CFO’s Beware – Enterprises Are “Accidental” Software Pirates – Often Paying Millions of Dollars Annually in True-up Fees

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CFO’s are now on notice — most enterprises are “accidental software pirates” and face frequent, unbudgeted software license true-up bills from their vendors – often to the tune of millions of dollars annually. This is the conclusion of a new Flexera 2013-14 Key Trends in Software Pricing & Licensing Report, prepared jointly with IDC, the ninth annual assessment of key issues and trends on the minds of software vendors, intelligent device manufacturers, and enterprise IT executives and managers. The report reveals among other things that 85% of organizations are out of compliance with their software license agreements, 63% were audited by their software vendors in the last 18-24 months (58% by Microsoft, the most aggressive auditor), and 56% were handed true-up bills (21% for a million dollars or more).

IDC Research Vice President for software licensing and provisioning, Amy Konary, says these software license audits, while not widely publicized, are typical:

“Software license audits are a legitimate way for vendors to ensure they’re getting paid for their software that’s actually being used. However, CFOs can be unaware of software contract provisions permitting these audits, which can result in an unexpected budget shock when IT staff present them with a true-up bill. The cost of these true-ups can be significant, so CFOs should take the necessary steps to reduce their risk by implementing software license management processes and technologies to help ensure continual compliance.”

Audits Are Frequent and Painful – Especially for Large Companies

Software license audits are exacting painful, unbudgeted true-up fees that must be paid out to software vendors on top of the initial contract amount. Almost a quarter of enterprises – 21% — were invoiced $1 million or more for true-ups, with 56% of respondents reporting audit fees of $100,000 or more within the last year. These numbers reflect a continuing trend. In the 2012 survey, 24% or respondents said their total true up was $1 million or more and over half said it was more than $100,000.

The survey also reveals that organizations, especially larger ones, can continue to expect frequent audits from the vendors that supply their mission-critical applications. 63% of respondents report having been audited in the last 18-24 months (roughly on par with 2012, when 64% or respondents reported having been audited). For enterprises with $3 billion or more in revenues, 33% report being audited three times or more over the last 18-24 months.

All of the major software vendors use audits as a means to capture additional revenue from customers’ non-compliant use. However some vendors are more aggressive in their auditing practices than others. For example, for the second year in a row, Microsoft was the most frequent auditor, with 58% of respondents reporting having been audited by Microsoft within the last year. Within that same timeframe 29% report having been audited by Adobe, 23% by IBM, 21% by Oracle, 12% by SAP and 8% by Symantec (In the 2012 study, 51% of respondents said they had been audited by Microsoft during the prior year, 27% by Oracle, 24% by IBM, 22% by SAP and 19% by Adobe).

Most Organizations are “Accidental” Software Pirates

According to the report, most organizations are “accidental” software pirates – they are using software they unintentionally have not paid for. This occurs when enterprises fail to implement the necessary processes and technology to track software installation and use across all environments – on-premises, virtualized, cloud and mobile – and reconcile that activity with the rules contained in their license agreements. Among respondents familiar with their organizations’ compliance position, 85% reported that at least some of their license spend is associated with applications that are out of compliance, 42% of whom say more than 10% of their software spend is associated with applications that are out of compliance.

Significantly, organizations that are most proactively managing their software licenses are the most satisfied with the results. For instance, 54% of respondents who report that they have implemented automated commercial software for managing their software licenses, like a Software License Optimization solution, report being satisfied or very satisfied with their methods. Satisfaction is only 31% for those who use vendor-provided software to manage their licenses, 22% for those who use home-grown systems, and only 6% for those who use manual methods, such as spreadsheets.

Software vendor audits are a fact of life today, as are the large checks CFOs are writing to their vendors to pay unbudgeted true-up fees. Best practice processes and technology are being implemented by prudent organizations to help ensure continual software license compliance. With these reasonable measures now so readily available, IT managers should no longer have to present their CFOs with six-, seven- or eight-figure true-up bills.

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