Software License Management: Tips, Tools, and Key Features

As businesses increasingly adopt a hybrid model of on-premises and cloud-based software, efficiently managing software licenses has become more critical. Effective software license management (SLM) helps companies reduce costs, ensure compliance, and mitigate security risks. Understanding how SLM works and the best practices associated with it can prevent costly mistakes and optimize software usage.

What Is Software License Management (SLM)?

Software license management involves tracking, managing, and optimizing the use of software licenses across an organization. This applies to both on-premises software, where licenses control locally installed applications, and cloud-based subscription software (SaaS), which operates on a recurring licensing model. SLM ensures that businesses use their licenses efficiently, adhere to contractual agreements, and remain compliant with legal standards.

Hear more on software license management in terms of SaaS from Zylo co-founder Ben Pippenger on the SaaSMe Anything podcast.

What Are the Types of Software Licenses?

Understanding the various types of software licenses is key to effective software license management. Each license offers different levels of control, distribution rights, and usage. Below are the most common categories of software licenses businesses encounter:

Proprietary Licenses

A proprietary license grants the user rights to use the software but restricts modification, distribution, and access to the source code. The software remains the vendor’s intellectual property, and users must comply with the specific terms set by the license.

Limited Use Licenses (Freeware & Shareware)

• Freeware: This type of software is available for use at no cost but typically restricts modification, distribution, or commercial use. Unlike open-source software, freeware often keeps the source code hidden from users.
• Shareware: Shareware is distributed on a trial basis, allowing users to test the software before purchasing a full license. After the trial, continued use generally requires payment, with restrictions on modification and redistribution.

Open Source and Copyleft Licenses

• Open Source: Open-source licenses allow users to modify, distribute, and use the software freely, as long as they comply with specific terms, such as attributing the original creators.
• Copyleft: Copyleft licenses, such as the GNU General Public License (GPL), require that any modifications made to the software be distributed under the same licensing terms, ensuring that derivative works remain open-source.

Subscription-Based and Concurrent User Licenses

• Subscription-Based License: This model provides access to software on a recurring payment basis, typically monthly or annually. It is common for SaaS platforms, where businesses pay for continuous access and updates.
• Concurrent User License: These licenses allow a specific number of users to access the software simultaneously, maximizing cost efficiency by limiting active users rather than total employees.

Public Domain License

A public domain license allows anyone to modify, distribute, or sell the software without restrictions, as intellectual property laws like copyrights or patents do not protect it.

Lesser General Public License (LGPL)

The LGPL is a more flexible version of the GPL. It allows developers to integrate LGPL-licensed components into proprietary applications as long as modifications to the LGPL-licensed parts remain open-source.

Importance of Compliance in Software License Management

Compliance with software license agreements is critical for avoiding legal, financial, and operational risks. Noncompliance occurs when businesses exceed authorized users, mismanage licenses, or fail to adhere to licensing terms. The consequences of noncompliance include fines, legal penalties, increased operational costs, and potential reputational damage.

Staying compliant ensures that companies use their software legally, pay for the correct number of licenses, and avoid unexpected audits. Compliance also helps businesses manage software assets efficiently, reduce the risk of legal actions, and align software usage with company policies and industry regulations.

Key Compliance Standards in Software License Management

• SOC 2: Focused on data security, availability, and confidentiality, SOC 2 is especially crucial for SaaS and cloud-based software. It ensures that organizations manage data responsibly and protect against breaches or service interruptions.
• NIST Cybersecurity Framework (NIST 800-53): NIST offers security controls and best practices for protecting information systems. By following these guidelines, organizations reduce the risk of data breaches and ensure that software license usage meets high-security standards.
• ISO/IEC 27001: An international standard for information security management systems (ISMS), ISO/IEC 27001 ensures that software and systems are secured, helping organizations follow best practices in protecting their data and licenses.

Benefits of Software License Management

Efficient software license management (SLM) provides significant operational and financial benefits. These include:

Operational Efficiency and Cost Savings

Gaining visibility into software usage and licenses can help businesses eliminate redundant licenses and underutilized software. This data helps identify opportunities to rightsize license allocations, preventing unnecessary spending. Additionally, SLM enables companies to streamline processes, avoid costly audits, and stay compliant with vendor agreements.

Compliance and Cybersecurity

SLM ensures that businesses remain compliant with licensing terms, avoiding potential fines or penalties. It ensures that businesses only use what they pay for, and pay for what they use. With improved visibility, businesses can align purchases with actual business needs. They can also mitigate security risks by ensuring that licenses are properly managed, especially when employees leave, or licenses are no longer needed.

Reporting and Accountability

With detailed reporting capabilities, businesses can track software usage and license allocation in real time. By monitoring key software license management initiatives like downgrading, deprovisioning, and rightsizing, companies can demonstrate the value of SLM. This transparency improves decision-making, helps justify software investments, and creates accountability across the organization.

