ORACLE SOFTWARE LICENSINGTHE VALUE OF VARS

Today’s software licensing landscape is truly complex. With no standardized licensing model across various vendors, convoluted terms, and a shortage of reliable tools to track and manage software assets, compliance often seems out of reach if not impossible to achieve. Yet the Independent Software Vendors (ISVs) who license software are not making it any easier for customers to navigate software asset management (SAM) or ensure compliance. Moreover, as the frequency and risk of license audits continues to rise, customers are becoming more attuned to such complexity.

According to the CTO of a mid-size data company, “The vendors make it more and more complicated every year to be compliant due to the complexity of their licensing agreements. There are no standardized tools and no common platform to track software assets and licensing compliance in a consistent way. The way that Microsoft manages compliance is very different than Oracle, which is very different than, SAP, for example. In most organizations, there’s usually an out-of-date Microsoft Excel® document and attempts to automate processes. But, none of the available SAM solutions are 100 percent reliable, so there’s always some combination of auto-discovery with a lot of manual effort to try to stay on top of things.” 1

Leading technology consulting company and Oracle License Reseller DBAK has assembled new data and interviewed customers from organizations spanning multiple industries to explore and provide real-world insight into the growing risk, costs, and complexity of SAM and licensing compliance. Our experience and customer interviews show that these issues are not specific to Oracle, but rather common across all software vendors. Furthermore, while the responsibility of tracking software assets and maintaining license compliance is clearly a challenge for customers, ISVs are well within their rights to protect their intellectual property and conduct audits to do so. Our intent here is to examine and demonstrate with data covering the past five years that customers are increasingly turning to Value Added Resellers (VARs) – who have a strong understanding of software vendors, SAM processes, and software licensing – in order to mitigate risk and achieve license optimization.

W H I T E PA P E R 06/2014

IN THIS PAPER

Introduction 1The Rise and Risks of Software Licensing Audits

2Shining the Spotlight on License Compliance Spending

3SAM and the Compliance Connection

5Confusion Stands in the Way of Progress

6Taking Action to Reduce Risk

7The Value of VARs

8Conclusion

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“Software audits are increasing across every industry sector, every territory, and every size of business, and companies must be prepared to address the growing likelihood that they will be audited.”

Ed Hut, CEO of DBAK

THE RISE AND RISKS OF SOFTWARE LICENSING AUDITS

Software licensing audits are on the rise. Over the past five years, experts, analysts, and end-users have pointed to an increase in the frequency of software compliance audits for customers of all sizes. Most recently, Express Metrix’s 2013 benchmarking study to gauge software audit trends found that 53 percent of the 10,000 organizations surveyed had been audited within the past two years. Of those, 72 percent had been audited within the last 12 months.2 Express Metrix also identified the five independent software vendors (ISVs) most likely to have audited organizations within the last two years as Microsoft, Adobe, Autodesk, Oracle, and SAP, respectively.3 In addition, Ernst & Young’s 2011 software asset management survey demonstrated that software vendors are increasingly leveraging their contracted right to perform license reviews at companies that have purchased the vendor’s software. The analysts noted that, “Software vendors are understandably keen to ensure that customers are complying with their contracts and paying for what they are using. Consequently, customer audits have become commonplace, in some cases revealing over-usage to the tune of millions of pounds.”4

Ernst & Young’s survey also confirmed what many had long suspected: Software audits are tied to the sales strategies of software vendors, with 63 percent of vendor survey respondents pointing to revenue generation as the primary objective behind audits and compliance programs. In contrast, only 38 percent of vendors stated that their compliance or software asset management (SAM) programs are tied to promoting customer education and/or process improvement.5

“If you follow the earnings results from the software side of the business at IBM, Microsoft, and Oracle, among others, you’ll see that they’ve missed their quarter expectations with executives citing poor performance and execution by sales groups over the past several years,” said Ed Hut, CEO of DBAK. “At the same time, software audits are increasing across every industry sector, every territory, and every size of business, and companies must be prepared to address the growing likelihood that they will be audited.”

