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Regular Industry Development Updates, Opinions and Talking Points relating to Manufacturing, the Supply Chain and Logistics.

Software audits target supply chain upgrades

Software audits target supply chain upgrades
Enhancement and efficiencies in supply chains are increasingly triggering additional license fees from the major software vendors.

A number of the major software vendors, until now dominant in the on-premise software sector, are seeing their customer base shrink and their revenues fall as more enterprises switch to cloud services delivered by new providers – Amazon, Google and others.

The focus to increase revenues has therefore shifted onto an easier target: their existing on-premise customer base – particularly when supply chains are upgraded.

Software vendors rarely charge for the initial installation (often the programs are downloadable at no charge), instead charging on a variety of user numbers or other metrics. Oracle, for instance, has more than 50 metrics that it uses to charge customers, ranging from number of invoices raised to named users. The licensing schemes for SAP, IBM and Microsoft are equally complex.

Quite apart from the complexity of these metrics, the license agreements themselves are often opaque and ambiguous, with key issues being shored up by white papers, guidance, policies and website materials. Often key definitions are missing: for example, Oracle has no definition of ‘use’ or of ‘running’, even though these are central to understanding what permissions are given to the customer or, critically, when, and which, further license fees are triggered.

A chilling example is that of Diageo – the producer of Guinness and Johnny Walker and an £86bn company.

Until 2012, the company took orders from distributors and customers via a call centre. This was replaced that year by new systems – principally a software platform whereby customers could access their orders, check stock levels and prices, and make orders.

The system was built using Salesforce but critically passed data across (indirectly) to Diageo’s SAP systems that then responded.

SAP maintained that this meant that all external third party buyers using or having access to the Salesforce system needed to be licensed. SAP sued for over £55m.

The judge in the high Court found that Diageo was liable due to the fact its customers were accessing the SAP system on the basis that (according to the Judge) they were ‘acquiring visibility of, or connection to, the mySAP ERP software’.

Disturbingly, the judge could find no category of users in SAP’s licensing scheme that reflected the usage. The final settlement has never been publicised by SAP.

Similarly, ABN-InBev admitted in 2017 SEC filings that it was similarly the subject of arbitration proceedings in New York from SAP for $600m.

Reaching down the supply chain
The battleground here is one of ‘indirect access’: as a company do you need to buy for all third party users (consumers, customers, suppliers) that access your systems and then indirectly obtain information from one of the company’s other systems?

An alarming example is that of an online retailer having to pay usage charges – perhaps $10,000 per annum – for every consumer who access the website to check delivery of their item. No software vendor has explicitly asserted such a cataclysmic claim in respect of consumers; but the logic is there with software vendors reaching down for license fees in respect of all commercial users in the supply chain.

The metrics can also extend to robotic usage – often ‘named user’ licensing extends to devices such as POS tills or low-cost chips installed in consumer products which connect through the internet of things.

The result is that there is considerable uncertainty for any company that seeks to automate its supply chain – or indeed its relationships with its customers or suppliers. How then can they be fully protected unless they ask for, and then rely on, the software vendor’s own interpretation of its (often ambiguous) license terms?

If the question is not asked then it will certainly crystallise in the next software license review or software audit.

Every corporate of any size is likely to be impaled on these on two or three year cycles. These are nothing more than revenue-generating measures for the software vendor and, in almost every case, result in high demands for alleged ‘under-licensing’. SAP, IBM, Oracle, Adobe, Informatica and Microsoft are all very active in their software audit programs.

Even with inadvertent changed usage of little value to the company, the costs – when adding penalties, new purchases at list price, arears of support and maintenance, and the software vendor’s own audit costs – can cause significant loss to the business.

Many consider the capricious conduct of the software vendor and uncertain nature of the license terms unfair. The business may not have increased true usage – only, like in the Diageo case, simply streamlined some existing procedures: no change in customers, no increase in orders placed, but a substantial increase in license fees and penalties.

Software audits need to be challenged very strongly – using a combination of contractual, technical and commercial expertise. Better still is to remediate the position in advance of any audit, taking into account expected attitudes of the vendor and penalties likely to be imposed.

Supply chain enhancements, whether using robotics, AI or helpful software interfaces (APIs), will always have licensing implications and these can be very adverse. Businesses need to look not only into the costs advantages of enhancements but also accommodate licensing impacts.

How to confront software audits
  1. Recognise that any change in the supply chain is a licensing risk; 
  2. Do not assume that a long-standing relationship with the vendor, or individuals employed by them, has any weight. The audit process is driven by people above a customers’ account director and must be understood as a substantial revenue-generation opportunity; 
  3. Solicitors’ letters rarely work in isolation. Only a combination of astute technical, legal and commercial arguments can destabilise the software vendor’s insistent demands and reduce down claims to an appropriate level; 
  4. Upon receiving an audit notification letter, the company should delay and prepare; 
  5. Confront issues in advance. Businesses ought to commission their own audit using independent specialists (if possible, former licensing experts from the particular vendor) and then ameliorate any under-licensing that is exposed; 
  6. Choose to fight every demand. There is often ambiguity and opacity in license terms that do not clearly map to contemporary usage. This can be used to your advantage: you do not need to accept the software vendor’s own interpretation of the position. 

Robin Fry is a director of Cerno Professional Services and a highly-experienced software IP lawyer. He is prominent in defending software audits and advising on software licensing issues.

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