Software Licence Reuse, an opportunity for savings in Europe

By Gilles Goulay

Perpetual licences is still representing the vast majority of software expenditures in businesses and almost all of the installed bases. Since the decision of the European Court of Justice to legalize software licence reselling (C128-11 / 3 July 2012), a massive multi-billion euro secondary market for software reuse has raised in Europe, providing significant saving opportunities and new providential self-financing opportunities for European companies, whatever their sizes.

Therefore a new paradigm concerning the software licence valuation is born, meaning multiple consequences that every European company can take advantage from.

Almost 90% of the software licences bought by companies of all sizes are concerned. The eligibility rules are simple, licence must be perpetual, fully paid, have been originally placed on the market of the EU with vendor’s consent, the previous owner must have rendered unusable his copy and obviously, the re-licenced recipient must use the software in accordance with the terms of the original licence. All on premise licences are concerned, whatever the software vendors are.

This remaining value after usage brings tremendous changes for IT Asset Management. The first advantage is an opportunity for big savings on software licence budgets. Second-hand discounts range between 40% and 90 % compared to software vendor prices, in addition, by making available old versions, every organization can take advantage from an old metric when the current versions rely on a new rule which is less favorable. By selling the unused or decommissioned licences, outstanding incomes can represent up to 5% of the overall IT budget.

The typical application life cycle is based on three main stages: development, production and at the end: decommissioning. It’s during production that most of the time occur missing licences or compliance issues, unfortunately this situation is not comfortable for negotiating with software vendors. When the application is decommissioned, the licences are given up, however since the maintenance contract was active, this is the current version which is eligible to resell! This empowers the roles of Software Asset Managers, from the main scope focusing on risk management and fighting with software vendors in crisis situations, from now on they can involve in a broader role where they contribute to making application TCOs lower.

Low prices are not the only advantage of this secondary market, it enables to gain independence from software vendors as well. It’s an alternative when the product policy forces the customers to migrate to Saas solutions, to get an old version, even if is not supported anymore or to answer temporary needs like adding more test or acceptance platforms during application developments.

There is an immediate and obvious advantage that large organizations, often distributed on different sites and geographies, can benefit. This ruling overcomes any contract limitation about software licence transfers. Therefore they can perform internal reassignments and avoid purchases of software licences that they already own somewhere.

C-Level managers should also consider the value of their IT software licence portfolio. Because listed companies publishing consolidated accounts need to provide a fair valuation of their assets. IFRS #13 recommends relying on Information obtained from market representatives. Therefore, applying a 0€ net book value after amortization your company degrades its balance sheets and underestimates its financial health.

In a perspective of corporate merger or acquisition, taking into account the real value of software assets in the valuation of a company will reduce the share of goodwill. In addition, it will optimize the information system post merger integration by monetizing unused assets and lower the price of required purchases.

This secondary market can be challenging for organizations which are not aware of some basic rules. The licence must strictly comply the software vendor catalog definition, depending on product popularity, the scope of the broadcast can be very wide in order to facilitate the matching between requests and offers.

The major pitfall of this secondary market is the compliance with the EUCJ ruling. Buyers and sellers must check each compliance topic. Due to the intangible nature of software licences, the documentation involving the transfer must include the proof of entitlement and the traceability of the ownership.

Since maintenance is a service, it is not transferable with the software licences. However solutions exist. Before considering an option, every organization should challenge the value added by the maintenance. Then running the software without maintenance or buying such programs from software vendors or third party service providers can be considered.

Since the first access to this secondary market will highlight a proof of concept, we recommend to prioritize a simple transaction based on low hanging fruits and to involve a trusted third party to manage the overall process. A dematerialized exchange of documents will help to fasten the overall transaction.

About the Author

Gilles Goulay is the COO for Softcorner