areas that are critical to their overall success:• Compliance—Ensuring customers’ conformanceto license agreements.• Flexible Pricing and Market Strategies—Providingthe marketing department with the ability to betteraddress market needs.• Business Intelligence—Gaining critical insight intohow customers use their products.• Completion of the eBusiness Vision—Ensuring thecustomer experience is Web-enabled throughout thevalue chain.• Operational Efficiency—Ensuring that infrastructureefforts are focused on those activities that best supportthe business.Critical to the success of such an effort is the recognitionof the transforming nature of the activities. To successfullysupport such efforts, the software vendor must manage thetransformation as a company-wide program, incorporatingthe lessons learned from similar, large-scale efforts.This document explores the nature of the current inflectionand addresses the opportunity this time of change holds forsoftware companies. In addition to exploring the largermarket environment, we take a detailed look at the keysuccess factors that must govern the processes, planning,and implementation that are necessary to realize the manybenefits Transformation to Digital Licensing can offer.2 KPMG CONSULTING

LANDSCAPE OF THE DIGITAL-LICENSINGINFLECTION POINTToday’s software companies face a powerful point ofinflection, or turning point. This time of dramaticchange is driven by a combination of:•Customer demands for service and support.•Evolution of how software is used, licensed, andpurchased.•Need for streamlined operations that can supportgrowth and reduce costs.•Technology advances that enable new licensing models.Companies are challenged to optimize the use of new technologywhile increasing revenue and improving internaloperations. Additionally, companies are looking forcomplete solutions as opposed to short-term fixes.A Look BackThe software industry has seen tremendous growth in thepast 20 years. With relatively low barriers of entry and awide range of applicability, the industry has created anextensive range of solutions, applications, and markets.This expansive growth, however, led to a significant numberof challenges for the industry and its customers, including:•Internal Operations. Without the benefit of industrystandards for operational management, many softwarecompanies developed internal infrastructure andprocesses based on traditional hardware companies.Since financial, regulatory, and governmental agenciesdeveloped concurrently with the industry, they havealso been challenged to keep pace with industryevolution. Complex revenue recognition rules requirethat software companies manage their operationsdifferently from traditional industries. Since thesoftware industry has few fixed Enterprise ResourcePlanning (ERP) and Customer Relationship Management(CRM) operational standards, companies oftendeveloped and/or customized solutions to handletheir customers’ unique requirements. Coupledwith the natural tendency for software companiesto develop their own IT solutions, many softwarevendors find system integration in today’s environmenta major hurdle.• Growth and Consolidation. Due to explosive growthin the early 1990s, many software companies successfullydeveloped and introduced innovative technology,only to discover an inability to effectively serve anexpanded customer base over the long term. Numerousmergers and technology purchases followed,forcing the integration of technology, employees,data, systems, and—most important—customersinto the purchaser’s existing business practices.In most cases, companies sacrificed integrationto support rapid growth.• Focus on Physical Products. Technology limitationsin the 1980s often compelled companies to developa physical focus for products and their supportingsystems. The way vendors reached markets wasprimarily rooted in the production of physical goods(e.g., tapes, CDs, manuals) and supporting collateral(e.g., literature, boxes). Consequently, softwarecompanies were forced to become manufacturingand physical-distribution-based businesses. Whilea necessary reality of the early industry, companiesoften focus exclusively on this method for thepackaging and distribution of products. This modelalso generates significant overhead costs to maintainthe facilities necessary for its support.Emerging Industry TrendsIn addition to existing challenges, software vendors arefaced with several emerging trends that, while presentingmajor opportunities, also present increased complexity:• Providing “Software as a Service.” Advances in technology—includingthe emergence of ApplicationService Providers (ASPs)—coupled with evolvingcustomer expectations have given rise to the idea of“software as a service.” Historically, customerspurchased software expecting unlimited use of theTRANSFORMATION TO DIGITAL LICENSING 3

product’s features. New options including applicationrental and pay-per-use models now allow customers topurchase software rights for a specific length of time oron an as-needed basis. In spite of some implementationand adoption concerns, the new models are gainingacceptance.• Enhancing the Customer Experience. Today, customersexpect more from software vendors—both in termsof treatment throughout the sales, distribution, andsupport processes and the degree of product flexibilityand customization. Customers now expect softwarevendors to offer products and services that will meettheir specific requirements. In addition, since theynow recognize the flexible (and low cost of goods sold)nature of software products, customers now demandgreater discounts to meet their expectations.• Enforcing License Compliance. As the rapid growth—prevalent within the industry for so long—begins toslow due to changing market conditions, vendors mustlook for ways to increase revenue without significantlyincreasing costs. Existing customers are a center ofattention for this activity and represent lost revenuethrough accidental use beyond license-agreementlimits (or “honest abuse”).WHY DIGITAL LICENSING?EXPLORING NEW BUSINESS OPPORTUNITIESTraditionally, software licenses have been sold on a“perpetual” basis, allowing customers to continue touse the software purchased throughout their lifetime.This model, while simple, has resulted in a generalperception that, once purchased, the customer now“owns” the software.The reality of the situation, however, is that the customerhas only purchased the right-to-use the software. Based onthe terms of the license agreement, the customer has paidthe software vendor to utilize a specific set of functions overa particular time frame, typically only for the customer’sbenefit. The customer does not have the right to modify,copy, distribute, or otherwise abuse the software. In short,the customer has purchased the ability to use the software.At the termination of the license agreement, the customeris no longer legally allowed to access the product.Recent innovations in the software industry and availabletechnology have created a current business environmentthat is ready to more broadly adopt digital licensing.• Technology Maturity. Early adopters of the digitallicensingmodel, such as the electronic design automationindustry, successfully used licensing technologythroughout the 1990s. With the successful emergenceof commercial licensing applications (the market leaderbeing GLOBEtrotter TM ), new vendors have identified anopportunity for growth and are actively developingproducts to address demand and spur innovation.• Maturing of the Internet. The Internet has proven ableto deliver information rapidly, securely, and at minimalcost to the provider. While customers may not yet becomfortable conducting large-scale purchases via theInternet, small purchases and information transformationhave become a widely adopted businessstandard.• Growing Acceptance of Intellectual Property (IP)Protection. Both business and consumer customers arebeginning to understand the importance of protectingIP. The high-profile struggles of online music serviceNapster illustrate an increased awareness that valuemust be protected. Business software customers recognizethe importance of honoring their license agreements,if only to avoid the costly fees and expenses tobe incurred should they be found in breach of contract.DIGITAL-LICENSING VISIONIn Table 1,we review several key differences between thecurrent business model for software companies and thedigital-licensing vision.4 KPMG CONSULTING

