The European ruling on the re-sell of software licences was expected to cause a stir – but then very little happened. What’s going on behind the scenes? Paul Sheehan, partner, IT Asset Management Solutions gives his view…
More than a year after a ruling by the European Court of Justice over the re-sale of software licences, the business world is still holding its breath to see what will happen next. This is despite the Financial Times saying that the decision has “the potential to create a multimillion dollar market”.
Yet it seems that few outside of corporate IT departments have stopped to assess all the implications. In particular, few within the finance world appear to have considered the impact of putting a value on software licences.
The EU court made a final ruling on the UsedSoft versus Oracle case in July 2012. It decreed that perpetual software licences bought legally could be resold and was seen, in some quarters, as a European act of defiance against the power of the global software giants.
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This means that unsupported or ‘orphaned’ licences which would have previously been written off, now have a value and can, quite legitimately – be regarded as a tangible corporate asset. Of course, their value will depreciate over time, but even so, these licences can help raise significant asset values for a business and increase share value.
What’s it all about?
So is this ruling sustainable or is it likely to be overturned?
Although sales of licences have continued quietly and informally, usually driven by mergers and acquisitions or because of an unbudgeted shortfall revealed by an audit, new trading has so far been minimal in most areas. However, there has been some activity in the “after-market software” space (as it is gradually becoming known) in Germany where the seeds of the EU judgement were originally sown.
In our experience, while a good number of businesses say they would be happy to sell superfluous licences, provided all the right legal checks and procedures had been carried out, very few would be prepared to buy, even if they could save their business hundreds of thousands or even millions of pounds by doing so.
Corporates are cautious
Why the apparent reticence? In many ways, businesses are right to be careful and seek expert advice. Yet, this is no longer a grey area; it is backed by the EU. We have talked to lawyers extensively about this and it seems that the European Court’s judgement takes precedence over any contract a company may have with its vendor. In fact many lawyers who specialise in intellectual property (IP) law believe that, as the ruling reflects a fundamental principle of free trade, it will be difficult to reverse or unpick and that it is a real opportunity for businesses to save money or recoup costs.
Underneath the outward bravado, large corporates with a significant number of licences are typically cautious about damaging relationships with major software providers and are concerned that they may refuse support and maintenance.
But although software vendors can’t ignore the decision, there are several ways they could easily side-step it by changing the terms of their licensing agreement. After all, the ruling only covers perpetual licences. No-one has done so yet and I suspect they won’t do anything until re-selling licences begins to affect core revenue streams. No doubt, they are conscious of the brand damage any adverse publicity could inflict.
Microsoft, for example, isn’t blocking re-sales. I know of a 15,000 user organisation that has sold 4,000 licences to another business and the transfer quietly went through the accepted novation process as if the transaction were part of a merger or acquisition.
Large volumes equal big savings
Will the market develop from here – and if so, how? Although there is still significant work to be done on the due diligence process, the potential financial benefits are so huge that it’s unlikely that businesses will hold back for much longer. It’s likely that used licences will be available for around 50 per cent of the original cost – and for companies buying in large volumes this means significant savings.
There’s obviously a need for some type of trading forum or marketplace but it’s not yet clear the form this will take. It’s probable that an independent third-party will act as a broker, possibly by hosting an online portal which will act either as an internet auction site or a “dating” site where specific buyers are matched with possible sellers. Brokers will either take a percentage of sales or might even buy the licences outright to resell and burden the risk in return for the promise of faster sales.
Whichever way the market evolves, it will be essential that processes are transparent, showing all the right legal checks, while audit trails are maintained.
At first, I believe, more transactions will naturally emerge through improved licence management and the need for compliance. If licences are now an asset, companies will become even more concerned about keeping control of what they own. If, as part of this process, a business discovers it doesn’t have enough licences, it may use an asset and licensing management specialist firm to engage with another company which has too many through downsizing or other circumstances.
Whatever the reason for buying or selling, the situation is still complex and it would be advisable to use a facilitator who knows their way round licensing processes. Anyone interested should also talk to their own company lawyers. Although the EU ruling has minimised the risk of legal challenge, it’s essential to ensure that the licences and the conditions and terms under which they are transferred all comply. Global companies need to be aware that the situation in the US has yet to be clarified. An outstanding case from 2007 is still with the higher courts for debate.
It’s a case of weighing up a slight risk – which can be reduced further by using expert help – against major savings. The business world can’t take too long to make up its mind though. Transition to the cloud, for example in the case of moving from Microsoft Office 2010 to Office 365, is opening up a window – but it’s not going to remain this way indefinitely.
Tips for Taking Action Now
Whatever the ultimate consequences of the EU court’s judgement are, one of the biggest factors driving companies to achieve better control over their software licences and to take action is the current compliance environment. Software auditing by vendors is becoming increasingly prevalent – and businesses are often forced into paying huge sums to settle up, often because they have not prepared properly in advance.
In these kinds of scenarios, independent industry experts like ourselves at ITAMS are well placed to help companies negotiate resolutions utilising quality data. When they are faced with audits, this will be far less expensive for them than having to buy new licences directly from the vendors themselves.
So what can smart companies do now to ensure their licence management is up to scratch?
- Plan Ahead – Companies should be aware of when their software licences are coming up for renewal, and sensitive to potential vendor activity, and have information ready.
- Optimise Data Quality – Businesses need to get their house in order before they buy or resell software. They need to know exactly what licences they have in their estate, who is using them and how they are being used on what hardware. It is key that they ensure that their IT assets are being managed properly and where they are gaps in their approach that need rectifying.
- Deal with exceptions proactively– Even if software licences are installed on redundant machines locked in a cupboard, for example, the business that owns those licences will remain liable for them. Ensure that all parts of the company are covered, not just the easier ones, as any gap will be used by the vendor to trigger a negotiation cycle.
- Look to External Advice – Seeking out advice from independent experts in the area is critical. No one end user can be an expert in all licensing schemes, nor understand the latest changes and techniques in this area. Leverage the experience of others. Only these kinds of companies will be able to conduct a truly independent assessment of a company’s estate and provide them with the kind of low-cost, high value engagement that will help them manage the audit process. Large account resellers that are working on behalf of the software vendor cannot be expected to give impartial advice.
- Skill Carefully – The market is short of highly experienced licensing professionals. Plan ahead and partner in advance of need.
One by-product of the European Court of Justice ruling on the re-sell of licences is that it has focused more attention on issues around used software and licence management generally. There are many businesses today with hundreds of thousands and even millions of pounds of used software on their books, yet they are simultaneously buying the same assets and paying penalties. Knowing what to do with all of this is a massive problem for enterprise-sized organisations, in particular.
The Court ruling potentially opens up more opportunities for these organisations in terms of enabling them to exchange or resell at least some of this resource, while at the same time giving them a chance to exert greater control over their licences and make huge financial savings as a direct result. But to turn the vision to reality, they need to ensure they follow the tips above and most importantly of all open their minds to new paradigms in this space.