Most assume that software piracy is the trade of unscrupulous criminals in countries like China, India and Russia. But you may be surprised to learn that most of the world's large Corporations - a veritable "who's-who" of the FTSE Global 500 - are software pirates. They are using software that they have not paid for. And as software vendors get more scrupulous in enforcing their contracts - it's costing companies billions.
What CEOs Don't Know About Software Licences Can Hurt Them
In reality, it's a misnomer to call companies software pirates - they're really "accidental pirates." They fully intend to pay for all the software they use. The problem is, for several reasons it has become virtually impossible for them to do so. First, software licence agreements are incredibly long and complex making it difficult to manually manage compliance. In addition, new technologies, such as the cloud and virtualisation - further increases complexity around licence management. And finally - changes within the corporation itself - such as mergers, acquisitions, spinoffs, employee turnover, hardware acquisition and retirement - all have software licence implications, which must be taken into account.
As a result even the largest and most sophisticated companies are finding it impossible to manage the problem with their existing staff and tools, as statistics bear out. According to a recent report on software pricing and licensing conducted by my own firm, Flexera Software and research group IDC, 85% of corporations surveyed reported some level of noncompliance with their licence agreements. They are accidental pirates.
The recent economic downturn has underscored the problem, because software vendors are looking to make up for declining profit margins by being stricter about enforcing their licences with existing customers. So, it may come as a surprise to some CEOs that most software vendors negotiate into their agreements the right to "audit" their customers i.e. to send a team of auditors to the company, usually on an annual basis, and examine their systems to determine whether the company's software usage complies with the negotiated terms. If a company has over-used the software (i.e. if it is out of compliance), the company can be hit up with an invoice for the difference, which is called a software audit "true-up." And these can amount to millions, or tens of millions of pounds per audit annually in unbudgeted expense.
Companies Fighting to Regain Control of Their Software
Audit penalties have captured the attention of CEOs, CFOs and CIOs, who increasingly must explain to their boards why software audits are happening, why the company is using software that it hasn't paid for, and why as a result - software vendors are walking away with seven- and eight- figure true-up checks. Consequently, a new message is beginning to trickle down from the C-suite: "Fix this problem."
Danish shipping conglomerate A.P. Moller-Maersk, illustrates how smart companies are regaining control of their software estates. A.P. Moller-Maersk faced daunting annual software true-ups, and because of the complexities mentioned earlier, lacked the visibility and controls into its software estate to solve the problem. The company created an IT asset management team, led by Mr. Peluffo Johansen who reports directly into the A.P. Moller-MaerskGroup CIO. Through a combination of people, process and technology - the organisation is righting the ship, as it were.
To test out their new strategy, A.P. Moller-Maersk targeted their biggest (by software spend) and most critical software vendor. This vendor had been exacting multi-million dollar software true ups from the company on an annual basis - and the company lacked the tools to refute the software vendor's findings.
With the team, processes and technology in place, Mr. Peluffo Johansen's team conducted an analysis, which revealed with clarity that A.P. Moller-Maersk had been over-purchasing software from this vendor for many years; in fact, the company could actually reduce the number of software licences needed. For the first time, A.P. Moller-Maersk was able to walk into a software audit and defend itself against the vendor's claims that a true-up was owed. According to Mr. Peluffo Johansen:
"The November 2011 annual true-up resulted in A.P. Moller-Maersk having to pay nothing to this key vendor, instead of the millions paid in previous years. This true-up was the first proof point for the new software licence optimisation program, allaying any doubts about the business justification for the project."
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Without software, companies could not function. Applications are so strategic, that organisations often feel backed into a corner by their software vendors. But most CEOs are not aware of the significant risk and cost exposure they have through their software licence agreements. But that is changing. A combination of factors - from heightened awareness, lower tolerance for avoidable waste, and better technology to tackle the problem - have converged to give companies a fighting chance.