Consequences of Poor Software License Management: The Financial and Operational Risks

Our research shows that, on average, 55% of licenses go unused for large enterprises, equating to $127.3M in annual wasted spend. Neglecting license management leads to a range of financial and operational problems:

Underutilized Software

Many businesses purchase more software licenses than they use, leading to wasted resources. Known as shelfware, these unused licenses result in significant financial losses that could have been avoided with better oversight. Additionally, lacking usage data can lead to poor renewal decisions, as organizations fail to secure the correct types or amounts of licenses to match their business needs. 

License Overages and Compliance Issues

Overusing software licenses beyond what has been purchased can result in costly overages. These violations can lead to fines, legal action, and tarnished vendor relationships. By tracking licenses effectively, businesses can avoid these compliance issues.

Data Security Risks

Businesses risk unauthorized access to sensitive data when licenses aren’t properly deprovisioned after an employee leaves. This presents a serious security vulnerability, as former employees or third parties may access company systems without permission.

Challenges with Showbacks and Chargebacks

It’s challenging to allocate costs accurately to departments without accurate usage data. This lack of visibility hinders showback or chargeback processes, as license usage is a critical data point for calculating department-specific expenses and ensuring fair resource distribution. 

Use Cases for Managing Software Licenses

Managing software licenses isn’t just about compliance – it’s about maximizing value, reducing waste, and improving decision-making. Effective license management controls costs, boosts efficiency, and ensures alignment between IT and business objectives.

Enterprise Software License Management

Enterprise software license management involves tracking software usage, identifying underutilized licenses, and reallocating resources to optimize value. By analyzing usage data, IT and SAM teams can reduce waste and ensure licenses are properly deployed where they’re needed. This is especially critical with apps with complex licensing structures and multi-org instances, like Salesforce licenses.

This approach also ensures compliance with vendor agreements, minimizing the risk of penalties from audits. Ultimately, it maximizes the return on your software investments while reducing operational costs.

Cost Allocation

Using cost allocation methods like showbacks and chargebacks promote accountability by assigning software costs to individual departments. Showbacks provide transparency, while chargebacks require departments to cover their software expenses. This practice encourages departments to be mindful of their software usage, helping reduce unnecessary costs and driving more efficient budget management.

Renewal Decisions

License renewals are another key aspect of license management. IT and SAM teams, working with Procurement, analyze usage data to determine the right number of licenses to renew. This data-driven approach ensures companies only pay for what they actually use, saving money. Collaboration between IT, SAM, and Procurement ensures that renewal decisions are informed and cost-effective, optimizing software investments.

Challenges in Managing Software Licenses

Managing software licenses effectively requires full visibility and open communication across departments. Without these, businesses face several key challenges:

Shadow IT and Unauthorized Software Use

Shadow IT—when employees use unapproved software—creates visibility issues, security risks, and compliance challenges. Our research shows that nearly 40% of SaaS apps in use are unauthorized, underscoring the need for better software management. Without visibility, businesses face overspending and compliance risks. A robust software management solution helps regain control, reduce waste, and improve security.

Maintaining Up-To-Date License Records

Accurate license records are key to making informed decisions on renewals, reclamations, or downgrades. Outdated data can lead to overspending or compliance issues. Legacy tools and spreadsheets often fail to keep records current. Modern management platforms provide real-time data, making optimizing costs and staying compliant easier.

Lack of Visibility

Businesses often rely on outdated tracking methods, like spreadsheets, that don’t provide a complete picture of license usage. This can lead to over-purchasing, noncompliance, or missing opportunities to reclaim unused licenses.

Departmental Silos

When IT, Procurement, and other teams fail to communicate, license decisions may be made without understanding the broader implications that affect hundreds, even thousands, of employees. This disjointed approach results in missed opportunities for cost savings and inefficient license management.

Sam Chung, Chief Transformation Officer at Salesforce, shared how to overcome departmental silos using what he called “business intimacy” at a past SaaSMe session.

Outdated License Records

Keeping license records up to date is critical for making informed renewal and reclamation decisions. Legacy tools often fail to track software usage accurately, leading to wasted licenses or compliance issues.

Automated Renewals

Automatic renewals can prevent businesses from taking the time to assess licensing needs and make necessary changes. Without time to review licenses against current business requirements, companies may renew subscriptions they no longer need.  

The Cost of Software Licenses

Duplicate licenses or subscriptions can lead to unnecessary costs, diluting purchasing power and leading organizations to pay for software they don’t actually need. 

Change Management

Effective change management is essential when implementing new license workflows, such as reclamations or downgrades. Clear communication and cross-departmental buy-in are necessary to reduce resistance to new processes.

