Unlicensed Software Attacks the Bottom Line
A new study confirms software misuse costs vendors billions. Here are strategies for reducing revenue loss.
By Tom Lamoureux, KPMG
Jan. 18, 2008
Research conducted by International Data Corporation (IDC) in 2005 concluded that the world's software companies were losing USD34 billion in revenue to unlicensed installations. This is more than the gross domestic product (GDP) of 42 countries. Said another way, a USD34 billion software company would be almost on par with Microsoft's annual revenue as the second largest software company in the world. It would be nearly twice as large as IBM's software business, which racks up USD18 billion in software revenue annually. Any way you look at it, this is a very significant problem for the industry, one that is due in part to software license agreement violations.
KPMG surveyed software companies in order to understand the license compliance issues faced by most software companies today. The resulting report sheds a light on the extent of the problem and identified better practices in license compliance being applied by software companies today.
KPMG's Software License Compliance Survey 2007
Our respondents included those responsible for, or with a strong working knowledge of, license compliance in software publishing companies. The companies surveyed collectively represented almost 50 percent of total industry revenue.
Some important findings and conclusions drawn from this survey include:
A Low-Risk, High-Reward Endeavor
Overall, KPMG found that a systematic approach to software license compliance efforts produces good financial results and causes few, if any, negative ramifications. A large majority of those polled said that the impact of software license compliance activity was neutral, positive, or very positive at the end of the compliance review process.
Executives responding to follow-up interviews felt that customers ultimately view the process in a positive light, although initially a software compliance review may be perceived negatively. Christina Crowley, Vice President of License Management Services at Oracle, explained, "When first contacting a customer regarding a license compliance review, the perception may be viewed as negative or intrusive. People are nervous about what it means or how the review will be conducted. However, by providing information on the process and expectations, we can reduce overall concerns regarding what is expected during a license review." Another executive asserted that even if some customers consistently viewed compliance reviews negatively there was no visible impact on subsequent "repeat" sales to those customers.
More than 94 percent of survey participants said that their companies rarely lost a customer due to software license compliance activities. Ninety percent said that escalation to litigation was rare as well.
Microsoft's Rod Ross, Software Asset Management Director, agreed, "Overall, it's very, very positive. We've approached these situations in different ways over time. It's always potentially explosive, but approaching situations within the context of business process is very positive. We end up with neutral or positive perceptions 96 percent of the time."
Jeff Gustafson, a Worldwide Software Licensing & Compliance executive at EMC, views compliance primarily as providing value-added information to the overall relationship: "Software asset management is difficult even under the best of circumstances, with customers taking a risk-based approach to resource allocation in managing vendor contracts. Uncertainty, complexity, and risk in software licensing (e.g., the 'perpetual license/on-site deployment' model) can create perverse asymmetries in the business relationship, resulting in decisions based on imperfect information on both sides. In broad terms, compliance programs are responding by moving toward a relationship management engagement model in an effort to drive value-added information back into that relationship."
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KPMG surveyed software companies in order to understand the license compliance issues faced by most software companies today. The resulting report sheds a light on the extent of the problem and identified better practices in license compliance being applied by software companies today.
KPMG's Software License Compliance Survey 2007
Our respondents included those responsible for, or with a strong working knowledge of, license compliance in software publishing companies. The companies surveyed collectively represented almost 50 percent of total industry revenue.
Some important findings and conclusions drawn from this survey include:
- Unlicensed software use has significant and widespread impact on the industry.
- Almost all survey respondents said their companies lose significant amounts of revenue due to unlicensed use of their products. For example, 34 percent of those polled said losses amount to more than 10 percent of revenue, and 21 percent of respondents said their companies lose over 20 percent of overall revenue.
- A systematic approach to managing software license compliance efforts is a low-risk, high-reward endeavor.
- A substantial percentage of respondents indicated that compliance-related recoveries provide more than 5 percent of their annual software revenue streams.
- Most said license compliance activities have a positive or neutral impact on their relationships with end-user customers and channel partners.
- Use of fairness in the resolution of noncompliance issues with customers is of paramount importance in maintaining a positive customer experience and enhancing the overall relationship.
- Assistance from objective third-party service providers in performing compliance reviews benefits both the software publishers and their respective customers.
A Low-Risk, High-Reward Endeavor
Overall, KPMG found that a systematic approach to software license compliance efforts produces good financial results and causes few, if any, negative ramifications. A large majority of those polled said that the impact of software license compliance activity was neutral, positive, or very positive at the end of the compliance review process.
Executives responding to follow-up interviews felt that customers ultimately view the process in a positive light, although initially a software compliance review may be perceived negatively. Christina Crowley, Vice President of License Management Services at Oracle, explained, "When first contacting a customer regarding a license compliance review, the perception may be viewed as negative or intrusive. People are nervous about what it means or how the review will be conducted. However, by providing information on the process and expectations, we can reduce overall concerns regarding what is expected during a license review." Another executive asserted that even if some customers consistently viewed compliance reviews negatively there was no visible impact on subsequent "repeat" sales to those customers.
More than 94 percent of survey participants said that their companies rarely lost a customer due to software license compliance activities. Ninety percent said that escalation to litigation was rare as well.
Microsoft's Rod Ross, Software Asset Management Director, agreed, "Overall, it's very, very positive. We've approached these situations in different ways over time. It's always potentially explosive, but approaching situations within the context of business process is very positive. We end up with neutral or positive perceptions 96 percent of the time."
Jeff Gustafson, a Worldwide Software Licensing & Compliance executive at EMC, views compliance primarily as providing value-added information to the overall relationship: "Software asset management is difficult even under the best of circumstances, with customers taking a risk-based approach to resource allocation in managing vendor contracts. Uncertainty, complexity, and risk in software licensing (e.g., the 'perpetual license/on-site deployment' model) can create perverse asymmetries in the business relationship, resulting in decisions based on imperfect information on both sides. In broad terms, compliance programs are responding by moving toward a relationship management engagement model in an effort to drive value-added information back into that relationship."
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