TABLE 1TRADITIONAL VERSUS DIGITAL-LICENSING BUSINESS MODELTRADITIONAL BUSINESS MODEL• Fulfillment constrained to delivery of physical goods• Subsequent customer purchases require additional shipmentand installation procedures• Software purchased “perpetually”• Responding to market requires extensive software redesignby engineering• Disparate systems for management of customer and entitlements• Non-integrated legacy systems create disconnectedcustomer experience• Non-integrated, point solution-based contactsDIGITAL-LICENSING BUSINESS MODEL• Online fulfillment enabled through ESD and Electronic Keys• Subsequent customer purchases fulfilled through keys thatunlock critical functionality• Software purchased on rental or pay-per-use models• Marketing has the ability to rapidly design productswithout impacting engineering• Common view of customer and customer products• Web-enabled 360-degree view of the customerthrough install base• Integrated product suites enabled by licensingThe current and expected future uses for and benefitsof digital licensing include:• Compliance–Systematically monitor usage against licenseagreements by protection, compliance, and assetmanagement.–Provide tool for users to manage assets andpay only if they need to use the software.• Flexible Pricing and Marketing Strategies–Implement new sales strategies such as shiftingfrom enterprise-wide support models to supportfor individuals who perform a specific functionfor a limited time.–Align licensing and pricing to specificmarket segments.–Transition to value-driven sourcing and use(“software as a service”).• Business Intelligence–Improve business intelligence.• Completion of eBusiness Vision– Link functions across an eLicensing spectrum(electronic software commerce, electronicsoftware distribution, electronic license distribution,electronic license management).–Allow customer and channel portals to offerordering of right-to-use (features, functions,and bundled services).–Create self-service selling transactions that can up-sellnew features to better suit specific customer needs.–Support discrete-feature bundling and promotelevels of personalization.• Operational Efficiency–Streamline engineering processes through managementof single binaries for a product suite withrights-to-use unlocked by license keys.–Increase release flexibility by allowing marketing andengineering to easily reconfigure product offerings.– Establish digital distribution channels.–Provide detailed usage information.–Force registration of all customers and users.TRANSFORMATION TO DIGITAL LICENSING 5

CURRENT LEADERS: SHIFTING THE LICENSINGBUSINESS MODELMany independent software vendors successfully usedigital-licensing technology to protect revenues, driveoperational efficiencies, and enhance the customerexperience through expanded self-service capabilities.The following examples describe how digital licensinghas improved business for two software vendors.CASE STUDY: Monthly Subscription ModelA second software vendor challenged conventional wisdomby stating that its software must be available 24 hours a day,7 days a week, 52 weeks a year. The vendor offered an annualsubscription in the form of 12 monthly licenses that, wheninvoked, would “lock” a license to the person that invokedthe license for a period of 30 days.CASE STUDY: Product ManagementA major independent software vendor/producer of design anddevelopment products significantly improved customer satisfactionand increased revenue by fully embracing digital licensing andradically restructuring its product offerings.The software vendor did not restrict how the customers usedthe licenses. Some customers used their licenses one month at atime, while others would use multiple licenses in peak times andmanage the remainder during the balance of the year on an asneededbasis. The vendor’s sales organization initially feared anadverse impact to revenue, but their customers expressedsatisfaction, and revenue increased by 30 percent.Due to growth through acquisition, the software vendor offered acomplete range of products to address all aspects of the customerdesign cycle. Customers often found it difficult to justify productpurchases on the traditional perpetual or yearly subscription basiswhen the software was only to be used at specific points duringthe design process. Often the customer “made do” with cheaper,inferior solutions or in-house-developed alternatives.To address this issue, the software vendor redefined how it soldand managed its products for the largest, most strategic customers.Rather than providing a series of point solutions, this vendor offersa program where customers have access to the full suite of products,but only use specific products/features when they are needed in thedesign cycle. In place of a traditional “site license” that offers customersunlimited access to all products, the new program requiresthat customers “trade in” the licenses they no longer need (so theyare not accidentally used outside of the project) to receive access toother products as appropriate.With the new digital-licensing model, this vendor has realized a$100 million revenue increase, a significant decrease in operatingcosts, and a major increase in customer satisfaction.TOMORROW’S OPERATIONSIn order to reap substantial benefit from a Transformationto Digital Licensing,we must examine each stage of thelicensing life cycle through the customers’ eyes. (SeeFigure 1.) Customer-focused licensing means developingeasily understood, accurate, and efficient purchasingmethods. Data sources must be coherent and transparentso customers can easily reference and understand whichproducts and services they already have and readily identifythe additional options now available to their organizationat specific price points. Once purchased, it is crucial thatinstallation and integration of customers’ licensed softwarebe seamless and accurate.Evolving to the digital-licensing model requires thecareful planning of many key business process transformations,including several software-specific areas oftechnology focus:• Single Binary Vision. Currently, software vendors mustmanage a wide range of products, product families, andindustry-specific product versions. As a result, customersare often forced to select a product based on6 KPMG CONSULTING

