Software Licensing – What should you know?

We written about software licensing many times in the past and we continue to work with companies that simply don’t understand the software rules and the cost associated with violating these rules. Software companies are making it much harder to utilize illegally purchased software or to use their software in a manner that is not in compliance with the EULA (End User Licensing Agreement).

Below, we will discuss simple software licensing basics, the Business Software Alliance or the software police, and some of the different software models, including SPLA (Service Provider Licensing Agreement) which is important to anyone using the cloud.

Software Licensing Basics

Software basics start with a simple statement that surprisingly most people don’t understand.  It informs you that in most cases with commercially released software, you don’t actually own the software. When you purchase the software you are actually purchasing a license to use the software, and that license is valid as long as you use it in a manner that is in compliance with the End User Licensing Agreement.

The U.S. Court of Appeals ruled in the case of Verner v. Autodesk that people could not resell copies of Autodesk even if it had never been loaded in the past because it is stated within the EULA that Autodesk reserved the right and did not allow for reselling of their product by a third party.

So, how do you know if someone is illegally selling your software? In the case of Verner v. Autodesk the judges laid out a couple of points;

“We hold today that a software user is a licensee rather than an owner of a copy where the copyright owner (1) specifies that the user is granted a license (2) significantly restricts the user’s ability to transfer the software; and (3) imposes notable use restrictions.”

The Verner v. Autodesk case is one of hundreds that have been litigated over the years. The one thing that seems to be consistent in each case is that when you purchase a license and you agree to the terms when the software is loading, you are entering into an enforceable contract agreement between yourself and the software company. Now that you know you are entering into a legally binding agreement it is important that you read the terms or EULA when you are loading software to see if you are using that software for something that might be in conflict with the agreement.

Other EULA Limitations

There are other limitations that might be contained within the terms or EULA that could impact you if you are not aware that these items are limited or prohibited by your agreement. Where you can install the licensing could be restricted. For example, you cannot load an OEM (Original Equipment Manufacturer) copy of the software in a cloud environment. Another example would be that you can’t use an Educational version of the software in a for-profit company. Both of these scenarios would be considered out of compliance by the software manufacturers and prohibited by the agreement or EULA.

You are also not allowed to copy, modify or redistribute the software. In most cases software manufacturers do allow a single copy of the software to be made for disaster recovery purposes. However, copying the software for use on another computer would be considered out of compliance.

Decompiling the software so the source code is viewable or attempting to change the source code is also prohibited. Software companies go to great cost and effort to protect their intellectual property rights. Protection of that intellectual property is the key to their future financial success. If someone were to decompile the software and steal the intellectual property of the owner, that would be considered a crime first and foremost which is punishable with fines and jail time. In most cases it is strictly prohibited by the agreement and the EULA.

Open Source Software

One of the biggest debates in the technology software arena is the use of open source, or free software. We have many of concerns about free software in a world full of security risks, identity theft, stolen data, and the technology black market. We are always concerned about using a free piece of software on a corporate network. It doesn’t mean that the free utility is bad, or doesn’t meet a specific goal or objective but, from a business perspective, what is the quality and value of free? How often does your business work for free? If it is free, should you have a realistic expectation that the quality and vetting of the product or service is of a level that is going to meet your standards?

Then, there is always the bottom line, which tells you that nothing in this world is truly free. You’re going to pay somewhere, somehow and in the world of software, you going to pay through continued software development. You might even put your business in what we call IT jail. IT jail is where the business is afraid of change because only one person holds the knowledge of how things work. So, there is fear of what happens if this person leaves. We know it sounds silly, and is almost to the point of disbelief but, in our 35 plus years of being in the technology business, we have seen it countless times.

There are some advantages to utilizing open source programs that should be evaluated when determining the methodology of how you are going to utilize your overall enterprise software package to grow and expand your business.

First, is that acquisition of the software is going to be free, which on the surface, absolutely lowers your cost of acquisition.

Secondly, due to it being open source, it is continuously being modified and upgraded due to the volume of developers that may choose to implement and use the core software. Open source software doesn’t have the traditional limitations as most commercial software. The software becomes very flexible and will interface with many other types of systems. This makes open source software very adaptable to changing business requirements.

There are powerful advantages to open source software, however there are also some disadvantages as well that need to be considered.

