How to win the software licensing game

Call it a license to steal.

Software licensing agreements have always been rife with pitfalls. And the rise of virtualization, subscription-based pricing, and various open source models has made the software licensing game even more complex.

Most enterprises are not fully aligned with their licenses, say experts. Some organizations are using more software than their licenses legally allow; many are paying too much for software that’s underutilized.

The wrong pricing model, usurious maintenance fees, incomplete asset management, poorly defined terms, and failure to account for business change can cost you big over the long haul.

Here’s how to avoid the most common licensing mistakes.

Shelfware: Use it or lose it 

The best-known licensing gotcha is paying for software that’s gathering dust on a shelf. Fortunately, this is less of a problem than it used to be.

Scott Rosenberg, CEO of Miro Consulting, says that in recent years CIOs and CTOs have gotten a lot smarter about software asset management.

“For the most part, shelfware is a minor concern and a low priority for most IT organizations — until a software vendor audits or the executive management team asks IT to cut costs,” he says. “Finding the time, resources and subject matter expertise are the major hurdles to avoiding shelfware.”

Three out of four organizations say they buy more licenses than they actually use, according to a November 2009 survey by Flexera Software and IDC. Many enterprises have so many different applications, each with its own licensing policies and terms, that it’s hard to keep track of what they are using and who’s using it.

An even bigger problem? Software that’s been installed but never used, says Kris Barker, CEO of IT asset management firm Express Metrix.

“Under most licensing models, installation is the definition of a license in use, but that does not mean the application is actually being run,” he says. “While taking a software inventory is now a routine chore for most IT departments, tracking/metering usage is the tougher nut. Blended inventory and usage data is the only way to optimize your software purchases.”

The first step is to carefully inventory the apps you’ve licensed as well as how they’re being used and who’s using them. You might then be able to trade unused licenses for new software from the same vendor, or reduce annual maintenance fees, which can cost up to 30 per cent of the original purchase price.

Jeff Muscarella, a partner in NPI’s Telecom and IT practice, says companies negotiating a license agreement should inquire about the ability to terminate, park, or exchange unused licenses down the road, so shelfware doesn’t come back to bite them in the wallet. They also should negotiate the rights to use repackaged or remarketed versions of the same product, so they don’t have to pay again for software that’s only marginally different.

One way to avoid the shelfware problem is to opt for software as a service, says Jan Aleman, CEO of IDE vendor Servoy.

“The difference with software as a service is you don’t pay upfront for the maximum number of licenses you might eventually need, you just pay for what you use,” he says. “In the past, you might buy 100 licenses for a CRM app and find out a year later that only 30 people used them. Today, you start out by buying 20 seats from and add more as you need them.”

According to that Flexera survey, more than a third of software vendors plan to offer a usage-based pricing model by 2011.

Software audits: Watch your back office

Just as buying software you don’t use will cost you money, so can using software you haven’t bought. If a vendor audit determines you’ve exceed the limits of your license, your company risks heavy fines from the Business Software Alliance or the Software & Information Industry Association, with punitive penalties for repeat offenders.

“For companies without robust compliance programs, an audit letter from the BSA or SIIA is often the beginning of a long march of trouble,” says attorney Heather J. Meeker, head of the IP/IT transactions practice at Greenburg Traurig.

And it’s quite likely that all or part of your company is not following the rules laid out it in your SLAs, says Rosenberg. “While most companies intend to be compliant, the reality is that the majority of them are not compliant with their enterprise software vendor’s licensing,” he notes.

Most violations stem from a lack of oversight or from misinterpreting the terms of the license — for example, installing software on two different machines when you’ve only purchased one end-user license, or using software that was licensed for evaluation or development in a production setting.

To be compliant, organizations must set clear policies about software distribution, educate users about license terms, and perform regular in-house audits to ensure compliance. They also need to look carefully at the audit language in the license agreement and make sure it spells out what can trigger an audit, who will conduct it, how much time they’ll have to do it, and what types of proof are required to meet the standards set out in the license. For example, you may need to present packing slips or completed invoices as proof of purchase.

And beware of casual inquiries from your vendors’ sales teams, warns Rosenberg. Though it may be framed as a way to offer you a better deal on your existing licenses, this could lead to the vendor conducting a formal audit down the road.

“We’ve seen a dramatic increase in informal queries from software vendor salespeople,” he says. “By handing over information — even within the bounds of seeking a better negotiation position before a purchase — the risk of a formal audit increases. You need to make certain you are formally being audited before sending any information to the software vendor.”

Virtual software: Avoid confusion

Nothing has thrown software licensing for a loop more than the dramatic spike in desktop and server virtualization. A survey by IT solution provider F5 found that 90 per cent of enterprises intended to deploy a virtualized environment in 2009.

“Understanding the licensing implications of running virtualized environment lags far behind actual implementation,” laments Express Metrix’s Barker. “IT often doesn’t understand how virtualization impacts software licensing and vendor licensing language often doesn’t explicitly address virtual environments.”

If you run the same software within different OSes on your desktop, do you need multiple licenses? How about if you stream the apps from a server? The answer depends on a number of factors, including the virtualization technology you employ.

For example, if you’re running an app inside multiple virtual environments on one physical machine, à la VMware or Microsoft’s Hyper-V, you’ll usually need a license for each instance of that app you’ve installed, just as if they were running on separate physical machines, says Barker.

If you’re streaming that app from a server — say, via Microsoft Application Virtualization — the rules are slightly different. Though only a “stub” of the entire software package may be installed on a desktop, you’ll still need an individual license for each machine on which that app is run.

In situations where the entire app runs on a server on behalf of multiple desktop clients — say, a Citrix box serving up Microsoft Visio — you’ll still need a license for every end-user machine that runs it, says Barker. But here the usual rules for concurrent use don’t apply. So if only 25 people can access the app at the same time, but 50 people in your organization use it at one time or another, you’ll need 50 licenses.