FIGURE 1price and the discrete offerings provided. Frequently,after using a product, the customer is interested inadding new features or functionality. Invariably, thecustomer is required to generate a new purchase orderthat is fulfilled by the vendor through traditionalphysical delivery mechanisms and then installed bythe customer (potentially requiring the customer toreinstall the initial product). The complexity of thisupgrade process often discourages customers frommaking additional purchases. (See Figure 2.)To realize a single binary vision, the vendor mustmigrate its product suites into a single image (orexecutable code) and control the use of the IP througha digital-licensing program. Using this approach,software vendors can provide an entire code-set totheir customers in just one transaction and allow thecustomer, through Web interaction, to enable incrementalfunctionality as required. This model providesthe vendor and customers with a new range of salesoptions (providing temporary demo keys to trialproducts, short-term functionality adds for specificLICENSING LIFE CYCLEFIGURE 2PRODUCT 1(BASIC)PRODUCT 1(ADVANCED)PRODUCT 2ISVPRODUCT 1(BASIC)PRODUCT 1(ADVANCED)PRODUCT 2PRODUCT 3ISVSINGLE BINARY VISIONTRADITIONAL MODELDEMOPRODUCT 1(BASIC)PRODUCT 1(ADVANCED)PRODUCT 2DIGITAL-LICENSING MODELSINGLEBINARYLICENSINGWEBBINARYDEMO KEYPRODUCT 1BASIC KEYPRODUCT 1ADVANCED KEYCUSTOMERINSTALL/EVALUATE/PURCHASEINSTALL/USE/UPGRADEINSTALL/USE/EXTENDINSTALL/USECUSTOMERINSTALL/EVALUATE/PURCHASEUSE/UPGRADEUSE/EXTENDCONTRACTPRODUCT 3SELF-SERVICEUPGRADEENTITLEMENTMANAGEMENTPRODUCT 4SINGLEBINARYPRODUCT 2INSTALL/USEMAINTENANCEDELIVERYINSTALLATION,ENFORCEMENTINSTALLATIONACTIVATION, REGISTRATIONLICENSE MANAGEMENTTRANSFORMATION TO DIGITAL LICENSING 7

tasks, and so forth) as well as a significant reductionin operational costs for both parties.The single binary vision can also have a direct impacton the vendor’s engineering group in the areas ofsource tree and code management. Most softwarevendors will have to increase discipline in order tominimize code branching and ensure that all peripheraldevelopment is managed for inclusion in themain branch.• License Modeling and Configuration. Market leadersconstantly seek opportunities to enter new markets andfind ways to maximize existing market revenues. Frequently,however, requests to combine feature sets tomeet the needs of new markets or to offer alternativesales and usage models (subscription, frequency, etc.)will be stymied by the complexity of having to reengineersoftware products for each request. In some cases,companies must decide how to structure and sell aproduct months—or even years—before its completion,demanding an unrealistic level of predictabilityin today’s rapidly shifting market demand.Properly implemented, digital licensing allowscompanies to sell products through a wide array ofusage models that range from the standard perpetuallicense to subscription and pay-per-use. Also, byembedding the appropriate “hooks” into their code,engineering can provide internal marketing teams withthe ability to easily recombine feature sets and meetchanging market requirements without additionalcostly development. By separating feature-managementissues and the purchasing model from developmentof core code, software vendors can allow theirengineering teams to focus on their core competency:development.• Licensing Life Cycle (Installation, Activation, LicenseEnforcement, and Self-Service). Currently, mostsoftware vendors manage their customer experienceas a series of discrete events (purchase, fulfill, invoice,service). With the introduction of digital licensing,integration of licensing and the customer experiencerequires an increased level of coordination betweenformerly disconnected organizations. The phases ofthe digital-licensing life cycle include:– Installation—Requires a simple and completesoftware installation, as well as a licensing processthat is relatively transparent to the customer. At thesame time, however, the vendor must accurately trackwhat products each customer has installed and beable to update internal data sources appropriately.– Activation—The ability to access and install requiredlicenses that activate the software a customer isentitled to run. Again, transparency is key whilealso ensuring that the vendor can capture criticalcustomer information.– License Enforcement—Involves providing customerswith the technology to use products while ensuringthat a customer is not in violation of a licensingagreement. Currently, most customers have no wayof tracking their usage in order to manage their useractivity within compliance constraints.– Self-Service—Automates many of the non-valueaddedtasks that customers frequently require. Theseinclude updating customer information, transferringlicenses, rehosting to new equipment, and, in somecases, simple quantity increases. In today’s model,these activities require significant support from salesand operations with no positive impact on revenue.Fully automating these processes can significantlylower costs while improving customer satisfaction.• Managing the Install Base. Most vendors currentlymanage customer information within individualinternal organizations or departments based on specificrequirements. For example, marketing, operations,sales, and customer service all manage unique systemsfor different purposes, making it difficult to consolidateor reconcile customer information.By developing and managing a central install base thataccurately tracks customer purchases, shipments, installation,and entitlements (including service), vendors8 KPMG CONSULTING

