Software License Management Explained

Table of Contents

What is Software License Management

Software license management, also often referred to as software inventory tracking or simply software tracking, is the infrastructure implemented by organizations to identify and track software usage within the organization or among its customers. Software license management is done by both software vendors and customers however this article focuses only on the license management required for software customers and not vendors. Software license management, or SLM, is part of overall software asset management (SAM) capability and involves the process of reducing, documenting, and controlling total IT costs. In short, SLM is a plan to help you monitor and maintain all your organization’s various software licenses. Specifically, identifying which software is being used with how many and which type of licenses, by which employees. 

Why is it Important

Software license management is crucial for a number of reasons. Knowing who is using which software enables businesses to only pay for the software they are using and similarly only for the licenses needed. According to a study conducted by 1E.com back in 2016 titled “The Real Cost of Unused Software”, companies waste 37% of their software budget on unused tools! This means oversight of software license usage within your organization is very important as the average monthly costs of SaaS alone is $20,000. According to recent data from Gartner, SaaS will soon surpass more than $116 billion per year in sales, accounting for 43% of the total cloud market. 

SaaS has become the leading software category

Cloud-based delivery of subscription software is the new standard choice. Subscription software has been around for more than two decades and is successfully replacing on-premise, location-based software delivery. Established software vendors such as Microsoft, Oracle, SAP, and Adobe have followed suit and introduced their products as cloud-first or cloud-only implementations.

While this has led to an increase in SaaS spending, it also means that software asset management practices need to be updated to reflect the unique characteristics of SaaS within enterprises and beyond.

Increasing specialization of software functions

Decades ago, software for businesses could be considered a one-size-fits-all solution. As cloud-based software has removed the barriers to software access and deployment, applications have increasingly focused on business unit functions.

Business units such as marketing, human resources, finance, legal, and others now have access to tools designed explicitly and only for their business functions. For example, in less than a decade, the number of digital applications for marketing teams has grown from around 150 to over 7,000, a 45-fold increase. This in turn means the complexity of managing software licenses has grown exponentially.

Low cost per instance

With freemium options and low monthly recurring fees, SaaS applications are often purchased by employees without a centralized sourcing or procurement strategy.

A single employee who subscribes to a SaaS application is unlikely to have a significant impact on the bottom line, but if there are hundreds or thousands of employees in an organization, each paying several dollars per month, cost overruns can quickly occur.

End User Acquisition

The success of SaaS conclusively demonstrates the concept of product-driven growth, where software applications are designed to first maximize their appeal and value to the end user and then spread more or less organically.

This end-user focus shifts decision-making from traditional software development and procurement even further than the purchase of business units to the employees themselves.

Missed opportunities to leverage purchasing power

Suppose the company needs to purchase 100 user licenses for a project collaboration application.

The bulk purchase of end-user licenses allows the company to receive a discounted rate. However, if an end user purchases the same license, he or she would probably pay market prices. Hence, consolidating purchases is important.

Shadow IT

Because SaaS applications are so easy to acquire and deploy, they often escape detection. Without a way to uncover these purchases and correct things like cost allocation or ownership SaaS quickly accumulate as a hidden cost within the enterprise.

Gartner studies have estimated that 30 to 40% of technology spending leads to shadow IT. And even when these transactions appear in financial systems, they are often mislabeled or mis-categorized.

From a practical perspective, the same features that make SaaS more accessible, easier to use and easier to implement can lead to uncontrollable costs and uncontrolled spending.

Software Audits

It is important for the business to comply with the stringent terms of agreement laid out by software providers. The provider will sometimes pay an independent party to do a software audit in order to ensure compliance.

A software audit is an internal or external review of a software program to check its quality, progress or compliance with plans, standards and regulations.Software audits can be performed for a number of reasons, including:

Verification of compliance with licensing requirements.

Monitoring for quality assurance (QA).

Compliance with industry standards.

Satisfaction of legal requirements.

Internal audits can be useful to the organization to improve efficiency, identify inactive licenses that can be dropped, and find problems before they become licensing or regulatory issues in a third-party review. Third-party audits typically focus on software that is used beyond the licensed rights, and external auditors will usually not mind if some licenses are not used. These different priorities mean that it is advisable for an organization to conduct internal reviews prior to external audits.

An organization typically contracts with external auditors and teams to provide independent assurance that a software program conforms to development plans, industry standards, best practices, and legal practices. Compliance audits can focus on compliance with IEEE standards or regulatory requirements. This type of audit focus is particularly important in the case of software used in critical infrastructures and key resources (CIKR).

Software audits are often important and sometimes required. However, audits can disrupt an organization’s development and put a financial strain on a project because of unbudgeted costs. Teams and management may need to consult with auditors to ensure that the process is complete and accurate. This consultation may take up the time spent on the work. Because time is important, organizations should refrain from exaggerating audits, and managers should understand how, why and when audits are conducted so that they can best prepare for them.

In case of noncompliance the software provider may leverage significant fines. These usually are made up of back payments for the unused licenses at 125% list price, list prices typically being much higher than the price negotiated by the customer.

License Management Tools

License management tools also known as saas vendor management tools are designed to facilitate the process described above. Provides software tracking in one system of record for all cloud-based applications, their users and licenses, and then automates routine IT lifecycle activities In short, license management tools help you keep track of who is using which licenses in your organization. 

License managers are primarily dashboards, where IT managers can see an overview of all the SaaS tools they are currently using, how many licenses they are paying for, when their next billing date is as well as the total price of their invoice.
Whilst basic license managers are little more than fancy calendars where this information is tracked manually, more sophisticated license managers such as Torii  integrate with your email and banking providers which allows an algorithm to interpret the emails and invoices you received from vendors. This enables them to update information on your SaaS use and spend automatically with a relatively high degree of certainty. Virtual credit cards, are a type of license manager which generates custom credit card info for each of your SaaS vendors which then equally allows tracking and even allows them to provide a single invoice for your SaaS. High end license managers use this to provide exact tracking and analytics of which tools are used when by which employees. This allows us to assess how useful tools are and whether they are worth the money or should be discarded/replaced. License managers sometimes also provide an overview of providers and contracts as well as invoices in one place.

Tracking trends and developments in license use over time may also be valuable as a way to negotiate larger discounts, for instance if the number of licenses has been growing significantly over time. 

License management solutions offered by non-vendors are more valuable to end users because most vendors do not provide enough information about license usage. A vendor license manager provides only limited information, while non-vendor license management solutions are designed for end users to maximize the value of the licenses they own and minimise unused licenses.

tools overview

License Management Tools vs Software Asset Management Tools

A license manager is different from a software asset management tool that end-user organizations use to manage the software they have licensed from many software vendors. However, some software asset management tools include features of the license manager. These are used to match software licenses and installed software and generally include device discovery, software inventory, license compliance, and reporting capabilities.

An additional benefit of these software management tools is that they can reduce the difficulty, cost, and time required for reporting and increase operational visibility to prevent litigation costs associated with software misuse.