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IBM Virtualization; Five Hidden Costs

Five Hidden Costs in IBM Virtualization ProductsThis article has been contributed by Julie Machal‐Fulks, of Scott & Scott, LLP.

Many enterprises are exploring virtual technology as a way to reduce both hardware and software technology costs related to IBM solutions.

For disaster recovery, security, and resource allocation purposes, virtualization can present an attractive solution. However many organizations might reconsider virtualization if the stakeholders realized the total costs before deploying virtualized solutions.

The costs associated with non-compliance can be extraordinary, and because IBM has undergone a massive audit campaign, it is critical to ensure that businesses evaluate all the costs of deploying IBM products.

No Legal Right to License Less than Full Capacity of Physical Servers

Companies that intend to deploy IBM licenses in a virtualized environment need to ensure that their effective licenses give them the right to license a smaller capacity that the full physical server, also called sub-capacity licensing. Although IBM does offer licensing alternatives that allow end-users to acquire licenses for only the capacity of the servers actually assigned to IBM products, customers cannot take advantage of the opportunity for reduced licensing without having a properly executed Sub-Capacity License Agreement or licensing terms in their Passport Advantage Agreement that allow for sub-capacity licensing. Although IBM no longer distinguishes between full-capacity licenses and sub-capacity licenses during the ordering process (i.e., IBM combined the SKUs and now has one SKU for both types of licenses), IBM did not eliminate the requirement that customers have an agreement giving them the right to license on a sub-capacity basis. Customers who do not have the legal right to use sub-capacity licensing will be required to license each virtual server to the full capacity of the physical hardware.

Failure to Follow License Terms Results in Requirement to Purchase Full Capacity Licenses

Many IBM customers have a properly signed agreement, but fail to adhere to all the contractual requirements. The Sub- Capacity License Agreement requires most customers to deploy either the IBM License Metric Tool (ILMT) or in some cases an equivalent to ensure that the customer does not exceed the allowed licenses. Customers are required to retain the reports from the monitoring tool for the audit period, usually two years. In some cases, it is extremely difficult and expensive to deploy ILMT. Many end-users do not account for the cost associated with deploying ILMT when evaluating the total costs. IBM may argue that failure to properly deploy ILMT requires the company to pay for full-capacity licenses for all virtualized servers.

In the newer IBM agreements, there are several enumerated exceptions to the ILMT requirement:

  1. When ILMT does not yet provide support for the Eligible Virtualization Environment;
  2. If Customer’s Enterprise has fewer than 1,000 employees and contractors, Customer is not a Service Provider, and Customer has not contracted with a Service Provider to manage Customer’s Eligible Virtualization Environment;
  3. If the total physical capacity of Customer’s Enterprise servers with an Eligible Virtualization Environment, measured on a Full Capacity basis, but licensed using sub-capacity terms is less than 1,000 PVUs; or when Customer’s servers with Eligible Sub-Capacity Products are licensed to the Full Capacity of the servers.

Even if a customer is exempted from deploying ILMT, it must still keep audit reports documenting the usage of IBM’s technologies that are deployed in a virtual environment and licensed on a sub-capacity basis. These reports must be generated when the deployments increase, or quarterly, whichever is more frequent.

Improper Hardware Configuration Results in Inflated Licensing Cost

Even when an organization has an appropriate Sub-Capacity License Agreement and adheres to all the provisions in the agreement, the organization can still encounter hidden costs if it does not understand the licensing implications of hardware configuration. For instance, many companies cluster their virtualized environments for failover purposes or to achieve maximum performance from the servers. Other organizations fail to properly limit the capacity of the physical servers. In these common scenarios, it is often the case that the organization must license the full capacity of the clusters or non-limited servers, which could result in much higher licensing costs than expected.