can reduce the time and effort spent on maintainingmultiple systems and greatly increase employee productivity.In addition to being the centralized masterlocation for key generation, a central install base willalso enable support teams to better service customersby providing a more complete record of what productsthe customer owns. Sales and customers also benefit byhaving a better understanding of the product suite. Inaddition, a fully enabled install base can provide criticalproduct usage information, enabling better productdevelopmentdecisions.ENABLING DIGITAL LICENSING:KEY TECHNOLOGIESIn Figure 3, the specific front-office technology enablersthat characterize licensing across the value chain areillustrated. Here we examine this transformation’s impactand consider the expansion of business opportunity thatmust begin with a more specific stratification of theproducts, services, and delivery mechanisms that makeup the business.FIGURE 3DIGITAL LICENSING SPECTRUMPRODUCTMEDIARIGHT-TO-USELICENSE MANAGEMENTESCElectronic SoftwareCommerceESDElectronic SoftwareDistributionELDElectronic LicenseDistributionELMElectronic LicenseManagementLOCKINGMECHANISMSOFTWARESALESOFTWAREDISTRIBUTIONLICENSEFULFILLMENTLICENSEMANAGEMENTMAINTENANCEPROCESS• CD Protection• Copy Protection• Wrapper Encryption• Integrated LicenseManagement– “License Server”– InstallationAuthenticationControls• Testing and FailureProofing• Modeling of License– ConfigurationEngine– SKU Definition– Bundling– Pricing Engine– Tangible vs.Intangible• Contract Management(Service)– Modeling– RevenueRecognition• License– Order Acceptance– Key Generation orAuthorization Code– Push vs. Pull KeyGeneration• CD Creation Process– In-house orOutsourced• Physical Fulfillment– CDs– Manuals– In-house orOutsourced• ESD Portion– EFT – ElectronicFile Transfer– Degree ofSelf-Service(Pushvs. Pull)– In-house orOutsourced• Channel Delivery– Retailers– Distributors– Resellers– OEMsGENERATION• BoM vs. BoF– Version– Time Period– Functionality• Integrated to OrderManagement• Integration toInstall Base• Pull vs. Push• CustomerPortal-Enabled• E-mailDISTRIBUTION• Fax• E-mail• In the Box• Web Pulled– Forced Registration• Installer Programs• Allowing Users toView AvailableLicenses• Rehosting• Self-Service- Rehost/Reconfigs- Installation• Software AssetManagement• Updates- Automated- New KeyGeneration• Upgrades- Notification- New KeyGeneration• Bumps- Additional Licenses- May IncludeFinancialTransactions• Support andMaintenanceRenewals- Notification- Entitlement- Does It Requirea Key- RevenueRecognition• Subscription Renewals- New License- RevenueRecognitionTRANSFORMATION TO DIGITAL LICENSING 9

FIGURE 4CORE ERPMORE THAN JUST AN ERP INTEGRATIONSOFTWAREMANAGEMENTcustomer accessto developedintellectual propertyELECTRONICLICENSINGautomateddistribution ofintellectual propertyPORTALToday, although it is still necessary to deliver code “frozenin time” by shipping software, this inconvenient step canbe overcome as delivery processes are streamlined movingforward. The shift to digital licensing will reinforce theunderstanding that software companies license theright-to-use IP.INCLUDINGPROCUREMENT,MANUFACTURING,ORDERMANAGEMENT,INVOICING,CHART OFACCOUNTS,ETC.CONTRACTMANAGEMENTLICENSEMANAGEMENTFULFILLMENTBILLINGPLANSINSTALLED BASEMANAGEMENT& SOFTWAREMAINTENANCEDEFERREDREVENUEBILL OFFEATURESPRODUCTPROFILEKEYREQUESTAUTHORIZATIONDISTRIBUTIONMEMBERSHIPMANAGEMENTPRODUCTCATALOGSHOPPINGCARTORDER ENTRY& STATUSELECTRONICSOFTWAREDISTRIBUTIONELECTRONICLICENSEDISTRIBUTION &MANAGEMENTCRM-ENABLING TECHNOLOGY, TOOLS, AND PROCESSES FOR SALES, MARKETING, AND SERVICEThe software-management-process layer links customeraccess to developed IP. Digital licensing automates thedistribution of IP to customers. To ensure effective operationsthat generate maximum revenues, the managementlayer must provide flexible sales and maintenance contractsand licensing programs that are transparent at the level ofautomatic distribution. Many software companies havealready embedded code into IP packages to return usageinformation that can be tapped at renewal points in thedelivery cycle. Regardless of individual contract complexity,the future of digital licensing demands a set of process toolsto automate electronic commerce, software distribution,license delivery, and management, as well as software assetmanagement for both vendors and their customers.The shift to licensing appropriate rights-to-use is importantto customers. However, a technology-based productdeliverysystem cannot work effectively without strongconnections to back-office systems as well.Traditional ERP enables only part of the digital-licensingsolution. Figure 4 shows the grouping of enterprisefunctions by application. Effective operation of both thesoftware management and distribution processes assumesthat core ERP functions are available to appropriatelyinform the Internet-portal-customer interface, enableaccurate product-feature profiles, and authorize properdistribution-on-demand. Figure 4 also illustrates therelationship between two key process layers that often weremissing links: software management and digital licensing.Effective configuration management ensures that engineeringhas a consistent methodology for managing codedevelopment. Consistent defect tracking and changemanagementprocesses are required to allow engineeringand marketing to make effective cost-benefit-driven decisionsregarding change requests to fix defects identified latein the process. Finally, an effective packaging solution thatgives engineering the flexibility of modular developmentwhile ensuring that a single-binary-driven image can berapidly built and tested is critical for success.Digital licensing is not simply the addition of appropriatetechnology to improve current licensing processes. Fully utilized,it completely changes the way IP is packaged, purchased,serviced, and maintained.10 KPMG CONSULTING

