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How to maintain the trust during devastating software audits

The trust channel firms work hard to build can be contaminated by a poorly handled audit

People looking at data on a table

An escalation in software audits by the major vendors is putting pressure on businesses. These can indeed be painful exercises, but, within this, there is opportunity to clear the decks and reduce software spend on legacy applications. But, importantly, the customer-reseller relationship must not be upset by any disquiet around the audit or its findings.

Software license reviews – essentially software audits – are embedded in license terms of all the major vendors for on-premise applications. Oracle, SAP, Microsoft, Adobe and IBM all rely on regular audits of their customers.

Often described by them as there to 'support' the customer, they are unequivocally a revenue-generation mechanism. These vendors habitually use outside firms to deliver an Effective License Position on which the consequent claims for under-licensing, back support and penalties are then calculated. Often the Big Four accounting practices are mandated – although Oracle tends to use its own License Management Services division (LMS) based in Romania.

The outturn of these audits can be surprising even to the best-managed corporates and substantially adverse to the business. The issue of organisations not knowing how best to deal with this situation is exacerbated by the fact that audits – and the settlements – are rarely publicised; most settlements are bound up by confidentiality obligations and CIOs are often reluctant to share what they might interpret to be an embarrassing and costly oversight.

Just occasionally however, values surface: last year, drinks firm Diageo, famous for Guinness and Johnny Walker, was found liable in the High Court for use by its third-party agents of Diageo's SAP systems when making orders. The claim was for £58m; the final payment has not been disclosed. Equally, the world's largest brewer, ABN-InBev, admitted in SEC filings that it was arbitrating a $600m claim also brought by SAP. Again, the final outcome is not known other than that the case concluded.

So, where does this leave the original reseller or MSP? Rightly or wrongly, they might be seen as advisers that had failed to spot a devastating under-licensing exposure. Channel organisations work hard to establish a trusted relationship with the customer but this can be contaminated by an uncomfortable and poorly-handled audit.

The key is early and proactive recognition of the jeopardy of these audits and ensuring that their customer is fully supported. Independent software licensing expertise, outside the channel, can work alongside the reseller, with this opening up new opportunities:

1) Any residual under-licensing can be acquired, in advance of an audit, through the reseller on a consensual basis rather than, at the end of an audit, potentially being forced through another supplier and paying at close to list prices and penalties.

2) An early precautionary exercise can crystallise an understanding of over-licensing so that unnecessary further purchases by the business can be later avoided.

3) Products (and allied options) that have 'matching service levels' can be addressed either by the termination of surplus licenses, or by surrender and repurchase where support costs, based on a percentage of total original license costs, have become excessive.

4) The reseller need not itself directly confront the vendor in the audit and accordingly can maintain their long-term relationship.

5) Finally, the remedial nature of a license review can often be a useful opportunity for up-selling or phased move to the cloud.

The combination of contractual, technical and commercial expertise between the consultancy and the reseller can ensure that the customer truly obtains the best advice on their position.

Sometimes the arguments are legal, challenging the vendor's own interpretation of its license terms. At other times, the persuading factors are technical or commercial. All may be necessary and can be hard-fought with considerable resistance from the vendor.

The customer then has the confidence to settle without the anxiety that they have somehow entered into an opaque and disadvantageous deal.

Software audits are, for many, an uncomfortable and challenging time, sometimes creating distrust across all parties. Use, therefore, of outside consultancies, working alongside the reseller, can enable distance to be put between the license review process and the channel, which can, in turn, maintain and enhance the customer-channel relationship.

Robin Fry is a software licensing lawyer and director at Cerno Professional Services

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