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West Michigan companies face software audits

May 17, 2013
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An increasing number of businesses in West Michigan are being hit with software audits — and if they’re not handled properly, companies can find themselves on the hook for millions of dollars in fees and penalties. 

With the slower economy, businesses aren’t purchasing or maintaining their software, so software providers are looking at alternative revenue sources such as audits. They often start with a so-called demand or notice letter, where the software company or a third-party auditor requests to review all computers running that software to ensure it is properly authorized, documented and paid for.

Software can be tough for companies to track and maintain. There’s no one-size-fits-all licensing agreement, meaning some software is licensed per device — tablet, desktop, laptop or PDA — while others can be licensed per server or per user or even per concurrent users. 

It becomes difficult, though, when employees download and install a program on their computers and then pass a copy to friends. It’s easy and fast for such illegal downloads or shares to proliferate — but the business is still liable to ensure there’s proper documentation and compliance with the licensing requirements. The larger the company, the more difficult it can be, which is often exacerbated by poor document management practices.

Trial run: As a preventive measure, companies should run their own software audits as a trial before the real thing. How many licenses do you have? Can you count them? Can you find the documentation? Do the licenses and documentation match?

Put parameters on the audit: Virtually all software licenses come with language that gives providers the right to come in and audit for compliance issues. If you’re out of compliance, the boilerplate language typically says you will purchase licenses at the manufacturers’ suggested retail price, which few businesses ever do under a negotiated contract. The first step in managing an audit actually comes before you sign your licensing agreement: negotiating with the provider to put parameters on the audit. For example, require a maximum of one audit a year during normal business hours and ask that any purchases of new licenses be at the negotiated price.

Get the right team together: Some audit letters masquerade as softer, more subtle sales pitches, telling a company the provider wants to ensure it is getting the maximum value by checking the computing environment and perhaps suggesting alternative licensing models. It’s important to identify the request for what it is — an audit — and putting the proper internal communications in place so that the right people have timely, accurate information. While the request may come in to purchasing, for example, it’s imperative to assemble a team from accounting, IT, purchasing and, in larger organizations, asset management. It’s also best to have to one point person take the lead.

Sign a memorandum of understanding: Before the audit begins, you may consider signing a memorandum of understanding that memorializes the scope of the review. Which computing environments are being audited: just Michigan, subsidiaries across the country, all global operations? How are decommissioned computers to be treated? What about free software? What type of testing and evaluation will be done? Will you have to run a software script provided by the auditors or can you provide your own count? Will the provider only search for its own software or will it be on the hunt for ALL software? It’s particularly important to answer these and other key questions, as well as establish a timeline for the initial review and completion. If you don’t, these audits can drag on for years — literally — and become an employee’s full-time job.

Some providers use a third party, such as Business Software Alliance, to conduct their audits. A business doesn’t want the auditor to report its findings to other providers or to report specifics about any settlement payments or penalties. It’s critical to spell out the need for confidentiality.

Negotiate fees: Businesses should not be afraid to negotiate any fees, penalties, past maintenance fees or interest they may face. Many licensing contracts have terms specifying certain state law that allows the software provider to collect interest at high rates, in addition to the cost of purchasing new licenses. Some software providers might waive back maintenance fees or be willing to reduce portions of the bill if there’s a possibility for future business. 

Nathan W. Steed is an attorney at Warner Norcross & Judd LLP who concentrates his practices in technology and intellectual property law. He can be reached at nsteed@wnj.com

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