Directors could be jailed for unlicensed software

29 Feb 2008

Irish company directors could have significant undeclared liabilities on their balance sheet due to the use of incorrectly licensed software, a scenario that under Irish law allows for criminal prosecution with penalties of up to five years in prison and fines of €127,000.

“In today’s competitive world, business does not stand still – to stay successful it has to continually innovate,” explained Derek Alexander, software asset management consultant at Version 1 Software.

“This means software that was considered essential just two years ago could now be languishing unused and forgotten. Conversely, applications that did not even exist when the software was acquired are now so important that they have been rushed into production.

“In this dynamic environment, it is very easy to end up with incorrectly licensed software. Incorrect licensing can manifest itself in two ways. The software licences can either be insufficient for the current levels of usage (i.e. unlicensed software) or the existing licences are in excess of that required for the current levels of usage.”

Alexander, who will be presenting a paper on the subject at the Software License Optimisation breakfast briefing in Dublin next Tuesday, said under Irish law the onus is on the end user to ensure they are compliant. “I know of a case where the payment due to a software firm was equivalent to a year’s revenue.”

Alexander said the problem for Irish directors has been exacerbated by increased merger and acquisition activity. “The company you take over could have major software breaches of which it is unaware and for which you become liable.”

He also warned the threat to Irish firms was increased as software firms see the potential to grow revenues. IDC estimates the global cost of unlicensed software to the software industry is in the region of US$34bn. This is a significant loss to the IT industry and a part of this total loss has been attributed to software licence agreement violations.

In answer to the large amount of estimated unlicensed software being used globally, most enterprise software companies have become more active in conducting software usage audits of their customers, the impact of which is now being felt in the Irish market.

“Figures vary, but it is estimated a strong compliance team can account for between 10pc and 20pc of yearly sales figures,” commented Alexander, who before heading up Version 1’s software asset manager (SAM) team, conducted licence reviews in Ireland and Europe for Oracle.

“As we enter uncertain economic times, the amount of audits conducted by vendors will only get greater. Whether your company is large or small, you can expect some contact from a licence compliance team.”

He said when the licence compliance teams from software vendors come calling they tend to give little notice and take a fairly inflexible line on any additional licensing that is required. “Neither are they obliged to show you the most cost-effective way to become compliant.”

Alexander cites an example whereby information services for the city of Virginia Beach in the US were practically shut down for over a month and 50 employees were tied up trying to find and produce licences in response to an audit demand by Microsoft.

He said to avoid being penalised for under-licensing or to realise any savings from over-licensing, companies need to make sure control of their software assets is part of their corporate governance strategy.

In 2006, the International Standards Organisation (ISO) published standard 19770 – Software Asset Management (SAM).

“The standard is an attempt to provide an internationally recognised framework for managing these often seemingly intangible assets, and is an excellent model for demonstrating good corporate governance in this area,” Alexander explained.

By John Kennedy