Purpose
Every software you use has a license. Violating it can mean:
- Legal liability: Fines, lawsuits
- Operational disruption: Vendors disable your access
- Financial waste: Paying for licenses you're not using
This guide explains how to track, comply with, and optimize software licenses.
Context & Assumptions
Who this is for:
- Operations managers and finance teams
- IT administrators managing software assets
- Business owners who want to reduce unexpected costs
Key assumptions:
- You have a mix of commercial and open-source software
- You may not know all the licenses you're using
- You want to avoid legal and financial risk
The Three Types of Software Licenses
1. Commercial Licenses (Paid)
- You pay for the right to use software
- License terms vary: per-user, per-device, per-volume, perpetual, subscription
- Vendor enforces compliance (sometimes with audits)
- Examples: Microsoft 365, Salesforce, Adobe Creative Cloud, Shopify
Your responsibility: Track how many licenses you own vs. how many people/devices use the software.
2. Open-Source Licenses (Usually Free)
- Free to use, but come with conditions
- Common types: MIT, Apache 2.0, GPL, AGPL
- Important: Some (like GPL) require you to share your source code if you modify the software
- Vendors don't typically enforce compliance, but legal risk is real if misused
Your responsibility: Understand license terms before using or modifying open-source software.
3. Freemium/Free Software (Limited Free)
- Free tier with usage limits or feature restrictions
- Paid tier for additional users or features
- Examples: Slack, Zoom, Figma, Canva
Your responsibility: Track how many users you have vs. what your license tier allows.
Building a License Inventory
Start with an audit:
Step 1: List All Software
Create a spreadsheet with these columns:
| Software | Category | Type | Users | Cost/Year | Renewal Date | License Type | Compliance Status |
|---|---|---|---|---|---|---|---|
| Microsoft 365 | Productivity | Commercial | 15 | $2,700 | 2025-01-15 | Subscription | ✓ Compliant |
| Figma | Design | Freemium | 5 | $1,200 | 2025-06-01 | Subscription | ✓ Compliant |
| Slack | Communication | Freemium | 20 | $0 (free tier) | N/A | Free | ⚠ Over-limit (limit 10k messages) |
| Custom app (uses React) | In-house | Open-source | N/A | $0 | N/A | MIT | ✓ Allowed |
Step 2: Classify By License Type
- Subscription (pay annually or monthly): Track renewal dates
- Perpetual (buy once): Track support/maintenance expiration
- Per-user: Reconcile with current employee count
- Per-device: Reconcile with current device count
- Volume: Track minimum and maximum allowed usage
- Free/Open-source: Document license terms
Step 3: Verify Compliance
For each software, ask:
- Are we using more licenses than we own?
- Is the license type (subscription, perpetual, per-user) right for us?
- Do we have proof of purchase?
- Is there a better (cheaper) license tier for us?
Step 4: Identify Gaps
- Unused licenses: Paying for something no one uses?
- Untracked software: Employees using tools without company knowledge?
- Unlicensed software: Using open-source or commercial software without proper license?
Managing Commercial Licenses
Annual Review Checklist
| Question | Action if "Yes" |
|---|---|
| Do we have enough licenses for current users? | Buy additional licenses |
| Are we using the license tier we're paying for? | Consider downgrading (e.g., Slack free tier instead of Pro) |
| Could we consolidate to fewer vendors? | Negotiate multi-product bundle |
| Are there cheaper alternatives? | Evaluate competing products |
| Is our vendor offering discounts for annual prepay? | Switch from monthly to annual to save 10–20% |
| Do we have support contracts we don't use? | Cancel or downgrade support tier |
Negotiation Opportunities
Software vendors expect negotiation, especially if you have 10+ users:
Approach:
- Document your current licensing spend
- Get quotes from competitors
- Contact your vendor rep: "We're considering switching to [competitor]. Can you offer us a better rate?"
- Vendors often offer 15–30% discounts to avoid churn
Timing: License renewal or when vendor releases major price increase.
Managing Open-Source Licenses
Open-source is free to use but understand the license terms.
