Taming the compliance beast: A balanced approach to license misuse
Nutanix is a cautionary tale for sales and pricing teams, but draconian audits aren’t the answer. License misuse costs money in the short term; an overresponse can lose the customer in the long term.
Nutanix, a Cloud software company itself, hasn’t had an easy few months. Employees abused access to evaluation software by using it for production code, costing it $11M in unplanned fees. From the Wall Street Journal:
The San Jose, Calif.-based company said on Wednesday that the software, which Nutanix was supposed to only evaluate, was instead used for business purposes by “individual departments,” and certain employees intentionally concealed their actions to one of the vendors. The inquiry also revealed a “material weakness” in internal controls on financial reporting, which led to an “immaterial understatement” of expenses and liabilities going back to August 2014, Nutanix said.
Nutanix’s audit committee concluded that software from two vendors was used in a “noncompliant manner” over multiple years. Those misuses included “interoperability testing, validation and customer proofs of concept, training and customer support,” the company said.
Nutanix estimated cumulative expenses of $11 million as a result of the noncompliant software usage, representing “the estimated accumulated amount for past usage of evaluation software” over a multiyear period, a spokeswoman said. The company also expects to spend low-single-digit millions for “ongoing usage of the software on an annual basis.”
The parable has its morals: customers should be compliant, vendors should be vigilant, and bad actors that err will face their comeuppance. But business isn’t a parable – it’s real relationships with nuances and tradeoffs. It’s worth asking: should companies crack down, and if so how? Vendors should balance the financial loss with customer trust – after all, they'll be less willing to buy or upgrade if they have a bad sales experience. And there are ways to avoid the problem upfront or mitigate it post-hoc.
Head off misuse beforehand
Companies misuse licenses for many reasons; not all are malicious. The buyer isn't the end user, and usage can be unpredictable. A company may want to be compliant but lack a way to track usage. End users may not know the licensing nuances. They may have an unexpected surge of usage. A litigious vendor going after a well-meaning or oblivious CIO could make them rethink the relationship.
Getting every dollar can boost sales in the short term but mitigating the problem and showing trust can be more valuable. Before moving forward, it’s worth asking whether there actually is a problem and if the benefits of compliance outweigh the downsides. There are a few ways to crack down:
Packaging: It’s easier to control usage if the tiering works with you. Instead of saying “this usage isn’t allowed”, control which features you make accessible.
Licensing: Make it easy to understand and follow usage terms.
Assigning licenses: Empower administrators by giving them tools to track use (and misuse).
Netflix navigated this dilemma well with password sharers. They had seen peak user growth and maxed out price increases, but there was a pool of hidden users: the 100M accounts with password sharers. Netflix used packaging to give sharers low-cost alternatives ($8 extra-member subscription or $7 ad-supported plan), easy assignment enforcement (wi-fi network checks), and clear messaging on usage terms.
The tax man cometh
If a customer is still abusing its licensing privileges, first understand why. Again, enforcement isn’t always the answer. Oracle, with its infamous audit teams, is a case in point.
Source: Manu Cornet, Bonkersworld
There are responses, of which I default to “capture money later” over “start charging now”. Again, the trade-off is upfront dollars now vs. long-term relationship. Here are some options:
Do nothing: Self-explanatory, easy. Likely best if there’s a momentary lapse.
Alert now, charge later: Warn customers that they are overusing and that they’ll pay more later. The early warning preserves trust and lets the buyer find extra budget.
Claw back cash: Go after the customer for unpaid dues. This could spoil the relationship, so there should be significant cash at risk, blatant misuse, and low future opportunity.
Whatever the decision, the process is as important as the action: commit to a course of action, deliver the message early, don’t have the seller be the “bad cop”, and be prepared to pivot. Netflix again did it well: it telegraphed its intent early, ran tests in limited countries, and avoided any retroactive response.
Interesting read Kareem!