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M&A Glitches in Software Licensing Highlight Disconnect between Finance and IT

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mergerWhile scrubbing the web for my daily dose of the news, I came across an article discussing how the UK bank First Choice had been fined by the BSA because a company it had recently acquired was using software that had not been properly licensed. Michala Wardell, committee chair for the UK arm of BSA/The Software Alliance and author of the piece, uses the example of First Choice to emphasize that finance executives should, but often do not, pay close attention to software licensing during M&A activities.I was particularly struck by a statistic quoted by Ms. Wardell suggesting that only 7% of finance executives are confident that the software in their organization is correctly deployed and licensed. This figure gets to the heart of a much larger issue—that despite widespread recognition within organizations of the licensing landmines that potentially exist, there is generally very little executive appetite for investing in software asset management technologies and initiatives needed to set organizations squarely on the path toward compliance.Software assets comprise an increasingly large portion of most organizations’ IT budgets. Without the right software, a computer or handheld device is no more useful than a doorstop. This blind spot on the part of finance executives—who tend to treat software assets more like office chairs than a collective set of investments that fuel productivity and human potential—is an area of potential vulnerability that is magnified when companies are being bought and sold.

Organizations engaged in mergers and acquisitions go through incredibly detailed due diligence processes that cover everything from operating expenses to key employees’ social media activities. Marketing plans and product roll-outs are scrutinized under a microscope, but the very foundation of day-to-day operations—software—slips below the M&A radar in many more cases than not.

Part of the problem lies in the unfortunate reality that many businesses continue to assume that license management and software compliance are IT problems. And while IT is generally on the hook for performing internal software audits, M&A activity is usually driven by financial or business development executives, who don’t seem to be empowered to set in motion the necessary processes by which license deficits are discovered and documented—and ultimately remedied—as part of standard M&A due diligence. Unlicensed software must be accounted by finance executives and treated as balance sheet liability, just like anything owed to vendors, creditors, or other external parties.

If the acquiring business doesn’t have a means of auditing and ensuring that any licensing costs associated with an acquisition are properly identified and accounted for in financial statements, they are not only over-valuing the company being purchased, but they are also on the hook for any true-up costs and copyright infringement penalties in the event of the inevitable software audit. As First Choice found out, the financial repercussions of non-compliance can be unpleasant.

We recently blogged about our conviction that it’s time for software asset management to take its place on the boardroom agenda. Business and finance leaders need to fully recognize the implications of lackadaisical software compliance practices; the First Choice experience shows that a strong commitment to proper license management should move up many notches on the corporate agenda—particularly in M&A scenarios in which another company’s license transgressions become your own.