Users Leery of Microsoft License Checks

They question the vendor's insistence that SAM program isn't an audit

Barry Libenson, CIO at Ingersoll-Rand Co., was skeptical earlier this year when Microsoft Corp. contacted his company about possible license-compliance problems yet insisted it had no plans to pursue an audit.

Microsoft claimed that the Hamilton, Bermuda-based tools and machinery manufacturer likely didn't have enough Office licenses, nor enough client-access licenses for SQL Server, based on its experiences with customers of comparable size and revenue.

But instead of invoking the audit clause in Ingersoll-Rand's contract, Microsoft suggested a collaborative approach and offered to engage a third-party consultant to help the company reconcile the products it was using versus the software it had purchased.

CIO Dale Frantz

CIO Dale Frantz "We said, 'This sounds like an audit,' " recalled Libenson. "But they recoiled when I used the word audit. They said, 'This isn't an audit.' It was almost like a script to make sure we didn't feel that way."

During the past year, Microsoft has approached some 1,200 U.S.-based corporate customers it suspects may not be licensed properly, based on the data mining of its volume-purchase history records, according to Juan Fernando Rivera, the software maker's director of worldwide software asset management.

But Rivera swears that license compliance wasn't the driving factor and audits won't be forthcoming, even though Microsoft often suggests potential license problems in its initial customer contact. Instead, Microsoft is trying to persuade those customers to participate in its Software Asset Management (SAM) program, which kicked off two years ago in the U.K. and launched a year ago in the U.S.

Under the program, Microsoft pays for its consulting partners to educate customers on the merits of asset management, help inventory their installed software, compare the inventory with license documentation, and make recommendations on policies and procedures. In the end, the customers get a chance to pay for unlicensed software, or "true up," without penalty.

So far, 570 U.S.-based companies either have completed a free SAM engagement or are in the process of doing so with a Microsoft partner -- 132 of which have attained SAM certification since it became available in November, according to Microsoft. The software maker plans to spotlight the SAM program this week in Boston at its annual Worldwide Partner Conference, as it works to scale the model during the coming year, Rivera said.

But before moving too far ahead, Rivera acknowledged that Microsoft might need to look back to revise some of the heavy-handed tactics that have bothered some customers, causing them to question the program's purpose.

A Computerworld investigation involving 51 companies -- including 14 that Microsoft contacted about the SAM program -- showed that many U.S.-based IT managers were confused, distrustful or downright angry after their companies had been accused of potential licensing problems in connection with pitches from Microsoft SAM representatives. In some cases, they later learned that the pitches were based on Microsoft's admittedly incomplete records. Some IT managers said they felt pressured to sign up for SAM reviews, and others said they resented the threatening tone of e-mails and telephone calls that sometimes escalated if they balked at participation in the SAM program.

"Let's be honest. If I didn't feel pressure, I wouldn't have done" the SAM engagement, said Charles Smith, IT director of New York-based Plaza Construction Corp.

In the end, the program worked well for him. He said he picked up some useful tips and confirmed that his record-keeping had been solid. Plaza had to pay Microsoft for only two pieces of software worth $1,000 when done, he said.

The positive experience with his SAM consultant, Universal Management Solutions LLC, took the sting away from his initial dealings with Microsoft's SAM engagement manager, who claimed Plaza's Office and client-access licenses didn't match up.

"They basically admit, 'Our database can be wrong; it probably is wrong,'" Smith said. He later learned that Microsoft's records indicated Plaza's installed base was 680 when it's really about 250, he added.

"I definitely will say I was angry," Smith said.

The irony is that the SAM program's goal is to "build a customer for life," said Rivera. He said Microsoft assumes positive intent on the customer's part and is just trying to solve customers' problems. "Customers are sometimes out of compliance without their even knowing," he noted.

Risky Business

But it can be risky business making accusations when records are incomplete. Rivera noted that Microsoft does not track purchases made with hardware makers or purchases of "full-packaged" products from retail stores. That's why it's so important for the customer, the partner and Microsoft to sit down and have a discussion, he said.

For "customers that have very low-volume license penetration," Rivera acknowledged, "we really don't have much in terms of records."

Auto Warehousing Co. is a dedicated Microsoft shop, yet it doesn't have a volume-licensing contract to purchase the vendor's software at discounted rates. CIO Dale Frantz said he knows the Tacoma, Wash.-based imported-auto processor pays more than it would with a volume license, but he prefers that method to help with asset tracking of the company's desktops.

Every time Auto Warehousing buys a PC from one of its two resellers or a local retail store, Frantz has a record of all of the software on the machine. He noted that whenever the company needs more client-access licenses for Microsoft server products, it always buys extra "so we constantly stay ahead."

"When I was promoted to be head of IT eight years ago, I vowed we would never have a licensing issue," Frantz said.

Imagine his surprise when Microsoft told him that he faced an "urgent matter" requiring his "immediate attention" after its licensing research team found Auto Warehousing might not be licensed properly.

Frustration and annoyance followed after Microsoft sent a series of threatening-sounding e-mails and refused to back down -- even after Frantz offered to produce detailed purchase records at the suggestion of his company's lawyer.

"I spent a few sleepless nights," Frantz said. "How do I go to the CEO and the board and let them know Microsoft is coming down on us? They would raise the question: 'Why are they doing this if they don't have cause?'"