CURRENT OPERATIONS CHALLENGESExamination of the operational model that focuses onselling our customers discrete products points to manychallenges that can impede efficiency. Some companiesmay excel at marketing or product development, but fewcompanies have implemented a full digital-licensing vision.Every aspect of the company must commit to overcomingthe following operational inefficiencies:• Marketing delays the engineering-software-developmentprocess by requiring commitment to structure,licensing, and pricing decisions many months prior toproduct completion. Any changes to the initial specification,even if they don’t impact core development,must be approved via an engineering change order.• Engineering spends weeks to months navigatingdevelopment, integration testing, and release processesthat discourage rapid development or maintenanceinitiatives.• Manufacturing’s release process is often unstructuredand plagued with inconsistencies as developmentdelays drive an “anything that works” approach. Minor“tweaks” to products are not possible since developingan identical image is extremely difficult due to theextremely complex release process.• IT represents significant overhead, expense, and delay,and it fails to provide an effective platform for buildingadditional services and system flexibility.• Sales, order entry, and billing processes aredisconnected and/or inefficient. Sales may havedifficulty matching customer needs with complexproduct offerings. Operations and other resourcesconstantly spend cycles cleaning up data.• Customer experience is inconsistent at best.Inconsistent product offerings and multiple licensemanagementschemes make it difficult for customersto identify the products and solutions they need.Their experience is further diminished during theproduct execution due to nonintegrated pointsolutions, multiple installation routines, productshipping and invoicing complexities, and mistakes.This inflection point, caused by customer demand, industrytrends, and operational challenges, will transform everythingabout how we define and develop software products.It will no longer be adequate to simply characterize asoftware company’s products as executable software.Tomorrow’s software-enabled solutions will contain distinctcomponents including source code, executables, hardware,services, third-party products, options to facilitate additionalfeatures, and additional refinements yet to bedefined. In this context, “installation,” “license,” and“integration” will take on different meanings dependingon specific user requirements and relative to a variety ofdistribution options.Today’s multiple product lines, families, and release cyclesare driving complexity instead of innovation and effectivereuse. Systems, processes, and organizations that are optimizedfor one product line are often unable to easilysupport others. Efforts to optimize one or more businessprocesses across the enterprise may deliver less-thanoptimalresults for existing processes or systems inlocalized organizations.WHY DIGITAL LICENSING REQUIRESA “TRANSFORMATION”Digital licensing is not simply the addition of appropriatetechnology to improve current licensing processes. Fullyutilized, it completely changes the way IP is packaged,purchased, serviced, and maintained. Therefore, thinking,planning, and mobilizing the digital-licensing solution—on the right scale—provide the keys to success.In today’s boardrooms, executive-level discussions arecommon galvanizing forces of organizational and industrychange that acknowledge the need to carefully tie systemsintegrationinitiatives to the business vision. Once anenterprise accepts electronic licensing as its mechanismof change that will enable successful transition across theinflection point, it is of paramount importance to considerthe total impact that change must have on both its frontandback-end systems.TRANSFORMATION TO DIGITAL LICENSING 11

While working with software companies as they embark onthe path to digital licensing, we notice that however modestthe initial concept, its implementation impact spreadsenterprise-wide across operations, engineering, marketing,and sales. For example, a new business model may includedeveloping online configuration rules for a new product.This new product’s structure includes different levels ofbundled services. The online configuration rules willneed to:• Enable customers to unlock the appropriateright-to-use.FIGURE 5MARKETINGAREAS OF BUSINESS IMPACTPRODUCTDEVELOPMENTDIGITALLICENSINGFIELD SERVICEMANAGEMENTCUSTOMERSUPPORT•Support enforcement of license compliance.•Collect and accurately document onlineself-service sales revenue.SALESOPERATIONS•Report back to corporate marketing to ensure thatcross-sell and up-sell marketing campaigns can becalibrated to actual usage.•Report back to ensure that support and maintenanceprocesses can be developed and staffed appropriately.In this way, digital licensing impacts staff and managementresponsibilities and dependencies, as well as influences abroad range of business-process decisions. (See Figure 5.)You should pause to consider the complexity, opportunity,and pitfalls associated with moving your companyforward toward the new business landscape. All the lessonslearned when implementing major change programs willapply to digital licensing as well, including several keystrategic, governance, and process considerations andrecommendations.Applying a broader, more ambitious definition of functionaland organizational scope from the first step of implementationoften helps avoid fragmentation.FULFILLMENTPART II: Managing for Success:Strategy, Governance and Process inEnterprise Transformation ProgramsLESSONS LEARNED FROM ERPClearly, some degree of initial planning is essential to setthe vision, define the scope and business benefits, and layout the road map for achieving the vision of a transformationprogram. Yet, taking the time to set an effectivestrategic plan in motion often remains an uphill battlein many corporate environments.Since the early 1990s, we have gained extensive global ERPimplementation experience that enabled us to determinecommon (or global) versus local requirements. Meant tosupport international companies lacking globally integratedsystems, these ERP projects were frequently lacking thesupport of an integrated management structure to help setthe right direction. Therefore, ERP implementations had toforge appropriate decision structures—often painfully. As a12 KPMG CONSULTING

