Essential Best Practices for Proactive Software License Audit

Software has powered the modern economy for the last few decades, and its grip on all facets of the digital enterprise—from communication to data processing—is unlikely to weaken soon. In this interconnected world, almost every organization depends on software sourced from other entities. The software license exists to protect the creator’s intellectual property value, so organizations have to pay close attention to how they use each software product.

Managing software licenses in large enterprises is a significant challenge due to the ever-growing sprawl of devices and instances where the software is deployed. Due to limited visibility of installations, unclear understanding of license terms and conditions, frequent infrastructure changes, and lack of internal controls to limit installations, the chances of violating software license terms are high. That’s what triggers software license audits by vendors, who recognize these circumstances and want to verify that the usage of their software complies with the contractual terms. Where violations are encountered, these vendors are quick to impose heavy penalties in the form of fines, retroactive maintenance fees, and license costs.

To mitigate the risks of encountering violations during a software license audit, organizations should invest in appropriate measures that prevent such occurrences. This means staying a step ahead of vendors by proactively managing their software licenses to ensure compliance and avoid penalties. In this article, we describe several best practices for organizations exposed to vendor software license audits. 

Summary of software license audit best practices

Any enterprise preparing to undergo a vendor software license audit should consider the following best practices.

Maintain an updated software asset inventory

The first proactive action for any enterprise facing a software license audit is obtaining an up-to-date inventory of their software assets. This involves establishing mechanisms to discover all software, including their licenses and associated dependencies within your IT environment. Discovery of software requires using a system to automatically scan all on-premises and cloud instances and then creating a comprehensive register of the software deployed across the entire IT infrastructure. The software to be discovered includes operating systems, middleware, and server, network, and end-point applications across all environments.

A software asset register

The discovery of software components is a precursor to the organization maintaining a centralized inventory of software licenses. A software license management system enables the enterprise to qualify the license details for the discovered software components, including the license model, vendor, and count. By understanding the license model—such as perpetual, floating, or metered—IT administrators can gain an understanding of whether or not license terms are being violated. The discovered vendor information is useful for zeroing in on the scope of the audit.

Once this information is gathered, IT administrators can enter the purchased license counts and run a comparison against the discovered count to generate reports on software license utilization. These reports inform the actions that should be carried out to enhance the optimal use of licenses, including addressing inactivity, excess capacity, or obsolescence. This enables the optimization of software licenses and the pinpointing of any violations in advance of software license audits. Unauthorized installations or illegal software should be removed and a root cause analysis conducted to determine the source so that appropriate corrective and preventive actions can be taken.

The world’s most sophisticated asset discovery and dependency for compliance and license management

Learn More

Discover assets automatically including hardware, software, and cloud infrastructure

Match the assets against your software and hardware license agreements

Comply with your service license needs comprehensively and confidently

Review governance mechanisms for software license management

While preparing to undergo a software license audit, organizations should also consider ascertaining the status of their governance mechanisms. 

The first step is the software asset management policy, which provides direction on the enterprise’s adherence to software license agreements and employees’ responsibilities to follow software management procedures. This policy, together with associated procedures, guides the software asset management lifecycle: requests, acquisitions, installations, management, and finally disposition. It should also spell out typical breaches to software license agreements—such as installing on more devices than allowed or unlicensed copying—as well as potential penalties for the organization and individuals, including fines and prosecution. 

Updates to software asset management policies and procedures should be communicated to the organization’s staff and contractors. Comprehension needs to be tested to ensure that the users of software licenses are not caught off guard when audits take place.

Software asset management lifecycle (source)

Other governance mechanisms that require reviewing before software license audits include the existing vendor contracts signed by the organization for the provision of software. Whether the enterprise engages resellers, partners, or the actual software development companies, there is a need to evaluate the contracts and associated terms of use regularly to ensure that the organization is aware of what is expected should an audit occur and whether the current organizational context has changed in light of the terms and conditions. Such changes include expansions, mergers/acquisitions, decentralized offices, technology refreshes, and IT staff turnover, all of which could materially affect the usage of software licenses and trigger vendors to initiate audits. The review should also consider any updates that the software owners or vendors have made to the terms and conditions of software usage, such as changes to licensing metrics, which may result in increased budget or modifications to the enterprise’s install base.

A software license risk assessment is another governance mechanism whose review can help the business and IT leadership come to terms with the threats that the organization faces should a software license audit be conducted. The risk assessment, which is carried out as part of supplier risk assessment, identifies and analyzes risks that could impact the organization should a software license audit result in adverse findings, including financial penalties, litigation, intellectual property loss, remedial effort overhead, and reputational damage. The management should prioritize the identified risks and commit relevant resources to mitigate their occurrence.

Conduct regular internal audits of software licenses

Proper preparation for a software license audit requires organizations to conduct regular internal audits to identify license discrepancies proactively and address them before vendors find them. An internal audit may be carried out by the enterprise’s internal audit function or outsourced to an impartial third-party firm having the required capabilities and expertise. Where the internal audit function does not have full capability, it may onboard staff from IT, procurement, risk management, and legal to bolster their knowledge and ensure that the internal audit delivers value for the organization.

