European SAM teams have been able to buy and sell software licensing on the secondary market since the EU ruling in 2012, but it seems that only now is the market beginning to gain significant traction.
I recently caught up with Habibou M’baye, CEO of Softcorner, an eBay-like trading platform for buying and selling second hand software assets, on progress being made in the secondary software market.
Note: For readers outside Europe (especially the free market of the USA) – it’s not that second software trading is not possible, but to my knowledge there is no legal precedent. It would take a corporate to “take one for the team” and prove that, like the sale of a paperback book, it’s possible to trade software whilst also respecting intellectual property.
Q. In the context of the 2012 European ruling on secondary software – When was SoftCorner formed and please describe your journey to date?
We created SOFTCORNER in early 2014. 18 months earlier, EUCJ took this important ruling on secondary software, and since controlling IT expenditure has always been a major challenge for organization’s IT governance, we’ve quickly realized that the tremendous savings on software license budgets, enabled by software asset remarketing, were a huge opportunity for businesses of any kind.
However at the same time, we understood that certain conditions remained to be met before this market took off, especially with larger accounts. Indeed, despite larger companies facing lots of software audits, SAM was still a new topic (at least in France), and businesses poor maturity in this area and lack of understanding was a barrier to development of the secondary market.
Our early development has therefore been mainly focused on SMEs, and on opportunistic needs. During that time, we were refining our processes and our business model, leading POCs with some of Europe’s biggest accounts, and involved in the Parisian startup ecosystem, we have established important business partnerships (i.e. creation of a specific guarantee for licenses trading with AXA), and raised funds.
Today, while we see a rising interest for secondary software market, among European Large accounts, we are proud to be the first European software license exchange awarded seal of excellence 2017 by the European Commission.
We bring together a community of nearly 2,000 organizations including over 20 large corporates, hundreds of SMEs, around a strong set of trading rules and partnering SAM experts or 2nd hand software brokers from 9 countries.
In 2017 we introduced QUOTUS, the first price index for second hand software licensing.
Q. The secondary market is experiencing somewhat of a breakout, whilst buying and selling secondary software has been a concept for a few years – why is it suddenly gaining traction?
First, the SAM maturity of companies has improved significantly. While there is still a long way to go, more and more companies now have a team dedicated to managing and optimizing their software assets, and these people have naturally become evangelists for us and the secondary market: aware of both compliance and cost reduction, they are indeed able to take full advantage of this market while controlling potential risks.
Under their leadership, we are seeing the emergence of less “one-shot” approaches, aiming to include the use of the secondary market in their CAPEX reduction strategy and project governance as an extension of their SAM approach, whether it is by purchasing or selling.
Operated in this way, the software asset remarketing proves to be an effective lever for mastering the life cycle of software assets and controlling costs of legacy software systems. The savings and gains are delivered quickly, and positively impact the company’s budget providing manoeuvring room for strategic investments and transformation.
The other important factor in the development of the secondary market, is the way in which the ecosystem is progressively structuring around this issue.
While there is still much to be done, thanks to outreach efforts and word-of-mouth success stories, companies are more aware of and understand better their rights to purchase and resell used licenses. They also perceive more accurately the extent of the financial potential.
SAM consultants also start to take the subject into account in their optimization recommendations and Tier 1 resellers. Although, partners of publishers no longer hesitate to offer the use of the secondary market to resolve blocked commercial situations, for example by highlighting the resale of old unused licenses, as a way to release the budget needed for a migration project.
From our point of view, these trends translate into acceleration and a very clear increase in the average basket, with transactions closed in millions of euros. This is a very interesting time for us – and it’s only the beginning.
Q. What is a typical scenario of someone buying or selling secondary software?
On the selling side, these are usually licenses that have become useless after a migration to the cloud, an M&A operation, a cancellation or a resizing project. For our sellers, it is simply a revaluation process that, once mastered, is intended to be generalized and to enter in the TCO of their projects.
On the buying side, it varies and we discover new business cases every day, but most often, our buyers are companies or organizations which already have an application installed of the sought product and have a need for additional licenses to respond to an increase in activity, the arrival of new employees, or to deal with the consequence on the licensing of a modification of the infrastructure (i.e. hardware power increase or virtualization).
Generally in these cases, where it is a question of correcting or avoiding a situation of noncompliance without evolution of the functional need, the software asset remarketing is a perfect solution and the savings can be significant.
In addition, most of the time these are situations are where the balance of power is not in favor of the company: the project or the application is in its run phase, the change of technology is generally at this stage no longer an option and the needs are insufficient for the usual negotiation leverage to work, publishers are therefore less willing to concede any discount.
This is even more obvious when the company does not operate the latest version of a product in production, since publishers do not offer the possibility of acquiring (at a price adjusted accordingly) the previous versions of their products. In these cases the price differences between the opportunity and the new can exceed 1:10, and for our customers, the use of the secondary market is often simply the only viable option to equip these very mature applications, doomed to disinvestment at short or medium term, without impacting other projects.
We are here dealing with the issue of managing the application lifecycle, and the secondary market, just like third-party support, offers companies the opportunity to realign their governance with their real needs.
Q. What are the most popular titles for trading on the secondary market and what discounts are possible?
The top-selling titles remain Microsoft desktop products, and especially the Office suite. They are typically very standardized, omnipresent and weighing heavily on the IT budget, these products are indeed ideal candidates for the second market.