Several customers interviewed for this paper echoed the growing sentiment that ISVs are leveraging software audits as a means to capture more revenue. The Director of Database and Application Administration for a multi-billion dollar high tech manufacturer said, “I think Microsoft and Oracle and a lot of the big software vendors use the trust/verify model for the most part, so they rely heavily on auditing to generate revenue. As quarterly revenue and forecasts have become more difficult to achieve, some of the larger software vendors are relying more on audits to make sure they’re meeting their revenue numbers.”6

Of course, no one looks forward to a software audit and the risk and impact of an audit can be significant, which has many organizations feeling anxious. The CTO of a data analytics firm said, “The constant fear of an audit is always looming out there now. It almost feels like an audit from the IRS, where you know they have to find something. It doesn’t matter how much you prepare or how well you’ve done managing your licenses.”7

“Software audits are as disruptive to businesses as IRS tax audits are to individuals,” said Esley Gustafson, Regional Director, Software Sales for DBAK. “Regardless of what you’ve been working on or what important deadline is looming this week, if you receive an audit letter, you have 30 days to respond. It becomes your immediate priority.” Organizations certainly face financial risk from an audit, which not only includes the cost of true-ups but also lack of budget control and planning, including unbudgeted compliance liabilities as well as potential overspending on unrequired licenses. “You don’t have to be a very big company to get out of compliance by millions of dollars,” said Hut. “We’ve done reviews where companies have been out compliance by significant unbudgeted, unplanned

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Total sales, the number of transactions, and the average size of transactions have all steadily increased over the past five (5) years.

spend in the millions that could be devastating and could easily put small organizations out of business.” Factor in damage to reputations, operational risk, changes in personnel, lack of control over IT asset allocation and availability, along with legal risks, which include breach of contractual entitlements, software license agreements, and corporate governance legislation, and it’s easy to see why the increasing frequency and risk of audits has prompted new focus on SAM and compliance.

SHINING THE SPOTLIGHT ON LICENSE COMPLIANCE SPENDING

More than 70 percent of subjects interviewed by DBAK stated that software asset management (SAM) and licensing compliance are primary concerns for their organizations today, with fear of audits and the financial impacts of non-compliance topping the list of why SAM is increasingly important to them. The Director of Applications of a mid-size company in the energy sector explained that, “As software audits are becoming more prevalent, that’s putting a lot more awareness and focus on things that maybe weren’t in the spotlight five to 10 years ago. While it was more of an honor system in the past, there has certainly been a shift in focus toward SAM and regulatory audit compliance requirements more so now than ever before.”8

The increase in audits coincides with increases in software spending. New data from a global Value-Added Distributor (VAD) providing enterprise and midrange computing products and services to VARs, system integrators, and independent software vendors, shows that businesses are continuing to spend on software and more revenue is going through the channel at Oracle in particular. Total sales, the number of transactions, and the average size of transactions have all steadily increased over the past five (5) years (See Figures 1, 2 and 3).

Figure 1: VAD Data Displaying Total Sales of Oracle Software from 2009-2013

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Figure 2: VAD Data Displaying Total Number of Transactions Involving Oracle Software from 2009-2013

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Figure 3: VAD Data Displaying Average Size Transaction Related to Oracle Software from 2006-2013

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DBAK has assembled data, which, along with interviews, tie this increase in software spending directly to compliance. (See Figure 4). Mirroring the upward trend of the VAD data, DBAK has seen an increase in the total number of Oracle software sales transactions, and has been able to extract how many of those transactions are specifically tied to compliance.

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“We absolutely rely on third-parties to help us maintain 100 percent compliance, which is a mandate of our organization.”

Director of Database Application Administration, High-Tech Manufacturing Firm

Figure 4: Percentage of Total DBAK Transactions Relating to Compliance from 2009-2013

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By comparing data sets, one can see that revenue is increasing at the VAD level, and revenue tied to compliance is on the rise amongst Value Added Resellers.

In addition, more than 70 percent of the companies interviewed stated that they rely on third-party vendors to navigate SAM, audits, and licensing compliance. “Over the past several years, we have seen a steady increase in the number of companies relying on us, an Oracle-focused Value Added Reseller (VAR), to manage their software audits and a consistent rise in software sales due to the fact that we understand the complexities of software licensing,” Hut explained.