During the internal audit, the following elements will be assessed:

• Relevant software vendor contracts and licensing agreements
• Internal software management policies and procedures
• Software installed within on-premises and cloud environments
• Numbers of users for each software product
• Number of licenses deployed for each software product
• Payment status of software vendor invoices/subscriptions

The internal auditors should endeavor to be conversant with the approaches and tools that vendors utilize during their audits and try to replicate similar findings. In addition, they should be able to use existing software asset management tools to generate reports on discovered software and their associated licenses. These reports should be used as the basis to conduct the audits by sampling IT systems and devices to compare the actual status with the software asset management tools data.

A formal internal audit report that features findings and recommended corrective and preventive actions should be presented to top management, and follow-up of the resolutions to closure should be prioritized. Where resources are required to remediate audit findings, they should be made available and fast-tracked. 

It is worth noting that vendors may require an enterprise to conduct an internal audit using their templates and submit the results to the vendor, hence the need to build internal capacity through training and also carry out frequent audits in preparation for such occurrences.

Validate software license status information with vendors

Any organization that wishes to maintain a good relationship with software vendors should have a process in place for annual contract and performance reviews. During these reviews, the enterprise validates that changes to their environment align with vendor agreements so that both parties continue to agree to beneficial terms. 

Apart from checking performance against SLA and cost elements, it is vital that organizations also use these activities to review software license status to address any compliance issues before an audit. During the reviews, the IT teams can take this chance to validate the vendors’ count against theirs and seek clarification on any changes to terms and conditions. In addition, management can share any plans that impact software usage and inquire from vendors about potential issues that need to be addressed to prevent negative audit findings.

Beyond the scheduled contractual reviews, the organization can also use the vendor payment process to validate information on received invoices against the internal software inventory reports. By going through the line items submitted and seeking clarification on contractual terms for those items, the enterprise will be in a position to ascertain the vendor’s position on software license use and validate it against its software inventory records. This aids in revealing any discrepancies that could result in negative findings during a future software license audit.

Finally, the organization should take steps to closely manage the vendor throughout the software license audit activities. Some of the actions to be taken during the phases of the audit include the following:

• Pre-audit: During initial communication and the kickoff meeting with the vendor’s auditors, obtain clarification on the scope, timeline, and specific information required. Align internal teams, and appoint a point of contact (e.g., a vendor contract manager) to channel information across and coordinate activities. Consider engaging an expert to support the organization and handle audit queries.
• During the audit: Maintain an audit trail of all interactions, including communication and information requests. Use secure information exchange platforms when sharing information with the vendor’s auditors. Seek clarification on any finding immediately and escalate to top management when required.
• Post-audit: Hold a debriefing session with the vendor auditors and other stakeholders. Thoroughly review the draft report and seek guidance on whether issues can be addressed before the final report is published. Hold a lessons-learned session with internal teams to identify improvements to be implemented throughout the software asset management lifecycle.

Analyze the business reasons underlying software utilization

Since a software license audit carries significant risk for the organization, there has to be a deliberate effort to frequently analyze the business reasons behind each software deployment in the enterprise. Using software usage analytics, the business and IT leadership should analyze the rationale behind any overutilization or underutilization of software packages by business units. To maximize productivity and eliminate waste, top management should regularly review the status of software usage and identify where there are governance gaps that result in software bloat or suboptimal usage, such as limited visibility, disjointed approvals, and poor configuration management.

The organization should also seek to identify the causal factors behind software license audit nonconformities. Because enterprises don’t necessarily deliberately engage in improper license use, the root cause is largely driven by governance failures where lack of understanding or inadequate controls lead to violations of contractual terms. Findings from internal audits as well as software usage analytics reports can go a long way toward helping determine corrective and preventive plans, which have to be implemented before the actual software license audit happens. Organizations must also recognize that vendors are driven to find nonconformities during software license audits because it is an opportunity to drive revenue growth by making companies upgrade their software packages to remain compliant.

Based on the analysis of business reasons behind software utilization, the organization should document and implement corrective action plans to eliminate causes of software license underutilization or violations. This includes streamlining acquisition, enhancing software asset management tools, and conducting regular awareness for business users and IT staff on the risks of software license noncompliance. This ensures that the enterprise is in a better position to navigate through a software license audit successfully.

Last thoughts

Software license audits by vendors will continue to be an expensive operational headache for IT teams, as they introduce risks of service interruption, fines, or damaged reputations. Managing software sprawl, coupled with vendors changing licensing terms frequently while being more aggressive with audit frequency, has meant that the risk of noncompliance is higher than ever.

Organizations must take deliberate steps to ensure that they are better prepared to undergo software license audits. Apart from enhancing their governance posture and conducting internal audits, investing in robust software asset management solutions can greatly minimize the stresses from vendor software license audits. There are many benefits associated with implementing the best practices described in this article for any organization wanting to minimize the risks of hefty penalties that invariably arise from software license audit noncompliance.