No matter how much Microsoft insists its SAM reviews are not audits, that's still how many customers perceive them. Milton Bliss, CIO at Sunwest Management Inc. in Salem, Ore., said he may not have to capture every computer on his network with a federal marshal standing by -- but "it's still an audit," albeit "a whole lot friendlier audit."

Bliss said he initially felt threatened and wished Microsoft had been more forthcoming with the reasons it thought Sunwest needed to be audited. It was only after Tim Timmons, Sunwest's corporate integrity officer, contacted a Microsoft SAM official that he learned it might have had something to do with disparities between the employee number versus license counts.

Sunwest employs a staff of about 8,000 across 26 states, yet had only 600 Microsoft Office licenses and about 250 Exchange Server mail clients, according to Bliss. The company manages senior housing communities, and most of its caregivers interact with people, not computers, he explained.

Bliss said he also knew his company didn't have a good inventory tool, and he suspected that the company might be out of compliance. So Sunwest agreed to the SAM review with a Microsoft partner.

"The implication is the guillotine is about to fall on you if you don't get squared away," said Timmons. "But Microsoft assured me that is not going to happen. The only way we're going to get in trouble is if we found out that in fact we were lacking some licenses and we refused to purchase the licenses.

"Why would we do that? We want to know if we are out of compliance, and we want to make sure we stay in compliance," Timmons added. After having spoken to Microsoft officials, he now views the SAM program as a "win-win" for both the customer and the vendor.

Microsoft's SAM investments have paid off handsomely -- in some countries, the company gains $40 for every dollar spent on the program, Rivera said. In the U.S., the ratio is 15-1, he estimated.

Rivera was emphatic, though, that Microsoft was not looking for a specific return on investment when it started the SAM program. "Our main driver," he stressed, "is customer and partner experience."

Paul DeGroot, an analyst at Directions on Microsoft, said the SAM program is being driven by Microsoft's partner group rather than by its licensing team, and customers can expect the company to raise the profile of the SAM program among its partners.

As it now operates, the SAM program essentially provides Microsoft partners with free sales leads. At the end of their Microsoft-paid SAM engagements, the third parties have a chance to sell their consulting services or tools.

"It's a great deal for the consulting company. We can't understand why any partner would turn down the opportunity to do this," said David Burns, a principal at Universal Management Solutions in Sammamish, Wash.

Burns estimated that 20% of his company's more than 100 SAM engagements have led to sales of either consulting services or its license inventory and management tool, called licenseITall.

Benefits to Microsoft

And the future revenue opportunity doesn't stop with the partners. Once the consultant has assessed a customer's license situation, it makes recommendations about volume-licensing options that could be more beneficial to customers. Those recommendations also happen to benefit Microsoft whenever the customer elects to upgrade its licensing status -- especially to an Enterprise Agreement (EA).

The EA is typically the most lucrative volume-licensing deal for Microsoft because a customer must commit to run a standardized package of its software on every desktop PC. In return, the company receives better pricing and the rights to all covered products released during the three-year contract time frame, as well as training and support benefits.

But Rivera maintained that "SAM is not about selling." He said customers are not forced to accept the recommendations made by partners or Microsoft, and overlicensed customers might even be advised to downgrade.

"It's not about squeezing the customer and trying to get as much money as possible from them," Rivera said.

"It's about the benefits to the customer," he professed.

Both of the SAM reference accounts that Microsoft supplied to Computerworld wound up signing deals for EAs after their consulting engagements -- despite failing to meet the eligibility requirements for the program. To qualify for an EA, a company must have 250 or more desktop PCs.

Lovitt & Touche Inc. had about 220 employees at the time of its SAM engagement and took up a recommendation to move up to an EA, according to Ian Crawford, manager of IT at the Tucson, Ariz.-based insurance agency.

A nother Microsoft reference account, a software development company, had only 174 clients at the time of its SAM engagement, according to an IT project manager at the company.

But the company agreed to pay for the full 250 clients after Microsoft came through with training and service incentives, the IT manager said. In one fell swoop, the company was able to clear up license-compliance woes that had resulted from its 2004 sale to another company, pave the way for expected growth, reduce the financial hit by spreading payments over three years and ease the burden of software tracking for its four-person IT staff, the manager added.

Since EAs cover all desktop PCs, each running a standard set of Microsoft software, there's no need to figure out who's running what. Companies true up once a year based on PC count.

While that benefits EA holders, it also opens the door for high-pressure sales tactics. Alvin Park, an analyst at Gartner Inc., noted that for the past five years clients have complained about Microsoft sales representatives mentioning potential license-compliance problems and then telling them that "an Enterprise Agreement will make that go away."

Whether Microsoft intended it or not, Park said, some clients felt they were being threatened with an audit. When he reported the incidents, Microsoft claimed that it didn't engage in such practices and would fix the problem, Park said. But he noted that he still hears monthly from at least two clients "who think they're being manipulated into signing an agreement they wouldn't otherwise sign because they know they've got some software compliance problems."

Libenson vowed that will not happen at Ingersoll-Rand, even though he has had numerous conversations in which Microsoft has claimed an EA would be "the solution for everything." He said that given Microsoft's trouble meeting scheduled product-release dates, the EA would become beneficial only if his company needed "voluminous amounts" of support from Microsoft. That's not the case, he added.

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