Regarding Office, the arrival of Office 365 led to the release on the market of large quantities of licenses of versions 2010, 2013 but also 2016. (In the case where the licenses transferred were under software insurance until the commercialization of the latest version).
The offer is therefore overcrowded (> 150,000 Office licenses all versions combined currently for sale on SOFTCORNER) and we can offer very attractive prices.
For example, while a current version of Office Professional Plus (2016) is sold between € 350 and € 470 depending on the level of discount, we will find this one between € 140 and € 200 on our online platform which represents up to € 330 and 70% of saving per license.
Depending on the size of the estate, we are quickly talking about hundreds of thousands of Euros in savings.
If you compare this to the Office 365 E3 cost, the used licenses are “amortized” from the 7th month.
Over 5 years, and even taking into account a fleet renewal at mid term via the secondary market; the budget is divided by 4.2. This must be added the benefit of the resale of licenses decommissioned at the intermediate renewal.
For public organizations, it should also be remembered that in some countries, they cannot recover VAT on their operating expenses. This increases O365 costs by around 20%.
In addition, most companies will of course, prefer to use an N-1 or N-2 version. In this case savings can quickly reach 90%.
For publishers such as Oracle or IBM, discounts are set accordingly around 80% for a product in the last version, in particular to compensate for the impact of reinstatement policies of publishers.
Q. It has been said the secondary software market lacks liquidity, in that there is an imbalance between buyers and sellers – what is your perspective?
Indeed, although between migrations, reductions / growth of activity and compliance issues, there is a growing number of opportunities for sales or purchases across a wide range of products (including the most exotic ones), the secondary market still suffers from a lack of liquidity. Actually, it’s simply a young market and, like all two-sided markets in the seed phase, supply and demand are still struggling to meet, align or balance.
In practice, this translates into uncertainty about the ability to find a buyer or seller quickly, which can be an issue for some clients. But if we take this reality into account by implementing a relevant approach, the company can then fully exploit the secondary market in a systematic way, and optimize its financial impact, while conciliating this with its business requirements.
To meet this need, our platform integrates a secondary market-monitoring tool.
A company can thus, very simply from and its personal space, create and update a free, non-binding, and non-time-consuming watch on the secondary market, based on its inventory of available / sought licenses, and by qualifying its matching criteria.
This company will therefore be notified upstream of its needs of any relevant purchasing opportunity, while keeping the ability to use it’s usual sourcing channels, in case of failure of the research.
It will also be able to extend its sales opportunity detection to all of its unused licenses, and thus identify the qualified sales opportunities on which the efforts (decision process, documentation of licenses) should be concentrated.
At the scale of a large enterprise, this represents a very important source of opportunities. Remember that, whatever the publisher; all on premise licenses deployed in Europe are resalable. This literally represents thousands of products and potential earnings or savings of tens of millions of euros across a large account.
Q. How have your clients responded to large funds being deposited in their accounts for resale of unused software? It must be quite a moment!
Clearly, the large cash inflows experienced by some of our customers (up to € 1.4m for the biggest transaction) are quite unusual events and in a period, which remains largely marked by cost reduction plans, this is the assurance of having the full attention of the Finance Department.
It has happened to us that the question of the allocation of the received funds raises some questions, in particular to know which budget they must be imputed, but overall, for our customers who are generally in functions assimilated to cost centers, it remains very rewarding. In at least one case this has even been the subject of a major communication operation at Group level, as part of a strategic program to reduce capital expenditure.
For 2018, we plan to add to the economic impact, a CSR dimension, by offering our sellers the opportunity to donate a portion of the profit from their sales to the charity of their choice.
This seems to us an elegant and impactful way to combine SAM, cost optimization and CSR.
For us this would be proof that the circular economy, which is important to us, can be synonymous with profitability and societal impact.
Q. Whilst most organizations write off software assets over a three-year period, the International Financial Reporting Standards (IFRS) dictate that software should be accounted for at market value. What are the benefits to organizations in attributing market value to their software assets? How might it help their company’s standing?
The secondary market for software licenses, gives in fact rise to a concept of market value, which until then did not exist, or the IFRS standard which is a requirement for all companies publishing consolidated accounts, stresses the need for a fair valuation of assets based on market value obtained from market representatives. (“The organization shall use assumptions that market representatives would use to determine the price of the asset or liability, considering that market representatives act in their best economic interest.” Excerpt from IFRS 13: Measurement of fair value)
For the company, carrying out an operation of accounting re-evaluation of its assets from 0 €, for fully amortized licenses, to a market value that may be quite significant, this means an increase of its capital own and the value of its balance sheet.
Applied to the entire fleet of software licenses, this can have a considerable effect, and prove to be more or less useful for the CFO, according to the ratios that he is monitoring, and that he wishes to put forward.
In some situations, on the other hand, the interest is quite obvious:
In the context of a sale of a company or a subsidiary, for example, this makes it possible to rationalize the valuation by reducing the share of goodwill.
This may also be relevant in accounting strategies, when a company wants to charge back to its business units its actual IT costs, or in the calculation of transfer prices in case of asset transfers between subsidiaries.
Learn more about Softcorner here: https://www.softcorner.eu/gb/