esult, some early global ERP programs spent far too longconsidering global processes, often without clearly understandingthe implementation constraints they faced. Insuch an environment, frustration often set in and spawnedindependent initiatives. Although many early ERP adoptersstandardized on an application package, they often wereunable to achieve the “single integrated instance” goalthat would enable consistent global processes.Later adopters of ERP (or those carrying out consolidationprograms) learned the importance of establishing requirementsprior to beginning the first implementation project.A broader, more ambitious definition of functional andorganizational scope for the first implementation stepoften helps avoid fragmentation.Defining Program ScopeWe believe ERP lessons can be applied to the digitallicensinginflection-point challenges software companiesnow face. This past ERP experience can guide the organizationtoward the appropriate level of detail needed to:•Set goals and vision.•Define a realistic road map for implementation.•Identify measures for success.•Identify cross-functional boundaries.The appropriate time frame and level of detail is drivenin part by the effectiveness of the overall implementation,including how the organization gains agreement, avoidsrework, and determines up-front requirements. Anotherimportant consideration, however, is an organization’stolerance for this kind of operational strategy.•Too much detail and the vision is lost—or worse,analysis by paralysis sets in.•Not enough detail and the proposals will lacksufficient credibility.•Too much or not enough detail and consensusis never reached.Based on our experience and observations, it is essentialto adequately set the stage by defining a credible set ofinitiatives linked to the vision and goals. Planning for theimpact of each initiative on all systems, graphing benefits,and acknowledging risks—as well as developing realisticbudgets and identifying business value—must be clarified.A medium-sized company might expect to scope out auseful road map by focusing on the program’s parametersin a five- to ten-week planning phase.Putting a clearly defined governance and decision-makingmodel in place is a critical success factor. It must bechartered to respond to changes brought on by newinformation—or constraints and requirements that areuncovered—as project activities commence. Enterpriselevelprograms will always need to respond to businesschanges, so effective governance is essential to steer theright course. The expectation that program planning isa continuous process needs to be set at the outset.Measuring Business ValueAs recently as two to five years ago, major change programswere readily approved on the basis that infrastructureinvestment and a platform for growth were critical tosecuring future success. Today, such proposals are unlikelyto result in program-fund commitment. Without anexplicit articulation of the business value to be derived,your transformation program will be unable to secureexecutive-level support. You will need to define an appropriatevalue-measurement hierarchy to:•Identify a scale of measure for business improvement.• Place points along that scale including current, target,and best-practice benchmarks.• List the assumptions needed to achieve theimprovement from current to target.•Articulate the assumptions to translate theimprovement as a cash value.•Assign accountability for delivering the improvement.•Determine a time frame for realizing the benefit.TRANSFORMATION TO DIGITAL LICENSING 13

We believe that measurement can always be made and acash value derived. Assumptions made when translatingimprovements into cash value must be articulated. Forexample, some companies will determine that customersatisfaction, as measured by survey, needs improvement.A number of controllable actions can positively impact thesatisfaction rating, such as call wait time. The assumptionis that higher customer satisfaction will improve customerretention and therefore revenue. Management must buyinto the principle that improved customer satisfaction isworthwhile, agree which attributes are likely to impact it,and—if required—agree on the revenue equivalent forthose improvements.Although benefits can be quantified, assumptions are oftenrequired to express each benefit as a cash value. Reducedoperational cost is also a tangible benefit. Too often,companies quantify simple measures to justify a project,while failing to articulate the more complex measurementssuch as how the more strategic benefit of improved customersatisfaction will be delivered. Without managementattention and quantification, such strategic value willgo unrealized.As illustrated in Figure 6,each of your improvementscan also be linked back to shareholder value. Once youconsistently define how specific processes are expectedto contribute to the enterprise’s bottom-line valuation,it becomes easier to advocate for the technologicalimprovements that can secure organizational transformation.When all constituencies understand and agreeon what the key program-value indicators should be,you can prepare to effectively manage your projects todemonstrate that value.FIGURE 6STRATEGIC VALUE METRICS AND VALUE DRIVERSPUBLIC STATEMENTSOF CORPORATE VALUEFUNCTIONALGROUPINGAREAS OFPROCESSOPTIMIZATIONKEY METRICSTO MEASUREIMPACTSECONDARYMETRICSIMPACTEDPOTENTIALVALUEQUALITATIVEINTANGIBLESAND MARKETVALUATIONINCOMESTATEMENT$BALANCESHEETSHAREHOLDERVALUESALESCOGSSG&AINVENTORY/FULFILLMENTACCOUNTSRECEIVABLEFIXEDASSETSCURRENTLIABILITIESSUSPECTTO COLLECTRECORDTO REPORTPROCURETO PAYHIRETO REHIRECONCEPTIONTO PRODUCTIONCONTACTTO CONCLUSIONREVENUEGROWTH RATEMARKETSHAREREVENUE/EMPLOYEECHANGE INGROSS MARGINCASH-TO-CASHCYCLESG&A % OFREVENUEECONOMIC PROFIT/REVENUEMARKET VALUEMULTIPLEEFFECTIVETAX RATEROI/ROACAPITALSPENDINGGROWTHEMPLOYEERETENTION RATEAVERAGETRANSACTIONYIELD12% INCREASEIN REVENUECOGS 2%REDUCTION,CYCLE TIMEREDUCTION1.24% DECREASEIN SG&ASIGNIFICANT2 – 5% ON EBITDSO REDUCEDBY 2 DAYSFIRST-YEAR NETDOLLAR BENEFIT14 KPMG CONSULTING