Key Features to Look for in License Management Software

A software license management tool must offer comprehensive visibility and reporting features to help businesses manage their licenses effectively:

Real-Time Visibility and Tracking of Your Software License Inventory

Knowing what software you have is the first step to effective license management. A centralized software license inventory provides businesses with real-time data on license usage, helping prevent overages or underutilization.

Streamlined License Renewals

Centralizing renewal and contract data gives you clear visibility into upcoming renewals, helping you rightsize licenses and avoid unnecessary costs. 

Data Integration

Quality integrations with other platforms ensure that data about users and software licenses is accurate and up to date. This reduces redundancies and allows businesses to monitor license usage seamlessly.

Legal and Contract Compliance

License compliance ensures your business stays within contract terms and avoids penalties. Automated tools provide insights to spot potential overages or underutilized licenses, helping reduce waste and manage costs effectively.

Improve Cybersecurity

Identifying apps with poor risk scores is critical to strengthening your security posture. Effective software management highlights these risks, helping mitigate potential vulnerabilities.

Cost Optimization

Software management tools provide visibility into spend per application and license, offering cost-per-user metrics that help optimize expenses and reduce waste.

Automated Reports

By automatically generating and distributing reports, businesses can maintain transparency and hold departments accountable for their software usage. These reports provide valuable insights into compliance and cost-saving opportunities.

Software License Management Best Practices

Best practices for software license management revolve around proactive measures that prevent compliance violations and optimize license use.

Regular Compliance Checks and Continuous Monitoring

For on-premises software, periodic audits help ensure compliance, but they often lack the real-time visibility needed for dynamic license management. In contrast, managing SaaS licenses involves continuous discovery, with automated alerts for capacity limits and renewal reminders. This ongoing approach enables proactive adjustments and supports regular security reviews. 

Vendor Relationship Management

Accurate usage data allows for better negotiations with software vendors. Businesses can renegotiate contracts to eliminate unused licenses and optimize their software spending.

Training and Awareness

Educating staff about the importance of license management improves efficiency and reduces waste. When employees understand license workflows, like reclamation or downgrading, they are more likely to follow the processes that benefit the business.

Partner with Procurement to Streamline Renewals

Collaborating with your Procurement team is essential for optimizing software renewals. By bringing forward accurate license data, Procurement can renew the correct number of licenses based on actual usage. This partnership ensures you aren’t overpaying for unused licenses or scrambling for more as needs increase, ultimately driving cost savings and operational efficiency.

Use Software License Management Solutions

Managing both on-premises software and SaaS applications requires specialized tools for each. These tools give you a centralized way to track and manage licenses, whether for legacy systems or cloud-based software. An SMP helps ensure compliance, reduce spend, and keep your entire software ecosystem running smoothly.

Keep Your Licensing Data Current with Continuous Updates

Software license management isn’t a one-time task. Ongoing discovery and regular data syncs are crucial to keeping your system of record up to date. Continuous license usage tracking ensures you stay compliant, avoid unnecessary renewals, and adapt your strategy based on current needs. Always-on discovery helps ensure that your licensing data is accurate and actionable.

Software License Management FAQs

These frequently asked questions (FAQs) offer concise answers that help clarify key aspects of software license management (SLM) and address common queries.

What is a software license management tool?

A software license management tool helps businesses track, manage, and optimize their software licenses. It ensures compliance, monitors usage, and provides insights to reduce costs associated with over- or under-utilized licenses.

What are the consequences of not managing software licenses?

Failing to manage software licenses properly can lead to financial waste, such as paying for unused licenses or incurring fines from audits. Operationally, businesses may face service disruptions if licenses are not renewed on time. From a security standpoint, unmanaged licenses can lead to unauthorized access to sensitive systems.

What is an example of software licensing?

A common example is a subscription-based license for cloud-based software-as-a-service (SaaS), where businesses pay a recurring fee for a specified number of users. Alternatively, perpetual licenses allow one-time payment for software that is installed and used on-premises indefinitely.

What is the most common software license?

The most common types of software licenses are proprietary licenses for commercial software, which restrict modification and distribution, and open-source licenses, which allow users to freely modify and share the software.

How do companies keep track of software licenses?

Companies use specialized software license management tools to maintain a centralized inventory of all licenses. These tools monitor usage, track renewals, and provide reports on license allocation, helping businesses ensure compliance and avoid over- or under-licensing.

How do I handle licensing for software used on multiple devices or by multiple users?

Many licenses, like concurrent user licenses, allow businesses to manage multiple users accessing the software at the same time. Alternatively, some licenses are issued per device, meaning each device requires its own license.

Efficient Software License Management with Zylo

Zylo’s comprehensive software license management solutions offer businesses the tools they need to gain visibility, optimize costs, and ensure compliance. No matter the size or complexity of your SaaS portfolio, Zylo simplifies license management for enterprises of all sizes.

Ready to streamline your software license management? Contact Zylo to explore our solutions and discover how we can help you take control of your software assets today.