Many software companies rely on OEM (Original Equipment Manufacturer) agreements, where their software is embedded into a customer’s end product. In these arrangements, royalties or license fees are typically based on the sale of that end product, often calculated as a percentage of revenue.

On the surface, these agreements seem straightforward. In practice, they are one of the most common areas where revenue leakage occurs.

When speaking with software organizations about risks in their OEM licensing programs, we consistently hear two responses:

1. We already have compliance checks in place on our OEM reporting  

2. We trust our customers and have strong relationships with them  

In our experience auditing customers across industries and technologies, both statements can be true, and significant underreporting can still exist.

Below are two common compliance myths and what organizations often miss.

Myth 1: Compliance Checks Ensure Complete Reporting

Most internal compliance checks validate what has been reported. They rarely confirm whether everything that should have been reported actually was.

Organizations may verify:

• Royalty rates are applied correctly  

• Reported volumes align with expectations or public estimates  

However, critical gaps often go unchecked:

• Additional product families, generations, or revisions using the licensed software are not included in reporting  

• The unit of measurement utilized in reporting is incorrect, such as reporting the inaccurate number of instances used in a customer end product

• Deductions from net sales are taken inconsistently with contract terms  

These gaps are not typically visible through standard compliance processes, which focus on known data rather than undiscovered usage.

Myth 2: Strong Customer Relationships Reduce Risk

Trust is important, but it does not eliminate complexity.

Tracking and reporting OEM software usage is inherently challenging. Unlike traditional software licensing, OEM royalties are based on distribution of end products, not deployment in the customer’s environment. This removes the ability to rely on standard software asset management tools.

Instead, organizations must depend on manual processes and seamless collaboration across multiple functions.

This often involves:

• Procurement teams managing software acquisition  

• Product teams embedding the software into end products  

• Finance teams tracking and reporting sales and distributions  

Even well-run organizations encounter breakdowns due to:

• Complex royalty structures, including varying units of measure, tiered pricing, caps, and minimum commitments  

• Required cross-functional collaboration to ensure new product versions, variants and generations are accurately identified and quantified in reporting

• Long product life cycles, especially in industries like automotive and industrial manufacturing, introducing the challenge of employee turnover over the lifespan of the licensed product generations.

These breakdowns lead to gaps in reporting that share a common characteristic: they are often invisible to the software licensor without access to the customer’s underlying sales and distribution data.

How to Identify and Recover Lost OEM Revenue

Because these risks are difficult to detect internally, many organizations are unaware of the extent of underreporting within their OEM customer base.

Connor helps bridge this gap through independent third-party royalty audits. Our approach is designed to be efficient and collaborative, working closely with your customers to:

• Assess whether reported royalties are complete and accurate  

• Identify gaps in reporting across products, units, and calculations  

• Provide clear, actionable findings  

This process enables both parties to resolve historical discrepancies while strengthening the relationship through improved transparency and alignment on contract terms.

Key Takeaway

OEM agreements are highly valuable but inherently complex. Even organizations with strong controls and trusted customer relationships can experience meaningful revenue leakage. The challenge is not intent. It is visibility.

Gain Clarity on Your OEM Revenue

If you rely on OEM agreements for revenue, it is worth asking a simple question: Do you have full visibility into what is being reported and what may be missing?

Connor works with software companies to identify gaps in OEM royalty reporting and recover lost revenue, while maintaining strong customer relationships.

Contact us to learn how a targeted OEM royalty audit can provide clarity, recover value, and strengthen your licensing program.