THE CASE FOR CHANGE:MAKING THE VISION REALMaking the case for change is different from quantifyingbusiness value. Business value cannot always be directlytied to specific actions. If there are to be several relatedinitiatives, the case for change must be clearly stated. Yourcase needs to effectively demonstrate how the transformationproject will tie to specific departmental or individualprocess results. To drive action, change must alwaysbe made personal. Effective change agents are able to getthe organization excited and motivated, since they helpothers envision the collective future. The change agentsalso keep a steady eye on the end-state goals in order toidentify and communicate when each has been achieved.Executive sponsorship is an essential motivation for changewithin the enterprise. Frequently, actions to drive changeconsist of the “boss” informing or persuading the subordinatethat something needs to happen. Perhaps the bossmandate is the most unambiguous path to managing atransformation program. Persuasiveness in matrix managementstructures, even in empowered team-buildingcultures, demands a clear executive sponsorship—inaddition to consequence management—that lines upwith a single company vision.The Burning PlatformSimply identifying transformation drivers at the personal,departmental, and individual levels still may not be enoughto drive true organizational transformation. Creatinga well-documented business case cannot make changehappen by itself. In reality, current pain is more vividthan anticipated reward. When an enterprise needs tounderstand certain situations and practices as being bothunacceptable and threatening to the business, the situationcan also be characterized as a “burning platform” issue,defined as when the organization is facing a major(disruptive) change in which the cost for the status quois prohibitively high, and there is significant risk thatimplementation failure could occur.Systemic organizational changes such as Transformation toDigital Licensing must be characterized and communicatedas a burning platform for the business. Without this levelof urgency, change either will not happen at all, or its endstategoals become diluted during execution.Evolutionary Approach“Think big, start small” is a good principle. The proof fora truly evolutionary approach will be found in measuringincremental business value. Today’s market environmentdemands an evolutionary approach to organizationaltransformation. The measurement process will help identifycritical issues and ROI or improvements in key companymetrics. The starting point for your rollout strategy shouldbe identified business value, not your technical constraints.Work-around cost, the need to establish a flexible technicalinfrastructure, and your application architecture must all beconsidered—but they are not the transformation drivers.Given the holistic nature of transformation programs,organizations often struggle to effectively map big-picturebenefits down to the tiny steps necessary to accomplishchange incrementally. We recommend delivering businessvalue in 90-day increments. This value may not always bea direct-cost measurement. Reducing release time from30 days to two days would be a great value. Rather thana direct-cost savings, it may be reflected in improvingcustomer service or market share. This in turn mighttranslate to reduced headcount, redeployed staff, or theability to realize additional revenue. At the end of 90 days,finding ways to measure and achieve this business valuecould demonstrate a tangible achievement for the transformationprogram by providing management with optionsfor how to achieve additional benefits moving forward.The measurement process can help identify critical issues andROI for improvements in key company metrics. The startingpoint for your rollout strategy should be identified businessvalue, not your technical constraints.TRANSFORMATION TO DIGITAL LICENSING 15

IMPLEMENTING THE PLAN: MOBILIZATIONAND THE EXECUTIVE TRACKIf the initial approach is to take five to ten weeks to createthe vision and plan, what happens next? How do wesmoothly transition from creating a plan to deliveringbusiness results? What can we do to maintain momentumfor the program? Too often, the strategy-development phasefails to bring together a critical mass of stakeholders toagree on the collective vision and commit to its realization.This results in fragmented initiatives and the creation ofnew processes that develop increased resistance to change.After weak executive sponsorship, ineffective mobilizationis the biggest cause for program failure. How do we implementthe above recommendations to ensure a successfulTransformation to Digital Licensing? We have found that inorder to move seamlessly from strategy through mobilizationto implementation, an “executive track” (ET) shouldbe established to address the requirements for capturingand articulating the vision, engaging key stakeholders,securing resources and funding, and owning the deliveryof business value.Executive Track: Purpose and ProcessTo effectively communicate results, a variety of communicationvehicles must be established that speak to the specificconcerns of several audiences and program constituencies.Again, ET oversight is critical to ensuring that the rightmessages are delivered at the appropriate points so thata range of purposes can be seamlessly served throughoutthe project duration (e.g., project approvals, ongoingbudgeting, keeping project work focused on deliveringhigh-value business tools). The key is to identify andcommunicate whatever is needed to ensure ongoingprogram momentum and success.The most important mistake we have observed after ourERP implementation experiences is the client’s neglectingto establish and empower an ongoing ET. This oversightis analogous to investing in and completing project workand then shelving it rather than following through withthe “go-live” stages that allow the organization to actuallyaccrue the value of everyone’s hard work. As difficult as itis to realize systemic transformation that aligns technologyenablers to measurable business values, we believe a strongET can make all the difference. In order to support organizationsin preparing to achieve these goals, Figure 8identifies and describes the tasks of the ET at each stagein the strategy phase of a transformation initiative.Figure 7 graphs the flow of an ET to support the realizationof large change-management programs. An ET mustsuccessfully create the case for change to the board, theassociated executive team, employees, customers, andsuppliers. The ET is the driver for larger project decisionsregarding scope, benefit, cost, time, and risk. It is alsoresponsible for keeping these dimensions aligned toenable smooth step-by-step project implementation.Perhaps the most visible duty of an effectively managedET is to build and maintain momentum throughoutthe project implementation stages, including a proactiveprocess that clearly anticipates and effectively feedsexecutive requirements for information, consultation,and approval to the project teams.It is difficult to realize a systemic transformation thataligns technology enablers to measurable business values.We believe a strong executive track can make all the difference.16 KPMG CONSULTING

