The era of a trust-based system of software use may be coming to an end. Software publishers have historically relied on organizations to pay for what the companies thought they were using. However, software publishers are realizing that when left unchecked, most organizations will at some point get out of compliance with their licensing terms, such as by allowing more users to access the software than the organization has accounts.

Software publishers have a tool in their court, however, to help them ensure that you are following their licensing agreement: the software licensing audit. If you are unsure of what a software license audit is, it’s simply having a company from which you buy software look into whether you are using the software as agreed-upon in the licensing contract. By targeting purchasers for software license audits, software publishers have been able to recover millions of dollars in license revenue. The success of these ventures will likely make these software license audits more common moving forward.

For organizations using software, now may be a good time to review your software licensing agreement for compliance. If you are not following the terms of the agreement, you may be leaving your company exposed to licensing audits, as well as the costs that could accompany them, such as breaches of contract, intellectual property (IP) infringement, and non-optimal contracts.

How Will Publishers Know That My Software Licenses are Out of Compliance?

Some software publishers use embedded telemetry technology to track license misuse. Other publishers will use the threat of legal action by invoking the audit clause in your organization’s software licensing contract. Didn’t know you had an audit clause in your software licensing contracts? You do.

Software license audits are inquiries into how software is used, how it’s configured, and whether the software licenses that you’ve purchased cover your actual use of the software. In the best case scenario for your organization, you’ll be expected to fill out a brief questionnaire to report license usage during a license software audit. In the worst case, you’ll have an independent third-party audit team knocking on your door for the next three months.

There are Hefty Penalties Associated with Failing a Software License Audit

Failing an audit can result in unexpected fees, which, if you’re not careful, can result in huge impacts to your organization’s bottom line and reputation. If found out-of-compliance with your software licensing contract, a software publisher will require your organization to procure all under-licensed software at full list price (instead of at your volume discount levels) plus the cost of audit fees. That’s right: You will be expected to foot the bill for the software license audit.

A software license audit may also disrupt your business activities because it can take months to complete. When you fail a software license audit, you will at least need to buy enough licenses to close the gap. But the expense doesn’t end there. Often software vendors demand you pay back-maintenance for the new licenses, too. What’s more, the risk of under-licensing and failing an audit grows every day as you deal with complex IT architecture, virtualization, and intricate license metrics.

Overspend on Software Licenses Can Also Be Costly

To be safe, some organizations purchase more license than they need. The over-supply of licenses will help the companies stay compliant by the software company’s standards, and it will reduce the risk of being audited. But being over-licensed over a long period of time can cost more than failing an audit.

Optimize IT Spend, and Reduce Risk of Noncompliance

How you deal with that audit is a little like Goldilocks – not too much, not too little. Spend too little on licenses and you’ll pay big penalties during the audit. Spend too much on licenses and you’ll overspend your IT budget, which could be problematic in the long run.

The good news is that the risk is controllable. A software license management program can be the solution your organization’s risk management needs. Software license management services help your organization monitor and track compliance with software license agreements, and can be customized to meet your organization’s needs, whether it’s to establish the foundation of a compliance program or guidance to inform future software strategies.

For questions and additional information, please contact the CBIZ Risk Advisory team.