You might think improving customer loyalty through compliance is a crazy statement. An oxymoron! In the end, we all heard the stories of how audits are damaging relationships, how licensees pull all of their investments the moment they receive an audit notification, and how audits create a zero-sum game. But is this really the case?
Over the past 15 years, I managed hundreds of license audits, both in the Software space, as well as for IP-based royalty agreements. My direct experience leads me to conclude that most reviews are not going to destroy your valuable relationships. If you set up the program correctly, put the right checks and balances in place, and adopt a customer-centric auditing approach, your relationships will benefit from it!
Let’s address the elephant in the room at this point. Not all audits will conclude amicably. And not all relationships will thrive post-audit. There are many variables in a licensor-licensee relationship that impact how the partnership works. Often enough, the positions are already adversarial before an audit, and the relationship is already damaged. Or, an inspection might uncover a massive non-compliance situation, which will erode all trust. And while those cases typically make headlines and shape the overall perception of compliance-related activities, the majority of engagements have a positive outcome.
Look for common Compliance objectives for customer loyalty
Licensing partnerships have one thing in common – both parties invested a considerable amount of time, energy, and other resources in creating a win-win situation and have a genuine interest for the relationship to thrive. The licensor has typically spent a ton of capital on R&D and Sales and Marketing to successfully bring their product (or intangibles) to the market. The licensee, in turn, sees the value of the offering and understands that using the licensed product or technology will positively impact their organization (could be a feature in their product, the usage of a brand name, or an application they use for internal purposes).
So, both parties see value in entering into this partnership as it is beneficial for each of them. Over time, their businesses evolve, requirements change, and stakeholders rotate.
When a licensor decides to send an audit notification, it means they are exercising their fiduciary responsibility towards their shareholders and stakeholders. For most organizations today, this is a standard business process. Equally, non-compliance rates remain at a steady high across industries, geographies, and technologies, so right holders need to take proactive measures to tackle these issues. Licensors face piracy, over-deployment of software usage, under-reporting of royalties, or supply-chain grey market activities (among many other aspects of non-compliance).
There are so many different flavors of non-compliance, as there are business models. And not all of them are by design, of course! A vast majority of non-compliance results from negligence, ignorance, or extremely difficult-to-read license agreements – all of them are part of the human element in this equation.
Naturally, the licensor wants to reduce non-compliance rates and get a fair return on their investments. There is nothing wrong with it. But they are equally interested in the partnerships they built and invested in with their customers. They want to fix systemic errors and encourage their licensees to comply with all the Ts & Cs of the agreements.
An audit can be a compelling event to look for common objectives on how to strengthen the relationship. A review offers both parties the opportunity to evaluate the investments made, consider future needs, and open the dialogue about how each party can support the other.
For software vendors, this could mean streamlining maintenance and support renewals, migrating their customer footprint to the cloud, or offer a subscription-based licensing model. Other commercial benefits are Upsell & X-Sell opportunities that arise as part of a well-run engagement.
Technology vendors can identify new business opportunities and form stronger alliances with their customers. They gain an understanding of how their technology is implemented or used, what might be missing and how their competitors position themselves. Obtaining feedback from your customers can help pivot their business model.
Licensees can also benefit from an audit as they can stress-test internal controls, accounting processes, record keeping, and IT systems. An audit often results in findings that the licensee must pay (sometimes with interest, late fees, contractual charges, or back-maintenance payments). Still, a review presents an opportunity to streamline their operations, uncover process gaps, and engage in open dialogue with the vendor on how to improve the partnership.
In each case, the common objective is to continue to thrive together.
In closing, audits don’t have to be adversarial. As both parties engage during the review process, opportunities arise to address challenges and look for common objectives. Not all audits will end on a positive note, but more often than not, a license compliance engagement can, and does, strengthen the relationship between both parties. An objective audit process is a crucial element to reduce possible friction and produce factual and accurate reports. An experienced third-party audit firm can bring that objectivity into the process and act as a neutral buffer when a situation is about to escalate.