The real costs of being out of compliance with your software licenses

When it comes to software licensing compliance, manufacturers are stepping up their game. All the major software vendors are ramping up their audit frequency. Gartner and other industry pundits have noted this acceleration for the last few years, and there doesn’t appear to be any slackening of the pace. Just as notable, software vendors are also increasing the intensity of their audits, digging deeper and harder into some of the areas in which they’ve traditionally given customers some leeway.

Most of the penalties a customer can suffer from a manufacturer audit are not immediately apparent or quantifiable. Nonetheless, there are very real costs for poor software license governance and manufacturer audits. They include:

  • Cost of the software required to “true-up.” A “true-up” is the process by which an organization reconciles the amount of deployed software instances with the number of software licenses actually owned. Most organizations are on average 20 percent under-licensed. In these cases, the most obvious and quantifiable cost to the company is the purchase of all the licenses necessary to true-up any compliance shortfall. In cases in which a customer has been out of compliance, some manufacturers will charge full price for the licenses needed to rectify these out-of-compliance instances rather than the company’s negotiated discounted price. In addition, the customer might owe back maintenance for all the time the software had been in use.
  • Budget surprise. In general, business executives and finance departments HATE surprises. And audits are very unwelcome surprises, especially when they result in having to immediately cut a substantial check to resolve an out-of-compliance situation. Not only is it harmful to have to address the unbudgeted expenses, departmental budgets and projects are put at-risk in order to pay the bill after a poor audit performance.
  • Cost of resources. Audits are expensive projects. The immediate, unscheduled involvement of many departments they require, including procurement, IT, legal, executives, PR, and end users, is perhaps the greatest audit expense for most organizations. The cost to conduct a formal audit, which is on the manufacturer’s timeline and under vigilant surveillance, far exceeds the cost of a self-audit that can be planned and executed under more manageable and reasonable circumstances.
  • Credibility. When a customer is formally found to be out of compliance through an audit, trust is compromised. Manufacturers and customers shift from being partners to being adversaries. This usually results in tougher, more expensive, and less productive negotiations moving forward. It also means that any cost-saving, “benefit of the doubt” allowances the manufacturer might have made in the past will be lost.
  • Opportunity costs. There are significant opportunity costs associated with an unscheduled, unproductive, resource-intense project … especially when that project results in an outflow of unbudgeted cash.
  • Reputation costs. Bad news travels fast. There are a number of issues that affect reputations when an audit goes bad. Poor audit results reflect badly on a company’s standing with its customers, stakeholders, and the public (or the company pays dearly for a non-disclosure clause in the audit). Plus, a company’s entire governance process can be called into question, expanding the costs and implications well beyond software compliance. In the end, companies (and their executives) spend extra time and effort trying to manage and mitigate the damage to their individual and collective reputations.

And these costs could only be the beginning. If an organization demonstrates flagrant ignorance or deliberate avoidance of licensing rules, it could become the subject of a legal audit. The Business Software Association (BSA) is the legal arm of a consortium of manufacturers that is authorized to pursue copyright infringement, conduct formal audits, and file lawsuits on the manufacturers’ behalf. Penalties assessed by the BSA can theoretically amount to as much as $1,000 per instance of copyright infringement–that is $1,000 for each unlicensed, installed piece of software.

Such drastic legal measures are rare. But even in the case of a less formal manufacturer audit, the costs of under-compliance can add up.

On the whole, we can expect audits to consume more of companies’ attention, time, resources, and money than they have in the past. That’s why it’s important to have a comprehensive understanding of your software environment. After all, properly managing and licensing software will only grow more complicated as new software, licensing models, and devices are introduced to the organization.

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