Five Shades Of Grey (How software buyers and license managers should be compliant without being submissive).

Duncan Jones
Vice President, Principal Analyst
February 19, 2015

Any procurement or asset management professionals who have seen the new movie based on E.L.James’ best selling novels may have noticed the similarity between the eponymous antihero and a license management services consultant.  Mr. Grey will use charm and threats to persuade you to run his audit scripts on your network. You have an obligation to demonstrate your compliance with the software license terms, but that doesn't mean that you have accept his opinion about what those terms actually mean.

Sources inside some large software companies tell me that license audits generate 20% to 30% of their license revenue. Although a lot of that will represent deliberate or reckless under-licensing, many of the disputes that I hear about involve software salespeople abusing some licensing shades of grey to pressurize customers into paying them money. It is difficult to predict how a court will interpret nineties contract language in the current technology context, so many companies pay up rather than risk a compliance lawsuit. Here are five questions of interpretation that no lawyer can answer:

  1. Who is really using my software? I continue to hear risible interpretations of ‘use’ and ‘access’, such as the software company that claimed motorists were users because they saw output from its database when they drove past an electronic road sign. I’ve previously suggested a standard interpretation of use in my report Let's Clear Up The "Indirect Access" Mess based on the concept of interaction – i.e. both input by a user and output by the software. Enterprises need to persuade their vendors to accept this interpretation urgently, otherwise the Internet Of Things will bankrupt you.
  2. Where is the boundary between soft and hard partitioning? Processors on which the software is installed and/ or running” was fine when chips, memory and storage were all in the same box, but today’s datacenters are different. Even when vendors add extra language post-contract, technology evolution can restore the grey shades. For instance, who can say whether or not the latest ways of optimizing storage and resilience are "installation", as the contract signatories understood the term? The vendors may try to convince you that they can redefine the word as they see fit, but they may not be correct.
  3. At what point does an enhancement become a new product? We know we’re paying maintenance so we can get “product upgrades”, but it is unclear exactly what that means. Software companies reinvest their maintenance revenue into development and acquisitions. They package some of the results as new products that you can buy if you want to, and others as enhancements that you get at no extra cost when you upgrade. How should they decide between these two? It’s not defined anywhere. What’s a fair balance between the two to represent value for money from maintenance? 80%? 50% 5%? No-one knows that either. This is a key issue at the moment for SAP customers, who will be looking at SAP S4Hana and wondering how much of it SAP will deem to be “upgrade” versus “expanding scope”.
  4. Does my contract allow me to collaborate with customers? Most software contracts grant you a license to use the software, but “solely for your internal business purposes”. What does that mean? Isn’t it an oxymoron? Surely business is external, by definition? Increasingly, our processes involve external collaboration and engagement, with customers, suppliers, distributors, agents, etc. We all need to be able to use our software and/ or data for joint endeavours that support their business and ours, but the contracts appear to forbid this.
  5. Under what circumstances does one person need two user licenses? Another grey aspect of collaboration scenarios is the principle of one-person, one-license (OPOL). Suppose you allow me authenticated access to your network to collaborate with you, via an Oracle database, say, or via Microsoft Sharepoint. I’m using the software, so I need a user license – that’s clear. But what if Forrester uses the same software, so I already have a user license that Forrester has bought and assigned to me? Surely you don’t need to buy me a 2nd user license? Every user needs a user license, I have a user license, WTP? It seems reasonable to assume that OPOL applies, but few contracts say clearly whether or not it does.

With these grey situations, just as with marital disagreements over the activities in the aforementioned film, you need to have an open, honest, adult discussion about the wider relationship. Don’t let the salesperson persuade you that his company’s opinion is gospel truth – it isn’t. Try to show how the vendor’s attempts to enforce a warped (in your view) interpretation of this particular issue will damage your firm’s perception of it, and hence limit its chances of winning future business. Otherwise the salesperson will focus only on the short term revenue he can extract from you if he stubbornly holds to the official line. The shades of grey are his home turf, so he has the upper hand if the argument is merely about the specific detail, not the bigger picture.  The Strategic Software Sourcing Playbook explains how to increase your bargaining power by elevating the negotiations.

Bottom line: Out-dated language in software contracts creates many licensing disputes for which there is no right or wrong answer. Don’t let an account manager tell you a compliance situation is black and white when it is clearly grey. Reject bullying and threats of legal action over what are genuinely differences of opinion. Instead, seek a reasonable compromise as part of a wider discussion about the vendor’s role in your future sourcing strategy.

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