Why does cloud software lead to increased audits of “classic” software?

Software vendors conduct audits. Some more frequently, others less frequently. It’s been that way for quite some time. No one could really predict when a company would be audited. As a company, you should be properly licensed at all times, neither over-licensed nor under-licensed. Vendors use the audit for several things. First, to check if enough licenses have been purchased in the company for the products being used. Whether a company is overlicensed, on the other hand, is of no interest to the manufacturers.

Why do manufacturers love SaaS?

Now, software vendors have also realized that the SaaS model offers advantages for them as well. A key point here is that companies can present themselves as cloud companies if many customers use their SaaS solution. Thus, they appear innovative and progressive and this delivery model is also rewarded in the stock market. SaaS products are sold as subscriptions, which means that the manufacturer has less fluctuation in its revenues than with a one-time purchase of a perpetual license and subsequent maintenance.

The monthly/annual cost of subscriptions will initially be less than the purchase of a perpetual license. However, from the vendor’s point of view, it is quite easy to calculate the break-even point for each product, how long a subscription has to run in order to become more expensive than the purchase of a perpetual license plus maintenance. As soon as this point is exceeded, the provider earns more money and thus increases his profit. Depending on the provider, the point is already reached between one and three years.

SaaS contracts typically include automatic price increases, which allows the vendor to increase revenue without having to discuss it with their customers.

Perpetual licenses hinder the transformation of the business model towards. They shed annual maintenance costs, but the perpetual right to use the software itself discourages customers from purchasing new products. Gartner predicts that perpetual licenses will no longer be available for re-purchase after 2025. In addition, maintenance and support will only be available until the next full version update and a short period thereafter. Once maintenance and support have been discontinued, the option remains to maintain the software themselves or through third parties, which can be risky and costly. Thus, vendors are increasing the pressure to move to the cloud. It is doubtful whether old licenses will still be credited at this point.

Why are manufacturers now auditing more?

To accelerate the migration to cloud products, vendors will pull out all the stops. Companies that are not yet ready to migrate to the cloud and are holding on to their perpetual licenses will be increasingly audited. In the process, auditors will try everything to make customers look mislicensed. Subsequently, vendors will make a “kind and excellent” offer if you move to the cloud solution. In this case, the vendor will “generously” waive the contractual relicensing at list prices if you accept the offer. This will leave you with little choice but to do just that. If you are correctly licensed, on the other hand, you do not need to worry that the manufacturer can use the audit to create leverage.

Therefore, be prepared for the number of audits to increase in the coming years. It is also advisable to develop an alternative strategy now and play through all possible scenarios in order to decide which path you want to take in the future. In doing so, you should also consider the possibility of switching providers. Moving to cloud solutions ties you closely to the vendor. Exports of company data in the event of a subsequent change of provider can be made difficult or impossible. In addition, it must be noted that, according to legal requirements, some company data must be retained for at least 10 years. If you decide to switch providers and the old provider does not offer an export function, you may have to continue paying the old provider for the entire period. Think carefully about your choice of cloud provider.

An important component of a good SaaS strategy is planning for increased budget requirements in good time. Gartner predicts that the cost of software will increase by at least 35% by the end of 2025. That’s a steep increase that should not be ignored.

Conclusion

The number of audits will increase as vendors will use audit results as potential leverage to move to SaaS.

The manufacturers are increasingly gaining power over the customers, as the customers are tied to the manufacturers (“vendor lock-in”). A vendor change requires a lot of planning and causes high migration costs. This gives the manufacturers the opportunity to set the prices and dictate the conditions.

In the long term, the manufacturer will earn more money from the subscription fees than from the sale of perpetual licenses.

For all important software products in your company, you should run through all scenarios in good time and think about a strategy for the future.