“We absolutely rely on third-parties to help us maintain 100 percent compliance, which is a mandate of our organization,” said the Director of Database Application Administration for a high-tech manufacturing firm that spends over $3M per year on software licenses. “They know what we own, and when we’re getting ready to roll out a new initiative. I trust that they are not upselling like the ISVs, but rather recommending what is required from a systems and licensing perspective in order to maintain compliance and optimize licensing.”9

SAM AND THE COMPLIANCE CONNECTION

Compliance relies on consistent and accurate software asset management. In “Software Asset Management: Mitigating Risk and Realizing Opportunities,” KPMG International emphasized the value of effective SAM: “A solid SAM initiative is not an expense to be justified, but rather an investment that can provide a marked competitive advantage. Companies implementing an integrated SAM program frequently report both significant direct cost savings as well as efficiency gains. Moreover, these benefits are by no means limited to the IT department, but often extend into the broader enterprise.”10

Just what is standing in the way of effective SAM and maintaining licensing compliance? The increasingly complexity of SAM and the ISV licensing landscape coupled with a lack of resources, reliable tools, and established processes are consistent challenges.

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“Before 2000, there were primarily client-server environments, which were fairly straightforward to understand and license. After the dot-com boom, internet-based licensing took over and now software companies are moving to cloud and SaaS models, all of which increase the complexity of SAM and licensing.”

Ed Hut, CEO of DBAK

“Keeping up-to-date on software asset management and compliance is a challenge when things happen fast,” said the IT Governance Analyst of a sales lead organization. “Outside sales reps with laptops are not always connected to the network when we try to track assets, so we can’t capture their data consistently. Like many organizations today, we have limited resources and limited staff, so SAM gets pushed to the bottom of the list.”11

Adding to the complexity is the fact that licensing models have changed significantly over the past two decades as technology has advanced. “Before 2000, there were primarily client-server environments, which were fairly straightforward to understand and license,” explained Hut. “After the dot-com boom, internet-based licensing took over and now software companies are moving to cloud and SaaS models, all of which increase the complexity of SAM and licensing. The fact that large organizations often rely on software from multiple providers, which are all licensed differently as there are no consistent licensing standards, compounds the problem.”

Organizations often lack the ability to effectively track assets. While the customers that DBAK interviewed for this paper are attempting to track software assets, they still rely heavily on manual processes, which are prone to human error and difficult to maintain consistently. In addition, organizations often have difficulty reconciling their software inventory with licensing terms.

“The level of effort it takes to track software assets and manage licensing compliance becomes more and more intense every year, and it is very difficult to find ways to measure yourself,” said the Director of Applications of a mid-size company within the energy sector. “There are tools that pull data, but you need someone to focus and analyze that data and actually correlate it to licenses.”12

“Understanding what we have and what we need is difficult and entails wading through the ordering documents, the purchase orders, and all of that, and it’s frustrating and time consuming to really get to the bottom of what it is that we own versus what it is we’ll be using,” said the Senior Director of Global IT for an in-building wireless solutions provider.13

CONFUSION STANDS IN THE WAY OF PROGRESS

Confusion regarding software license terms and conditions can also stand in the way of progress. The responsibility of reading all software license terms falls to the customer. However, translating legal jargon is far from easy and confusion regarding so-called Unlimited License Agreements (ULAs) as well as licensing test and virtualized environments, for example, is often exacerbated by a lack of clear terms, communication, and agreement between vendors.

“It seems intuitive to assume that under an ULA, you can use products in unlimited quantities, but that is not the case,” explained Gustafson. “While ULAs are very beneficial to vendors, the population of companies that truly benefit from a ULA is pretty small. The overall goal is less focused on the ULA and more focused on managing your software deployments and compliance.”

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“The level of effort it takes to track software assets and manage licensing compliance becomes more and more intense every year.”

Director of Applications, Mid-Size Energy Firm

Test environments are also tricky. “Many organizations assume that you don’t have to license test/development/QA environments,” said Gustafson. “In terms of Oracle, I think some of the confusion is caused by Oracle’s Licensing and Services Agreement (OLSA), which includes the right to run Oracle Database on an unlicensed computer for up to four times, not exceeding two days per testing, in any given calendar year. Many times this gets misinterpreted as ‘I don’t have to license test/dev environments,’ which is not the case.”

