Introduction
Virtualization is not a new concept, but it is increasingly reaching new users. What was once only available to the large mainframe computers of decades ago, is now affordable and available for use on computers in organizations of any size. As servers become less expensive and more powerful, it is increasingly possible for enterprises to exploit the advantages of virtualization at an affordable cost. “Virtualization”, broadly defined, is a methodology of dividing a computer’s resources into multiple execution environments. In generic terms, virtualization uses a layer of software (referred to as a “virtual machine monitor” or “hypervisor”) to create multiple instances of “virtual” machines on one physical machine, and allocate hardware resources dynamically between them. These virtual machines operate as though they were each separate “real” machines, even as they all reside on the same physical machine. Each virtual machine contains its own CPU, memory, operating system and network devices, and can each run their own software applications. Through virtualization, multiple operating systems can run concurrently on a single physical computer and share hardware resources with each other. Virtual machines need not use the same operating system (e.g., it is possible to use both Linux and Windows on the same physical machine).
Why Virtualization?
Computers that run a single operating system and a single application are significantly underutilized. Each computer is functioning at a fraction of its capacity. This underutilization is exacerbated in organizations that use different machines to perform different functions: each system has considerable spare processing capacity.
The main benefit of virtualization is efficiency. For example, consider a data centre with two servers. On one server, a Windows system uses 30% of that server’s processing capacity. On another server, a Linux system uses 40% of that server’s capacity. If the data center deploys a virtualized system, it could eliminate one server and run both the Windows system and the Linux system on a single physical server, which would then utilize a combined 70% of that server’s processing capacity.
Eliminating the second unnecessary server poses several advantages for this fictional data centre. Fewer servers mean reduced capital costs, improved energy efficiency, lower power and cooling costs, smaller space needs and higher server-to-administrator ratios. Taken together, this can result in considerable cost savings for an organization.
Legal Considerations
While the benefits of virtualization are clear, the legal implications are varied. Organizations need to consider the impact of virtualization on software license agreements, maintenance and support arrangements and outsourcing agreements before moving to a virtualized environment.
Software Licenses
Software licences are often structured around a per-machine fee structure, where license fees are calculated, in part, based on the number of physical machines running the licensed software. The license may also tie the software to a particular piece of hardware. A switch to a virtualized environment could result in fewer machines running the licensed software (even as those machines run multiple virtual instances of that software). This would skew a per-machine pricing model, and result in lower licensing fees (even as the licensee is still using the software to the same degree).
Although an apparent gain to the licensee (at the expense of the licensor), these circumstances are not without consequence. A frustrated licensor could interpret the use of licensed software in virtual environments as a breach of the license agreement, and even as copyright infringement. This could lead to penalties and the added costs of dispute resolution for the licensee. Moreover, license agreements can restrict the use of software to designated equipment. Consolidating multiple instances of software from one physical piece of equipment to another to facilitate the virtualized environment may also violate the terms of the software license.
Maintenance and Support Arrangements
Maintenance and support providers may not welcome a virtualized environment. The additional hypervisor software layer may exceed the comfort level or capabilities of maintenance and support providers. Indeed, some providers charge a premium for supporting virtualized software (ostensibly due to the need to train personnel in the specific virtual environment), while others refuse to support products used in a virtual environment due to the complexity of the virtualization software, and the potential challenges arising from that complexity.
Outsourcing Agreements
As with software licenses, information technology outsourcing agreements often use a unit pricing methodology. The specific pricing unit depends on the nature of the outsourcing arrangement, and the rate is used to make pricing adjustments, where needed, during the life of the outsourcing arrangement. Data centres often treat the number of servers as the pricing unit, and much like the discussion of software licenses above, a virtualized environment can impact the amounts paid under such a pricing structure. Companies should consider whether and how cost-savings will be shared by the parties, and whether the rate or pricing unit needs to be redefined.
Although outsourcing presents some of the same challenges as discussed above, there is one key difference in outsourcing arrangements: often, the service provider (and not the customer) controls the deployment of new technology. Unless the service provider is obliged to be both transparent in its use of virtualization technologies and responsive to redefining the pricing methodology in light of material changes to the technology, the customer may find that the service provider has significantly reduced its costs without passing on those cost savings to the customer.
Suggested Practices
When considering whether to adopt a virtualization strategy, note the following:
- Review existing agreements for any terms which may prohibit or exclude a virtualized environment, or result in added or skewed costs.
- Consider whether negotiations with the service provider will be necessary to amend pricing or other terms. If the pricing unit is the number of servers or CPUs, consider whether amendments are needed to tie pricing to the number of users, or to each logical server or machine instance rather than simply the number of physical servers or CPUs.
- For outsourcing arrangements, consider how transparent the service provider must be in its use of technologies, and how responsive it must be in redefining the pricing methodology in light of material changes to the technology. Also, consider how cost savings for both the provider and the customer should be allocated. Consider also negotiating cost savings clauses, which would share any cost savings realized by the optimization of the outsourced functions through a virtualized environment.
Daniel Fabiano, Fasken Martineau DuMoulin LLP