Audited Customers May Have to Pay Auditors’ Fees

Many IBM agreements contain audit provisions requiring their customers to submit to an audit upon request. IBM has a comprehensive audit program and often employs the services of third-party auditors like KMPG or Deloitte to evaluate compliance with license terms. These auditors examine output from ILMT or similar tools and compare deployment information against entitlement information to determine whether any licensing gaps exist. If there is a lack of license compliance, IBM is typically allowed under the contract to seek reimbursement for the fees it paid to the third-party auditors. These audits are expensive, and can be an unexpected cost when companies inadvertently fail to properly license all deployed IBM products.

Julie Machal‐Fulks, Scott & Scott LLP

Julie Machal‐Fulks, Scott & Scott LLP

Under-licensed Customers Face Substantial Financial Penalties

In addition to the audit costs, many companies are surprised to be facing tens of millions of dollars in licensing costs to IBM as a result of improperly deployed or licensed software on virtualized servers. If a company believes it is entitled to buy limited sub-capacity licenses, but for one of the reasons articulated above, it is actually required to license the full capacity of all the servers in a cluster, the costs can be astronomical. It is therefore critical for companies to understand the licensing terms, the contractual provisions related to sub-capacity licensing, and the reporting requirements well before IBM sends the end-user a request for an audit.


Although it can initially be attractive to use sub-capacity licenses for IBM products in an attempt to reduce licensing costs, organizations who decide to explore sub-capacity licensing must evaluate the costs of deploying ILMT and must have mature processes in place to ensure that they are complying with all of the contractual provisions. Many companies that have tried to use sub-capacity licensing to save money have been blindsided by multi-million dollar licensing costs at the end of an IBM-initiated audit. These companies may have been better served licensing the full capacity of the physical servers at the outside so that they did not incur huge unexpected licensing costs.

This article has been contributed by Julie Machal‐Fulks, of Scott & Scott, LLP.

About Martin Thompson

Martin is owner and founder of The ITAM Review, an online resource for worldwide ITAM professionals. The ITAM Review is best known for its weekly newsletter of all the latest industry updates, LISA training platform, Excellence Awards and conferences in UK, USA and Australia.

Martin is also the founder of ITAM Forum, a not-for-profit trade body for the ITAM industry created to raise the profile of the profession and bring an organisational certification to market. On a voluntary basis Martin is a contributor to ISO WG21 which develops the ITAM International Standard ISO/IEC 19770.

He is also the author of the book "Practical ITAM - The essential guide for IT Asset Managers", a book that describes how to get started and make a difference in the field of IT Asset Management. In addition, Martin developed the PITAM training course and certification.

Prior to founding the ITAM Review in 2008 Martin worked for Centennial Software (Ivanti), Silicon Graphics, CA Technologies and Computer 2000 (Tech Data).

When not working, Martin likes to Ski, Hike, Motorbike and spend time with his young family.

Connect with Martin on LinkedIn.

One Comment

  1. Hi Julie & everyone,
    Sorry for this late response to an interesting article (from my point of view). I agree with you in most of your observations, but I have to correct you on at least one of them; since July 18Th 2011 the ‘sub-capacity’ licensing agreement has been an integrated part of the IBM Passport Advantage agreement and no separate subcontract are needed anymore. Talking about ILMT I agree that many customers has misunderstood the importance of implementing ILMT to be compliant with ‘sub-capacity’ licensing, even though it has been a demand since April 9Th 2009. But the ILMT tool (and TLCM before that) has a history of technical challenges that might have influenced that. I have personal participated in some ILMT projects over the last 9-10 months and ILMT are in a technical better condition today. Looking at the cost of implementing ILMT, I have to agree with you again. Most customers will experience this to be more cost full than anticipated before starting implementing ILMT. Often because the effort with configuring the ILMT tool after the technical implementation are underestimated. But in the same sentence you have to mention the cost savings, which for many customers are in a completely different dimension and the total investment will then give very positive figures. The main issue here are, that many customer do take ‘sub-capacity’ licensing for granted without ILMT, because of the tools condition at the time were ‘sub-capacity’ licensing was chosen. Refreshing with some IBM licensing stuff in the forum too. Thanks. // Henrik

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