The Director of IT for a high-tech manufacturer illustrated the potential impact of such confusion: “We were subject to a license audit that resulted in almost a million dollar non-compliance bill and one of the things we got nailed on was that we had test environments and we were not properly licensed for the test environments. We are not a large organization, so this was significant.”14

For some organizations, licensing complexity is also standing in the way of technology progress, especially when it comes to virtualization. For the Director of IT for a high-tech manufacturer, “Licensing is impeding virtualization for us. We won’t even go there. We talked to the ISVs about it, but you have to pay for the entire server regardless of whether you’re virtualized or not, so it is not cost-effective and we will not virtualize.”15

The CTO of a data services provider agreed, “Some ISVs have diminished the value and benefits of virtualization through complexity of licensing. It’s been a struggle as we’ve looked to virtualize just because of their specific licensing requirements. It took us extra time to virtualize because of the way we are licensed, but we were able to design around those constraints.”16

TAKING ACTION TO REDUCE RISK

The increase in audits and resulting focus on SAM and licensing compliance has prompted many forward-thinking organizations to take action and reduce risk by turning to experienced VARs and/or establishing a dedicated SAM role within the organization to provide the same service internally.

“ISVs have definitely given software asset management and compliance audits a lot of attention,” said Hut. “They’ve increased the number of people that support audits and license compliance within their organizations, so it makes sense that customers would do the same.”

“We have a number of customers now that have built-out that role,” said Gustafson. “You can actually get certifications in software asset management now. I would say at best as the audits have increased, the role has become much more prevalent. We’ve worked with a number of customers who go out and fill that role after a license correction, true-up or audit. The logic being that ‘if my IT people can make an $8 million licensing mistake, it’s not a big deal to hire somebody to make sure that we don’t make that mistake’.”

Thirty-six percent of the customers interviewed for this paper have recently hired dedicated SAM professionals. A Senior IT Manager in the utility industry explained, “Six months ago, we created an official SAM position and have actually created another position for an assistant

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“Many customers think that their only alternative is to work directly with ISVs to address SAM and solve their compliance issues. Our data and interviews show otherwise.”

Ed Hut, CEO of DBAK

“VARs often have years of experience, understand licensing backward, forward and inside out, and dig into licensing to determine exactly what is required to achieve and maintain compliance, minimize costs, and better leverage current investments.”

Senior Director of Global IT, In-Building Wireless Solutions Provider

to that person. It’s part of our effort to lower the cost of compliance. It’s kind of ironic when you say, ‘Oh, I’m hiring people to lower the cost of compliance,’ but between the people and the tools that we’re looking to put into place, we’re really hoping that at least the overhead associated with license compliance is reduced, and that the results of our compliance activities are much more reliable and predictable.”17

For those companies that do not have a dedicated SAM professional, “Hiring a third-party company or VAR to assist with asset and licensing reviews, identify immediate risks, and provide a sustainable process to identify and mitigate continuing risk offers real value,” said Hut.

THE VALUE OF VARS

“Many customers think that their only alternative is to work directly with ISVs to address SAM and solve their compliance issues,” said Hut. “Our data and interviews show otherwise.” The fact is, leveraging the channel is a very viable and proven way for customers to mitigate risk, accurately track assets, and resolve compliance problems. An experienced VAR can provide organizations with a host of benefits related to SAM and compliance, including:

Deeper Understanding of SAM and Compliance: VARs can provide a much deeper understanding of SAM and license compliance, which not only reduces risk but allows organizations to focus attention on their own primary business objectives. “They (VARs) often have years of experience, understand licensing backward, forward and inside out, and dig into licensing to determine exactly what is required to achieve and maintain compliance, minimize costs, and better leverage current investments,” said the Senior Director of Global IT at an in-building wireless solutions provider.18

“Organizations need to know what they own and what they are running – and there are certainly tools that can help with that,” said Gustafson. “However, just purchasing a SAM tool isn’t going to ensure compliance. Having the ability to not only track assets, understand today’s complex licensing agreements, and apply both to your environment is what makes it so difficult for companies to stay compliant. VARs tend to bring deeper understanding and ability to analyze very complex licensing scenarios and schemes, which can help companies avoid or mitigate problems.”

