Software audits: Drag on innovation

The software industry is a leading driver of economic growth.  But the industry’s sales model stifles innovation.  The clearest example of this phenomenon:  software audits.

While software audits are not popular, most people consider them a necessary evil.  The software industry argues they need to audit usage to protect their investment in their intellectual property.  At first glance, this seems like a fair point.

Indeed, software users acknowledge they struggle to control the deployment of software.  Companies invest considerable resources to track and restrict use of the many software products deployed in their environments.  And those efforts are rarely totally effective.

And when the inevitable audit demands come, customers incur substantial costs responding to them.  An asset management industry has grown up to help companies cope with audits.  Customers pay consulting firms, lawyers and other professionals to manage a process that adds no value to the customer.

But those costs are not the fundamental problem.  The real problem is a misalignment of incentives:  software audits are a revenue center for software firms and, the more revenue they generate, the less incentive those firms feel to win new business by innovating for the benefit of their customers.  Put more simply, software audits are a drag on innovation.

Software audits are about revenue

Audit or not, corporate America is not interested in software piracy.  Companies are too busy running their core business to spend time plotting software theft.

So, why do some of them fail audits?  Two reasons.  First, it’s hard to monitor software use, particularly in a large organization.  And, second, those companies that try struggle to understand their license agreements.  The agreements are long, complex and ambiguous.

Some software firms have promised to simplify their contracts, and most will argue compliance costs are a normal part of doing business.  Those arguments ring hollow, however, because the software industry has the ability to make compliance painless – and cost free. 

How?  One option:  concurrent licensing.  In a concurrent license, the software itself limits the number of users at any one time.  The model would require software companies to update their products.  But the cost will be insignificant compared to the time and energy they spend on complicated contracts and audit notices – not to mention the damage they do to their customer relationships.  

Another option:  link the license to the customer’s employee count, as reported in its 10-K.  A company’s employee number is a good proxy for usage of an enterprise product.

Why hasn’t the software industry adopted one of these approaches?  They have no incentive to change.  They may not need audits to protect their IP but the audits are a great source of incremental revenue.

The (negative) impact of software audits on innovation

Businesses license software to improve their business performance, increasing sales, boosting productivity and making data accessible.    When software audits become part of a company’s sales model, however, its focus shifts from innovating to benefit their customers to generating more revenue from yesterday’s products.  When a customer fails an audit, the quality of the vendor’s software becomes irrelevant; the only question is how much the customer owes.  

A better conversation between the parties would be one in which the customer approaches the limits of its use rights and has to decide whether to buy more or choose an alternative, including competing products.  When that happens, the software firm is not arguing about compliance.  Instead, they are focused on persuading the customer their product is  the best on the market or on offering their client an even better tool.  That sales dynamic – not audits – fosters innovation.

An innovation argument can be made for audits.  Innovation is hard, after all.  Many great products die an early death because the market doesn’t recognize their value.  Why?  Because people are resistant to change, even when change has obvious benefits.  Innovators are justified, therefore, in using every tool at their disposal to drive adoption of their products.

There’s an obvious flaw in this argument:  it assumes the innovator’s only responsibility to society is to come up with great ideas.  Great innovators recognize, on the other hand, that the sales process is a key part of the innovative process.  Selling ideas forces you to think about what value they have for your audience.

What is to be done?

The answer is simple:  just say “enough.”  Call your software vendors in and ask for a proposal that will focus them on how they can continuously improve their product not only for your benefit but for theirs as well:  you get better technology, they get more revenue.  Software companies should embrace that:  it’s that spirit which made their industry great.