FIGURE 7EXECUTIVE TRACKWhat is the strategicobjective behind thetransformation?What should thefuture look like?What are theinitiatives needed toachieve the vision?What will it taketo get there?ASSESSCURRENT STATECRYSTALLIZEVISIONDEVELOPFRAMEWORKDEFINEROAD MAPWhat are the marketleaders doing incomparison?What is required tosupport that vision?What is the potentialtechnology required?What is the phased planfor execution?TASKS ANDDELIVERABLES• Conduct managementinterviews• Conduct business userfocus groups• Define organization’scurrent structure• Assess customersand products• Establish baseline metrics• Assess organization’schange readiness• Assess end-to-endbusiness process• Conduct workshops todiscuss application ofleading trends and bestpractices• Formulate businessmodel vision• Validate draft visionstatement with stakeholdersand executivemanagement• Define governancecommittee and thecharterBUSINESS• Develop (and baseline)key metrics• Develop programframework• Create gap analysis• Identify programinitiatives• Develop high-levelfuture state processdefinition• Prioritize and finalizeinitiatives portfolio• Develop phasedrollout plan• Finalize key metrics• Finalize governancestructure• Finalize changemanagement planTECHNOLOGY• Assess landscape• Assess integration• Assess infrastructure• Formulate and validateconceptual end-statelandscape andarchitecture• Identify technologyportfolio requirements• Identify short listtechnology providers• Identify technologydependencies• Finalize technologyportfolio visionTRANSFORMATION TO DIGITAL LICENSING 17

FIGURE 8EXECUTIVE TRACK: FOCUS ISSUES, AUDIENCE, AND DELIVERABLESPHASEVISION/SOLUTION/APPROACHSTAKEHOLDERS CASE FOR CHANGE BUSINESS VALUE COSTS RESOURCESMobilizeTransformationProgramDevelop high-levelvision statementIdentify criticalsuccess factorsDefine program scope:process, system,company organization,products, customersegmentsIdentify stakeholdersProvide program briefsUnderstand stakeholderareas of impactList other companywideinitiativesCreate “burningplatform”Identify top five issuestransformation programwill addressDevelop businessvalue hypothesisDetermine criticalmetrics to supporthypothesisProvide in detailfor strategyDevelop totalprogram estimatesProvide in detailfor strategyDevelop totalprogram estimatesAssess Current StateCrystallize the Visionassessment are validEnsure stakeholders agree business value hypothesis merits investigation and they will support with resourcesUpdate scope asappropriateRefine visionRefine criticalsuccess factorsIdentify anecdotes tosupport “burningplatform”Update top five issuesand business valuehypothesis as currentproblems dictateDetermine baselinefor critical metricsEstablish benchmarkmeasuresEnsure stakeholders agree to program scope relevancy and validate baseline measures and current state assessmentSet goals for businessvalueConfirm businessvalue hypothesisRespond to (and/or provide) feedback on vision and goalsDevelop Framework(of End State)Map solution to visionand business valueConfirm impact Finalize case for change Finalize end-statebusiness valueRefined ballparkestimates (based uponfirst cut of initiatives,sequence, and timingIdentify initial initiativestructure, sequence,and timing in order togenerate feedback andinform total programcost estimatesPrioritize/reconcilewith other initiativesIdentify costconstraintsIdentify resourceconstraintsAgree on end vision and benefits. Run vision/scope/benefits and costs by decision makers.Provide approval for quick-strike projects, cancel unnecessary projects.Define Road MapPrioritize road mapscenarios in alignmentwith company vision,relative to time-tobenefitand riskEstablish total programgovernance structureDevelop time-phasedbusiness valueDevelop time-phasedcostCreate six-monthresource allocationprofileAgree on road map, budget, business value return, and resource allocation profileQuick Strikes/Refinements andFinal ApprovalBegin quick-strikeproject(s)Solicit stakeholderfeedbackPrepare for programmobilizationAllocate staffresourcesMobilizeTransformation programlaunch announcedcompany-wideEstablish mechanismsto manage programscope over timeHold department-levelprogram launchmeetingsEstablish format forchange managementinterventionsSet business valueand risk monitoringin placeEstablish costmonitoringAssemble team andlaunch program18 KPMG CONSULTING

LAUNCHING YOUR TRANSFORMATIONTO DIGITAL LICENSINGTo succeed with transformations on this scale in ourcurrent business climate, a phased approach is essential.At KPMG Consulting, we focus on the following goals:• Think Big: Establish a vision and blueprint at theoutset.• Start Small: Create a phased implementation strategy.• Deliver Quickly: Set scope of work to deliver rapidROI and build momentum with incremental projects.We have identified several other elements that can help anorganization plan and execute for success. To succeed withcross-enterprise initiatives, there must be strong corporatesponsorship and constant communication between allstakeholders. To stay focused over the long haul, organizationsmust institute a cross-functional, consensus-drivenapproach to determine and/or clarify:1. Who-owns-what product data.2. Common business rules (data standards, privacy,process, auditing).THE BENEFITS OF WORKING WITH USKPMG Consulting is one of the world’s most respectedbusiness advisors and systems integrators. We buildenduring relationships with our clients by helping themcreate new business models and innovative solutions,enabling organizations to leverage technology for strongerreturn on investment and enhanced service to theircustomers, vendors, and employees.From business systems strategy to implementation,we combine our industry knowledge with technologyexperience to deliver results-focused solutions quickly.By partnering with technology leaders, we provide leadingbusiness and government organizations around the globewith best-in-class solutions across every industry segment.THE NEXT STEPSIf you would like to learn more about how we can helpyour organization, please contact us at 1-866-FOR-KCIN(1-703-747-6748 from outside the US and Canada) or visitour Web site at www.kpmgconsulting.com.3. Common and/or shared processes anddata requirements.Finally, never forget that this must remain a dynamicprocess that requires:1. A scalable, flexible, extensible infrastructure.2. An ongoing team and commitment to evolvingprocesses.3. Remembering that today’s business rules willnot last forever.TRANSFORMATION TO DIGITAL LICENSING 19

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