“We’ve found it very helpful to work with a third-party vendor for SAM and license compliance,” said a Senior Director of Applications in the energy sector. “They brought a lot of knowledge to the table that we didn’t have. We felt like they were a neutral, unbiased party, just here to get to the facts. We also felt like they could look at our environment, our situation, and help us interpret the readings in a relative manner, versus just performing an academic exercise, like ‘Here’s your number and here you’re not compliant.’ It’s really rationalizing the data and understanding the data that is valuable.”19

Audit Assistance (Independent Third-Party Evaluation): VARs can offer direct assistance to streamline the audit process and minimize an audit’s impact. Of the subjects DBAK interviewed, 73 percent expressed concern about regarding compliance and only 27 percent felt that they could successfully navigate an audit on their own. “Customers should never be fearful of an audit,” said Hut. “They should address audits as a very serious situation, but they don’t have to resolve compliance issues by themselves. To respond to an audit, first talk to your sales partners, or your best relationship with the sales team at the manufacturer, and call on an outside third-party or VAR that has experience with SAM and license compliance for help,” he said.

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“Some customers contact a lawyer first, but lawyers may not have the technical experience and understanding of IT environments required to successfully navigate an audit. A lawyer may understand the legal terms of a license agreement or contract, but they may not understand the definition of a processor.”

Esley Gustafson, Regional Director, Software Sales for DBAK

“Some customers contact a lawyer first, but lawyers may not have the technical experience and understanding of IT environments required to successfully navigate an audit,” explained Gustafson. “A lawyer may understand the legal terms of a license agreement or contract, but they may not understand the definition of a processor. Leveraging a VAR provides technical expertise, insight into what assets you own, what you are using and what you’re obligated to do based on your licensing, which can help combat an audit from the get-go.”

The IT Director for a high-tech manufacturer noted, “We were worried going into a license audit and wondering what was going to happen. We contacted a VAR that understands licensing very well to help. They stepped in and walked us through the Oracle audit process. Before we got the final review from Oracle, I was prepared for the potential impact, so it wasn’t a complete and total surprise. I also asked them to be at the table when we were talking to our sales account managers just to help guide me through the conversation, which was great.”20

Lower Costs and Licensing Optimization: Due to their deeper understanding and expertise, VARs can outline a direct path to savings and compliance by optimizing licensing. The IT Governance Analyst at an online marketing and publishing firm stated, “They are familiar with Oracle licensing and can help you avoid expensive mistakes. We were about to cancel a whole lot of licenses that we didn’t believe we needed anymore, but they explained why we shouldn’t and what we should do instead to stay compliant without overspending.”21

The Director of Database and Application Administration for a high-tech manufacturer shared this example: “I’ve used a third-party vendor to do a license review and to take a hard look at what we own versus what we’re actually consuming, allowing us to true-up some of our licenses. This involved consolidation as well as adding additional licenses in order to be compliant with our technology license. Because we’re proactive in doing that, we’re getting customer discounts rather than paying list prices for all of those licenses, which would occur if we were to face an audit. That’s really one of the big differences in working with a VAR. You’re buying what you need, and you’re being proactive about buying what you need so you’re getting a discount. Whereas if you wait for an audit, you’re going to be paying twice that.”22

Help Navigating the Sales and Support Environment: Navigating today’s sales and support environment is also a challenge that many VARs can overcome. “One of the primary barriers for effective compliance is communication and the sheer number of sales reps that companies have to deal with at the manufacturer level,” said Hut. “For example, there is no single person within Oracle’s sales force that can represent all the products across all the different market or industry opportunities. The software manufacturers also juggle the sales force quite frequently across territories and accounts. It’s difficult to determine who owns what account. It’s the same thing at IBM, Microsoft and others. As there is no point person, and turnover is rapid within these organizations, customers have to deal with multiple reps and they get multiple opinions on how things are licensed. That’s where a third party or VAR can be beneficial. They know what’s happening across manufacturers and the industry, and can pull information from the multiple sales reps, then communicate it clearly to the customer.”

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“There’s a lot of consideration involved in understanding the full lifecycle of a software asset. Planning certainly puts us in a better position to be a little more strategic with the business and our licensing.”