Open source software doesn’t have a single source provider. It is an accumulation of several developers which is one of its advantages. However, from a risk mitigation perspective, you have to consider the quality of the work performed and who is responsible if your business is somehow damaged by using a free multisource program.

Business Owners and Open Source Software

Business logistics or business workflow is to be led by the business owner. Business owners must have an intimate firsthand knowledge of how their business works and operates in order to utilize the real power of open source software. This becomes a problem as businesses grow and the owners become less knowledgeable on how their business operates both technically and clinically.

This limits the effectiveness of open source software. You won’t own the software or the intellectual knowledge that is developed on your behalf. It is open source, which means that it is open to other businesses and developers that want to take advantage of what you have developed. We call this accumulated knowledge. That is a great and powerful advantage of open source software but, don’t assume you own the software or that you have a legal claim to the software because you don’t.

Open source software does have some very powerful advantages. However, having been involved in many legal cases regarding risk mitigation, ownership of intellectual property and security of data, we have concerns around software that may or may not have been developed with the highest standards with a legal entity standing behind the quality and security of the product.

Open source products certainly have a place in the market, but as we have advised many of our clients, open source is much like proprietary software development. Once you start, you have to have the fortitude to continue for years to come. You have to budget wisely. If you are interfacing with other commercially released programs, make certain that you are ready to invest in upgrading your software to match the requirements. This will be never ending, and there is a cost to free.

Types of Licensing Agreements

There are many different types of licensing agreements:

Perpetual License Agreements

These are licenses that grant you have the right to use the software as long as you like. However, if you upgrade a perpetual license then you may be charged for the upgrade. So if staying on the current versions of software is important to your business, then perpetual licensing may not be an option.

Renewable Licensing Agreements

Then there are term licensing agreements that have to be renewed, typically every year. This can vary based on software vendor. When it comes to software licensing and picking the correct licensing package for your organization, there are factors you need to be aware of.

One of the biggest reasons that companies end up in software trouble is because software rules change regularly. It is the responsibility of the company to be aware of those changes and to make sure that you stay in compliance.

Another area that can create software licensing issues is not understanding your software assets. You need to know what you are doing with those assets and properly manage them to ensure that you don’t overspend. You will also need to ensure you are licensed properly for the people who need the assets.

Common Software License Mistakes

Let’s talk a little about mistakes companies make in managing software licenses. One of the first things to remember is that it is your responsibility to prove you own the licenses you have on your system.  With that in mind, some of the things to watch out for might include:

Making Ad Hoc Purchases

Employees should not be allowed to purchase software and load it. The documentation of software purchases is the only real defense you have against being in non-compliance.

Tracking Installation and Use

It is not recommended that you allow people to manage their own software. This leads to over-spending in licensing, and it leads to system compatibility issues. Again, this easily can put you in a situation of non-compliance.

Not tracking renewal dates

This can lead to allowing your open licensing or enterprise licensing to expire. This can then result in having to purchase all new licensing when it is time to upgrade. Have a central repository for all software licensing and proof of licensing. If for some reason you get audited, not having the licensing in one place can make it difficult and expensive to prove your compliancy. One of the biggest mistakes is assuming that licensing rules don’t change. They do change, and they change on a regular basis. Software companies routinely update and modify their agreements based on discontinued versions, change in market approach, or based on separation of software packages. Do not assume that the rules you purchased your software under still apply, make sure you read the agreement and understand it.

Business Software Alliance

The Business Software Alliance, what is it and what authority do they really have over the software agreements? As stated earlier, when you sign an Open Licensing Agreement or Enterprise Agreement you are actually entering into a legal contract that does have binding rules that you are agreeing to.

The Business Software Alliance is an alliance between most of the major software vendors, and mid-major software vendors to enforce their software agreements and aggressively pursue people that willfully violate the agreement. Look at it from the software vendor’s perspective. If you are violating software licensing, you are stealing the work product and intellectual knowledge of another company. You’re then using that stolen property to make a profit for your business. I think any legitimate business would legally pursue any one that was stealing your intellectual property or work product then turning a profit for themselves without properly paying for the tools.

The most common method that gets the Business Software Alliance interested in you is when someone reports you to them with evidence that you are violating software agreements.

Who is that person? In most cases it is one of your employees, typically someone who is knowledgeable in the manner in which your business is managing software assets. The Business Software Alliance does pay, and pay well for people to report software violations to them so they can pursue through the legal system resolution and restitution for violations to the agreement.