Even then, there are always exceptions, he adds. For example, Windows Server 2003/2008 Datacenter allows for unlimited virtual machines running on the same physical server, as do some enterprise versions of SQL Server.

The best solution? Rather than installing your VM environment and hoping for the best, it makes sense to revisit your licenses and negotiate a new deal with your vendor.

“The most sophisticated licensors and licensees now include specific terms about whether and how a licensee can run the software in a virtual environment,” says Greenberg Traurig’s Meeker. “Those terms would include, for instance, whether the software can be accessed via virtualization, and whether outsourced employees can use it.”

Payment: Define your terms

If you haven’t figured out how you’re really using the software and carefully defined the terms within your licensing agreements, you’re probably either out of compliance or paying too much for what you’ve got.

The problem? There are almost as many ways to pay for software as there are apps. You can pay a set amount per seat, concurrent user, CPU cycle, logical partitions of a CPU, or some combination thereof. You can pay a single price upfront, spread your payments over time, or pay an annual subscription fee for the use of the apps.

Larger companies may offer multiple ways to pay, depending on the application. They might sell licenses on a per-machine basis for productivity tools while selling them per-device or per-user for server software. Open five instances of an Office app on a desktop and you’re probably covered by a single user license. But if you’re a CAD user, you may need a separate license for every copy of the software opened on your machine.

Even seemingly simple terms like “user” or “employee” can lead to misinterpretation and noncompliance. For example, most licenses do not include outside contractors or temps within their definitions of named or concurrent users, says Meeker.

And if you’re using the software for evaluation or development purposes, you’ll likely pay much less for a license than if you need it for production. “Nearly all vendors have licensing programs for internal testing and development,” says Servoy’s Aleman. “Yet you still see companies buying commercial licenses for their development servers. They can save up to 90 per cent by entering their vendors’ development programs.”

The key is understanding not merely what you’re using but also how you’re using it and how the license terms apply in each instance. “Companies have to be cognizant of how they are using these licenses,” cautions NPI’s Muscarella. “If some users only need access to an application for limited use, then full professional licenses aren’t needed, or sometimes customized user definitions can be negotiated. Vendors want to sell the highest value license available, so don’t let them decide for you.”

Maintenance: Mind your wallet 

Even customers that play hardball on licensing costs often pay too little attention to annual fees for support and upgrades. As software vendors try to squeeze more revenues from their existing customer base, maintenance fees can be a far bigger money sink.

“The initial licensing spend will feed into the annual maintenance and support costs, which is approximately 22 per cent per annum of the total licensing purchase,” notes Rosenberg. “Therefore, by year four or five, your maintenance and support will exceed the initial purchase cost.”

The good news? Tough economic times have spurred enterprise vendors to cut deals on maintenance fees to keep their customers. Last May, Oracle announced it would trim license fees on some of its older products, while SAP said it would slow down price hikes on its annual fees.

Jim Shepherd, senior vice president of AMR Research, says maintenance agreements are a huge pain point for many enterprises. “People tend to focus more on the license price than on maintenance fees,” he says. “They end up spending far more on maintenance over the life of the software than they ever did on the license price.”

They might also be getting less than they bargained for. “In some cases, companies are paying maintenance to get product enhancements, only to find the enhancements they want have been repackaged as a new product the vendor wants to sell them,” says Shepherd.

Muscarella advises companies to negotiate the rights to use repackaged or remarketed versions of the same product, so they don’t have to pay again for software that’s only marginally different.

Assignments: Anticipate change

In today’s economic client, the only constant is change. Companies acquire and become acquired; they downsize divisions and spin off subsidiaries; they contract or expand to new markets. Don’t assume your licensing agreements are flexible enough to weather all the changes.

“We recently worked with a major U.S. media company that decided to expand its North American online publishing arm to Europe and Asia,” says Rosenberg. “There was no merger or acquisition. The company had assumed its Oracle Unlimited License Agreement meant that any usage by the company was covered. However, the Terms and Conditions limited the media company’s use of its Oracle products to North America.”

The solution? The company revised its licensing agreement by adding the new regions, as well as the option to assign up to 10 new regions within a specific time period.

Besides inserting assignment or transfers in case of purchases or acquisitions, Muscarella suggests build more flexibility into the agreement for unforeseen circumstances — like the ability to extend usage rights to subsidiaries or new acquisitions at a discount, or a transition period where no additional charges are incurred.

Money talks

The good news is that most software companies are hungry for your business and are willing to be flexible — and the bigger the deal, the more flexible they get.

If you’re unhappy with your current licenses, you’ll have a better chance of improving them when there’s new money on the table, says AMR’s Shepherd.

“We tell our clients that each time they go back to buy more seats or services, or add more products, to think about renegotiating their license agreements, because that’s when you have leverage,” he says.

You can keep your leverage strong by avoiding long-term agreements that lock you in, adds Muscarella. “It’s important to make sure you don’t have an out-of-date vendor agreement,” he says. “Every few years take a look at the agreements from vendors that may afford different rights that may be more beneficial.”

But there’s no substitute for doing your homework. The most successful companies know exactly what they need the software to do — now and in the future — and are deeply versed in all their licensing options. Those are things you’ll need to know before you sign on the dotted line.

“Many companies believe that they have self-audited by simply keeping their software deployments updated on a nicely detailed spreadsheet,” says Rosenberg. “However, this is only part of the equation. Your enterprise’s software deployments must still be reconciled to the license entitlements delineated in your contract. Most organizations fail to complete this reconciliation. Simply put, you can’t manage what you don’t know.”

This article, “How to win the software licensing game,” was originally published at

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