Executive Director of IT Asset Management, Large Consumer Products Company

VARs can serve as single point of contact for sales and support, which is often a relief to customers. The CTO of a data services provider stated, “The deeper knowledge and understanding VARs have of the licensing landscape along with their ability to communicate that back to us in a way that is actually comprehensible is great. In the case of Microsoft and Oracle, they act as a filter. Using a third party saves time, eliminates confusion, and the constant harassment of, ‘Can we take you out to lunch and coffee and etcetera,’ from new vendor sales reps has sort of dissipated as well, which is very nice.”23

Expert Insight to Utilize Technology Advancements: VARs often provide direct insight into the best ways for an organization to prepare for and utilize the latest technology advancements, such as consolidation, virtualization and cloud computing.

“We often see confusion regarding cloud computing and virtualization, not only because these are complex concepts that impact IT environments, but because customers are talking to the wrong people when it comes to understanding their impact on licensing,” said Hut.

VARs can offer specific guidance to reduce risk and complexity as businesses incorporate state-of-the-art technology into their unique environments. The Manager of ERP Business Support at an energy firm stated, “We are utilizing a VAR as we virtualize to figure out our current licensing and move forward with the right licensing model. With their help, we can better understand the impact of virtualization, lower the risk of being out of compliance, and mitigate or avoid licensing and user fees going in.”

Long-Term Licensing Strategy: VARs with a strong understanding of SAM and vendor licenses can offer focused support and guidance in developing a long-term licensing strategy to ensure forward compliance.

“Risk avoidance leads to costs avoidance,” noted the Executive Director of IT Asset Management at a large consumer products company, continuing, “Unbudgeted, unplanned costs from any noncompliance or audit are always harmful to the business. I’m working from a strategic planning perspective, so, as we’re developing our three- to five-year expansion plans, we’re also looking at what the business needs from a technology perspective. There’s a lot of consideration involved in understanding the full lifecycle of a software asset. Planning certainly puts us in a better position to be a little more strategic with the business and our licensing. Establishing and shoring up processes around software asset management and licenses helps us understand the impact of any changes, whether hardware forced end-of-lifecycle or a change with the vendor, and ensures that we have the capability to track, manage, monitor, and analyze assets through their lifecycle to ensure compliance.”24

“Having a long-term plan regarding SAM and compliance is essential,” said Gustafson. “If you haven’t asked the question, ‘What would we do if we got an audit letter from Oracle today,’ you’re going to be scrambling. VARs can help customers understand their licensing contracts, ownership, and usage as well as develop an ongoing plan of action for SAM, all of which mitigate the time and impact of an audit should one occur. With help from a VAR, you’re going to be much better prepared for an audit than you would be if you’re trying to gather information in the 30-day period you have to respond to an audit,” he said.

“We are utilizing a VAR as we virtualize to figure out our current licensing and move forward with the right licensing model. With their help, we can better understand the impact of virtualization, lower the risk of being out of compliance, and mitigate or avoid licensing and user fees going in.”

Manager of ERP Business Support, Energy Firm

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CONCLUSION

Today’s VARs offer much more to their customers than traditional resellers by emphasizing the value in the title “Value-Added Reseller.” VARs have become a viable solution to escalating SAM and licensing compliance challenges – and a proven path to reducing risk, complexity, and cost of compliance. Customers interested in taking a more proactive approach to SAM can look to VARs with demonstrated SAM and software licensing expertise to help them mitigate risk, lower costs, and position themselves for growth.

END NOTES

1 DBAK Interviews. April 2014. 2 Express Metrix. “2013 Software Audit Industry Report.” December 2013. 3 Ibid.4 Ernst & Young LLP. “Software Compliance without Tears: Monitoring Customers’ Software Usage

in a Complex World; Software Asset Management Survey.” April 2011.5 Ibid. 6-9 DBAK Interviews. April 2014.10 KPMG International. “Software Asset Management: Mitigating Risk and Realizing Opportunities.”

November 2009. 11-25 DBAK Interviews. April 2014.

Disclaimer: The views and opinions expressed within this paper do not constitute legal advice, but rather highlight business-oriented data and provide insight into the personal feelings and experiences of interviewees attempting to understand and comply with software licensing rules while reducing the risk and impact of audits. DBAK shall not be liable to any user of this report or to any other person or entity for any inaccuracy of this information or any errors or omissions in its content, regardless of the cause of such inaccuracy, error, or omission. Furthermore, in no event shall DBAK be liable for consequential, incidental, or punitive damages to any person or entity for any mat¬ter relating to this information.