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Software License Financial Management

An overview of how IT Financial Managers can use software license management to add value to both their IT organization and the business that IT serves.

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The fundamental objective of Software Asset

Management is to improve the bottom line performance of IT by record keeping, eliminating risk, reducing costs, and increasing returns on third party software investments. This is not all too different from the objectives of the finance department: Improve the bottom line performance of the enterprise by optimizing margins, decreasing risks, and keeping records. Earlier, hardware and software were generally

considered one. If you bought an AS/400 you also got the database and applications to run on the machine. When IBM revolutionized the software market in 1970 by unbundling the software from the hardware, the first price models were fixed—one price fits all. However, over the years, customer

pressures, largely based on the perception that the “fairness” of prices did not reflect unused capacity, forced vendors to introduce new pricing models. With the advent of PCs and client-server

infrastructure everything changed. The applications became indisputably independent of the machines and this resulted in a new competitive situation for the publishers, eschewing more new pricing models. But a certain loss of control also came with the

decoupling of applications and their direct users making it more difficult to track installations and, therefore, license sales. But, so long as the industry was booming the publishers ignored this problem. Instead of negotiating practical licensing terms, they invested their resources in developing new products.

Control Rising Costs

Enterprises spend billions of dollars each year to

acquire software licenses. Today, software represents approximately 20% of IT spend and roughly 6% of total organization expenses. Software also represents an ever-increasing

portion of the IT budget. It’s not just that the unit cost of software is rising, though this plays a significant part, but also that the use of and, therefore, amount of software in the organization is increasing. The rising cost and dependency on software forces enterprises to stop treating software assets as expenses and to productively manage them. For many CFOs, software is the only increasing

component of the IT budget over which they can exercise some control. The problem is the historic definition of price models rests on the publishers’s competitive support of a single environment, giving way to contractual terms slanted to that environment. Modifications in the environment, such as growth in processor capacity, change the cost of the software and disrupt the relationship between price and perceived value. And this leads us to software license management.

Software license management is a sub-discipline of software asset management (SAM). Essentially, license management is about the commercial and contractual aspects of software; this includes clear tracking of licenses, prices and payments, as well as maintenance and support entitlements, license metrics, and questions about transferability and special rights e.g. downgrade, second copy, and parallel usage.

When analysts talk about software asset

management, they always list high potential for saving, up to 30%, as a reason to invest. This is probably realistic for companies without any software management in place. But larger businesses, which already have one or more inventory tool in place, can easily save 10 – 15%. When you get into advanced software asset management (e.g. software metering) the savings go up again. This is how organizations today successfully deal

with not only the complexity of software licensing, but also the increasing cost of software.

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Risks

Most large organizations are decentralized, at

least to a certain degree. This means there are numerous decision-makers in different departments or legal entities that have their own budgets. So centrally coordinating software licensing decisions is the exception rather than the norm. Without license management the risks here are great and include:

� Because of a lack of centralization of budgets, different legal entities close the same contract separately.

� Double procurement: a business unit locally purchases licenses even though the products are included in a central Enterprise Agreement.

� No financial control over software demand, IT cannot plan the budget.

� An accurate compliance report cannot be produced, drastically increasing audit risks/consequences.

� Software is purchased, as much as millions of dollars worth, without involvement of the necessary people, and no one is really educated in the content of contracts..

� Despite unknown demand a flat rate is agreed upon for certain software. Now, external pricing and internal cost allocation is not possible.

� An inefficient business model for managing software licenses can create significant, often in the million dollar range, funding gaps.

� Underestimated software costs, missed deadlines.

Benefits for IT Financial Managers

A software license management project and

resulting processes cover a cross section of IT and finance. Financial Managers stand to gain as much as IT Managers. A process oriented software license management

solution, like Aspera SmartTrack, is very important. Good processes are critical to the ultimate success of IT controlling as well as continuous cost and budget control. In addition to the recording of actual costs and current liabilities, the plans for future fiscal years have to be regularly updated and adjusted. Cost Allocation With Aspera overhead costs are allocated pro-rata

to the respective projects and organizational units. The solution provides high transparency and allows for cost allocation based on the actual use of IT resources, which helps gain wide acceptance for internal prices and cost allocation within the organization.

SmartTrack supports the definition of cost

allocation formulae or their import from an ERP or planning system. These formulae determine how costs are allocated to projects and written off. The results can be documented in cost reports, exported to other systems via open interfaces or graphically analyzed and automatically distributed as a PDF file. Budget Planning and Control Certainly you’ve experienced increasing pressure

to reduce costs. For budget and cost planning purposes, SmartTrack breaks down all payments by cost types and budgets. The current status of payments is compared to the IT budget. The inclusion of liabilities improves cost control and permits taking early measures if IT expenses are too high.

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Software License Financial Manage

Price Assistant Well developed, competent technology will have

tools to help users assign reference prices to each software product. In SmartTrack this technology is called the “Price Assistant.” The Price Assistant helps users assign reference prices to each software product. It is a scientific algorithm that takes price and payment information from various sources (e.g. license inventory, vendor price lists, etc.) and

combines the information to suggest a reference price. The Price Assistant not only generates reference

prices, but also considers anomalies and deviations from the current price estimation. In doing so, it provides a reliability rating of the suggested reference price, allowing the user to determine if the reference price is plausible and whether or not to use it.

Risk Management

With license management IT Financial Managers

and Controllers are able to identify and eliminate compliance risks —before the auditors come knocking on your door. While having license management in place will not exempt any company from vendor audits, it will greatly decrease the amount of effort, stress, and time that goes into an audit. What’s more, software asset management helps to

streamline software purchases and eliminate inconsistencies. The results of a survey by Ernst & Young UK of 8 major software vendors shows that this can protect a company from future software audits and the consequences, because the vendors recognize that the organization is consistent with purchases, lending to compliance.

Finally, you will be able to conduct internal cost-risk

assessments that will help you prioritize actions. And you will also be able to easily report risks to top management (e.g. quarterly). Transparency Software license financial management provides

one component of complete IT chargeback. It is essential for the very reason that most enterprises aim to optimize investments, but do not understand software licensing. Software license management achieves not only transparency, but useful, reliable information for IT and well as Finance to optimize savings, reduce costs, and mitigate risks related to acquiring and using software.

For more information and to arrange a private introduction to Aspera and our software license management solution, please contact:

Mexon Technology B.V. Plesmanstraat 2 Phone +31 33 4321 700 3833 LA Leusden Fax +31 33 4321 521 The Netherlands www.mexontechnology.com