As businesses become more digitally enabled, their operations and profitability will rely increasingly on software. But software comes with licence terms and conditions and a simple oversight can cause big problems for customers.

A brief overview of Software Licences

An End User Licence Agreement (EULA) is a legal contract between a software provider and the customer who uses that application. The EULA, often referred to as the software licence or subscription, is similar to a rental agreement; the customer agrees to pay for the privilege of using the software, and promises the software author or publisher to comply with all restrictions stated in the EULA.

Buying a licence is easy…

While traditionally purchasing and installing software was the domain of the IT department, modern technology companies have made signing up to their EULA so simple that often anyone with an email address and a credit card can get access to new software in a matter of minutes. This has made it easier for small and medium businesses who don’t have the luxury of an IT department to get access to software that will drive their business.

If the company has a strong software asset management practice – one which manages and optimises the purchase, deployment, maintenance, utilisation, and disposal of software applications within an organisation – then the purchase of the software will not cause much issue.

But without good software management, there is risk…

The result is that a business can be signed up to and paying for new software without consideration for what the software does and how it might create risk on the business, including:

  • Doubling down on software capability: The business may already have software that does something similar to what has just been purchased.
  • Choosing the wrong type of licence: Many software providers have different levels of licence depending on the customer, with certain licence types restricting what the software could be use for.
  • Not buying the right number of licences: This can either be not purchasing enough licences for what the company needs or it purchasing more than is required. 
  • Signing up to the wrong vendor: Not all vendors are created equal, with some building software that is unstable or over priced for what it does. 
  • Breaching EULA conditions: EULAs contain a range of scenarios in which the software cannot be used – failure to adhere leads to breaches of these terms. The purchase of a new software package may even put you in breach of an EULA for another piece of software.

ExampleA New Zealand company exploring a tool for automation found one of their existing EULAs prohibited the use of automation software – both tools were strategic, but couldn’t exist together. The company had to negotiate a new, more expensive, licence agreement with the existing vendor. 

  • Lock-in terms: Some EULAs may require a minimum sign-up period, meaning a business can’t cancel early if it no longer wants to use the software. These periods are typically for 12 months, but may be longer 
  • Procuring software which is incompatible: A critical tool you use in your business may not be compatible with the tool that has just been purchase, which may mean a significant upgrade or a write off. 

Every risk has an impact… Even the best-managed businesses can come up short with licence management, often resulting in very high financial impacts, including: 

  1. Additional cost on a business as multiple software packages are purchased with overlaps in capability. 
  2. Unexpected costs on the business for the purchase of software that has not been accounted for resulting in impacts to the balance sheet.
  3. Cost write offs where software purchased is not compatible with existing tools.
  4. Penalties imposed by the software provider if any breaches in software licences are found. 

Example: The 2016 publication of court filings from a licence dispute reveals the tactics Oracle used following an audit of a French vocational training institute.

Financial impacts are just one, but there is also the potential for data loss if things are not managed correctly…

Signing up to software on a credit card may seem like a good idea at the time, but what happens when that credit card expires or is cancelled? Unless you updated where the licence is being charged to, a subscription may end up being cancelled and all data held within deleted. 

Additionally, staff turnover can be one of your biggest headaches. It might be tempting to use a former employee’s licence for a new employee, but that might be in breach of the EULA. However, deleting an old licence and buying a new one could cause bigger problems.

Tips to better licence management

It’s not difficult to mitigate the risk around licence management.

  1. Have a software management policy in place and ensure that your staff know how it applies to them.
  2. Limit who can purchase licences on behalf of your business, and consider all new purchases to require visibility and sign-off from the board.
  3. Know what software you are paying for and keep track of the number of licences you hold – staff turnover can cause issues if you don’t manage it properly
  4. Regularly check that you are using the systems you are paying for and cancel licences you are no longer using (but make sure you have secured any critical data first).
  5. Understand the constraints of your licences and ensure you’re not in breach of them – it helps to get your legal team to look over it.
  6. Don’t pay for your licences on a credit card – there are several options to purchasing software which won’t increase the cost.
  7. Always seek advice from an IT professional before buying new software. 

Worried that your licences might pose a risk on your business? Get in touch and we can talk you through how to minimise the risk

Further Reading

Ambiguity in License Termination Provision Precludes Summary Judgement – New York Law Journal (2019)

Why Company Directors Need to Focus on Software Licensing Small Print – Computer Weekly (2017)

Software Licence Agreements – Cavell Leitch (2015)

Even an Unintentional Software Licence Breach Can be Costly – Flexera (2011)

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