How does this process work? Typically it will start with the Business Software Alliance requesting that you do a self-audit of the software you have installed, along with providing the purchasing proof that you actually own the software you are claiming. In most cases it will end there if there is enough proof that through a good faith effort you are trying to manage, document, and enforce your software agreements on your own.

Good Faith Effort

What does good faith effort mean when it comes to a software audit? It comes down to having solid policies and procedures that help you manage the software that you own. It also seeks to find if you have a process that everyone goes through in order to purchase new software.

Managing Software Installation

What is the process that your business goes through in order to request new software or an upgrade to existing software? Is that a well-documented process or more ad hoc? How is that software installed? Is the installation of that software properly documented as to who has it and when it was loaded?

Documentation is always key. Copies of the agreements, licensing key management & protection, purchase history and the who and when the purchase happened.

Enforcement

This is the tough one. Every employee thinks they are key, the future of your company. When it comes to software, they can be expensive. Workstations and laptops should be locked down so that end users can’t load software. This is where the tough part comes in.Oowners and managers have to have the fortitude to say "no". You can’t say "yes" just because it is easy. Software licensing is one of the hardest things to keep track of and when you get behind, catching up is difficult and expensive. Violators of your companies’ software licenses should be dealt with just as if they violated any other company policy: verbal disciplined, written up or terminated. It is tough and owners and managers have to stick to their guns, put on the big boy pants and enforce their own policies.

One of the most common questions I get about the BSA is, should I take the audit seriously? The answer to that is yes. Remember you have already agreed to the terms of use, and in some cases you have already agreed to the penalty. In the case of software agreements it is simply a matter of simple contract law. Both parties have already agreed to the terms so now it is simply a matter of deciding if and how any violations are handled.

There are a lot of tools that you can use to help manage your software compliance to ensure that you know what is loaded on your system, and also let you know when someone loads something that is outside of your authorized software list so it can be removed in a timely fashion.

Beware, however, there are companies that will sell you, for example Microsoft Office 2013, for $100.00 when the retail price is $459.00. These are not legitimate and legal licenses of the software and the BSA is likely to reject these purchases as legal. So, be careful when you are purchasing software. A rule of thumb is that since in most cases the retail price is set by the software manufacture, there really isn’t much wiggle room, and finding the software at a higher price would not be uncommon. However, finding it significantly lower should set off an alarm that the licensing is not legitimate.

Service Provider Licensing Agreement

What is SPLA (Service Provider Licensing Agreement)? Due to the popularity of cloud based computing, Microsoft and other software manufactures have developed a licensing model for independent cloud providers and independent software providers to provide a customized licensing programs to their clients.

This goes to one of the core cloud principles of paying for what you are using so you don’t have dead licenses. Dead licenses are licenses that might be of current versions that you bought in a package deal but never used or activated. Simply put, they are wasted dollars. SPLA licensing allows cloud vendors and software vendors to license what you need. If you need seven, you can buy seven, if that changes and you need 25, you can buy 25. This can go up or down on a monthly basis depending the growth and contraction of your businesses specific needs.

Some of the advantages to a SPLA licensing model versus the traditional licensing models are:

Your provider’s ability to provide you with customized licensing. Keep in mind SPLA only applies to cloud based technologies not to in-house systems. Due to the flexibility of SPLA it allows your provider to deliver to you exactly the number of licenses you need for the products you choose to host. There are no upfront costs with SPLA, and no long term commitments, which means you can adjust your licensing based on the specific needs of your business, or individual needs on a monthly basis.

One of the huge advantages to SPLA is version control. Which means as manufactures offer SPLA licensing upgrade their software, you can upgrade at will and it is all part of your monthly fee. One of the features of the SPLA model is that since you pay by the month you can try out many of the software packages offered by SPLA manufacturers. If you don’t like it then you simply don’t renew it for the next month.

Software licensing continues to be one of the most confusing and costly aspects of running and managing an IT department. However, it is worth taking the time to learn and putting processes in place to ensure that you remain compliant. Regardless of if your strategy is to remain in-house or go to the cloud, licensing costs are going to be a huge part of your reoccurring budget. A time-consuming process to manage it is simply now a cost of doing business. However, if done correctly you can manage those costs, reduce your exposure and risk on a compliancy level and still get the software you need to grow your business in a productive manner.