The Complexity of Software License Compliance, and the High Cost of Noncompliance

Just how prevalent is software license noncompliance? Well, the fact that many software providers are cracking down on noncompliance and turning it into a revenue stream should give you a clear answer. Intentional or not, organizations that are out of compliance with software licenses face severe consequences.

Computer Weekly recently reported that SAP was going after Anheuser-Busch InBev for $600 million after unlicensed use of SAP software was discovered. This came on the heels of a court ruling in favor of SAP in an indirect licensing case against alcoholic beverage producer Diageo, whose users were accessing SAP software that was based in Salesforce technology. The ruling stated that “only named users” are authorized to directly or indirectly access the software.

Software license noncompliance is about more than fines and increased costs. When you understate your software license liabilities, you overstate your financial performance. Shareholders, bankers, suppliers and employees rely on this information to guide their ongoing business dealings. Reporting errors can affect credit ratings, vendor terms and share prices, all of which impact an organization’s reputation. In some cases, responsible parties could be asked or forced to resign.

Part of the problem is that software licensing strategies are changing, which has added complexity to an already difficult compliance process. Perpetual licenses, which involved paying an upfront cost and annual renewal, used to be the dominant model. Today, just 43 percent of software providers say perpetual licenses are responsible for more than half of their revenues, according to a Constellation Research study.

Virtualization, mobility and the cloud have thrown a three-headed monkey wrench into software license compliance. Subscription-based, usage-based and even outcome-based licensing models are being used by various vendors, who are also employing sophisticated enforcement tools to prevent unauthorized use of their software. Mobile app developers are taking steps to ensure users are paying to use their apps. There are signs that software licensing compliance complexity is even making its way into open-source licensing.

Changes in networking are also affecting software license compliance. In software-defined environments, resources are pooled and allocated dynamically, and software isn’t tied to hardware. Services are delivered through on-premises and cloud infrastructure. It’s getting more complicated to manage software license entitlements, determine who is authorized to use software, and maintain visibility into that usage. When is a subscription-based license portable across on-premises and cloud systems? Is a perpetual license limited to one environment? These and other questions only increase risk.

Due to the high costs and high risk involved, software license compliance should be a board-level issue, not just a CIO issue. The full board must understand the serious impact of noncompliance and take steps to proactively identify and address noncompliance prior to an audit or financial reporting. At the same time, organizations need to avoid wasting money on unnecessary software licenses as a way to reduce the risk of noncompliance.

In the next post, we’ll discuss factors to consider when developing a software license compliance strategy.