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What CIOs need to know about enterprise licensing agreements

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Maximizing the cost effectiveness of software consumption is a delicate balance. Underconsumption can lead to uncaptured financial and software consumption opportunities, while overconsumption can translate to financial distress to enterprises, and vendors often leverage overages to incentivize new purchases.

Enterprise licensing agreements (ELA) are contractual agreements that align vendor and customer incentives to provide select software at discounted, fixed pricing over a period of time. Despite cutting into profit margins, ELAs protect vendors that arrange steep discounts for high dollar, lump sum purchases.

Similarly, ELAs protect customers by providing immediate access to established software offerings at a significant discount. This is optimal for the customer when the total dollar value of an ELA is consumed but not when ELA consumption limitations are never approached or surpassed.

For example, when one Fortune 1000 company was informed by its server storage software vendor that its $10 million ELA was completely consumed halfway through a 36-month agreement, the potential impacts were significant.

Consumption of specific software provided by the ELA was a critical dependency for steady state and ongoing project efforts, yet the company was not actively tracking the ELA’s overall consumption.

What ensued was an ELA audit revealing that the ELA was vastly overconsumed in certain software and vastly underconsumed in others. In addition, the software substitution methodology was discovered to be non-compliant per the ELA, which provided use-cases of how to quantify and use software substitution credits returned for underconsumed software.

The vendor’s software consumption monitoring was also not capturing actual usage. Once these vendor consumption miscalculations and noncompliance to the ELA were identified and corrected, the vendor ultimately provided a $2 million credit back to the ELA.

This situation is not uncommon. Enterprises currently in an ELA or entering one for the first time should be aware of key ELA consumption tracking and negotiation best practices to protect their organizations from misuse and costly errors. Contract language must be highly transparent and the software substitution methodology exact.

Here are five best practices for navigating an ELA:

1. Identify critical right to audit language

While many ELAs enable the software provider to perform onsite inspections — disrupting business operations to verify the number of licenses deployed and invoice for discrepancies — ELAs often omit language enabling the customer’s right to audit.

It is critical to negotiate and insert contractual language establishing the customer’s right to request onsite ELA audits as part of the agreement. Without this, customers are waiving their rights to audit the agreement and verify usage and deployment.

2. Include software deployment definitions

Customers should negotiate and create a mutually agreed upon contractual definition of software deployment to avoid audit confusion.

For example, software providers may define software “deployment” as occurring when customers confirm the receipt of associated hardware purchases, regardless of whether the hardware purchase was installed.

This is critical because software that is associated with storage, network and other hardware is consumed when the associated hardware is deployed, and software vendors may assume software consumption and software maintenance should initiate at equipment deployment.

However, checking for actual equipment deployment can be tedious for vendors. Certain vendors may assume software consumption begins when the equipment is received by the customer from the VAR or OEM. Given that contractual language can consider a unit of software deployed even if the software is subsequently uninstalled, it is important to have a mutual understanding of what software “deployment” means.

Be aware of these assumptions, define contractually what is “software deployment” and keep track of when hardware is actually deployed with the software alongside it.

3. Define substitution methodologies to know what you are paying for

Software substitutions in an ELA can be tricky. While vendors allow organizations to receive credit for remaining units of software that are being underconsumed below the maximum licensed usage limit, structuring transparency into software substitution methodologies is critical to freely use substitution credits to purchase and consume other offered software.

To protect organizations and maximize their ELAs, customers should negotiate to ensure the substitution methodology is clearly defined within the ELA, including examples of how units of undeployed software may be substituted into credits and how these credits can be used to consume other software offerings.

4. Be wary of third-party software consumption tracking reports

Some software providers outsource the tracking of software consumption to third parties, such as accounting firms and others that may have little to no contextual or native understanding of why or how the software is being consumed. This can lead to difficulties in tracking true consumption.

For example, software purchased as part of hardware purchases may not be recognized, and third parties may assume that the hardware purchases will be consuming software from the ELA instead.

Customers should create a process to regularly request software consumption reports from the provider and distribute the reports to check for accuracy within the IT organization, working between asset management, procurement and IT to confirm consumption.

5. Assign resources to track ELA consumption

Ultimately, ELA consumption needs to be tracked consistently to maximize its value as well as to avoid situations where a lack of software can impact steady state or project-driven efforts. Enterprises should consider assigning resources to track ELAs on a regular basis.

This helps to ensure a greater understanding of the organization’s technical environment and allows leadership to properly forecast, manage and maximize its ELAs.