Common Open-Source Licenses
| License | Key Terms | Risk |
|---|---|---|
| MIT | Use freely, include license notice | Low — Very permissive |
| Apache 2.0 | Use freely, include license, document changes | Low — Permissive but requires documentation |
| GPL v3 | Free to use, but if you distribute modified code, must share your source | High — "Copyleft" requirement can be burdensome |
| AGPL | Like GPL, but even applies to network use | Very high — Most restrictive |
Action Items
- Audit your codebase: What open-source libraries does your application use?
- Check licenses: Use a tool like FOSSA or Black Duck to scan automatically.
- Document: Maintain a list of open-source components and licenses.
- Limit GPL usage: If you're a commercial business, be cautious with GPL/AGPL. Consult legal if unsure.
- Distribute properly: If you distribute your software, include open-source license notices.
Freemium Software Compliance
Freemium tools are common (Slack, Zoom, Figma). Track usage:
Slack Example
- Free tier limit: 10,000 message history
- Problem: Your 20-person team uses Slack daily; after a month, you hit the limit
- Options:
- Upgrade to Pro ($12.50/user/month) = $250/month
- Use Pro for key teams, free tier for others
- Switch to alternatives (e.g., Mattermost on-premises)
Action: Monitor message volume and decide upgrade timing before hitting limits.
Zoom Example
- Free tier limit: 40-minute group meetings
- Compliance check: Are your meetings exceeding 40 minutes regularly?
- Action: If yes, upgrade to Pro ($15.99/month) or team plan
License Renewal & Calendar
Create a renewal calendar:
Monthly tasks:
- Monitor license compliance (especially per-user licenses after hiring/departures)
- Check for unused tools
Quarterly tasks:
- Review license spend vs. budget
- Evaluate whether cost matches value
Bi-annually (6 months before renewal):
- Contact vendor for renewal quotes
- Get competitive quotes from alternatives
- Decide: renew, downgrade, switch, or cancel
Annual tasks:
- Comprehensive license audit
- Renegotiate high-spend contracts
- Plan budget for next year
Cost Optimization Strategies
1. Consolidate Vendors
- One vendor for all productivity (Microsoft 365 vs. Google Workspace vs. Apple)
- Often includes bundle discounts
2. Use Free/Open-Source Where Possible
- Email/collaboration: Mattermost, Nextcloud (open-source) vs. Slack/Teams (paid)
- Design: Inkscape, GIMP (open-source) vs. Adobe (paid)
- Trade-off: Open-source requires more self-support but saves money
3. Right-size License Tiers
- Use free tiers where possible (Figma free, Canva free)
- Upgrade only core users
- Example: 20-person team, 5 Figma users = $1,200/year, not $4,800/year
4. Negotiate Volume Discounts
- 10+ users: Most vendors offer 15–20% discount
- 50+ users: Often 25–40% discount
5. Switch from Monthly to Annual
- Annual plans typically 20% cheaper than monthly
- Caveat: Reduces flexibility if you need to cancel
6. License Mobility
- Some licenses allow moving between employees
- Reduces total licenses needed when people leave
Compliance Risk Assessment
| Risk Level | Scenario | Action |
|---|---|---|
| Critical | Using commercial software without valid license | Immediate: Purchase license or stop using. Vendor may audit and impose fines. |
| High | Using GPL software in proprietary product | Immediate: Consult legal. May need to open-source your code or replace library. |
| Medium | Exceeding per-user license limit by 1–2 users | Within month: Buy additional licenses or remove users. |
| Low | Unused subscription still active | Next renewal: Cancel to save cost. |
Common Pitfalls
- No inventory — "We don't know what we're using." Result: License violations, overspending.
- Ignoring renewals — Missing renewal deadlines can result in license suspension.
- Manual-only tracking — Spreadsheets work, but tools like Jira, Freshservice, or dedicated license management software are better for scale.
- No audit trail — Can't prove you own a license when vendor audits. Keep contracts and purchase receipts.
- Assumptions about open-source — "It's open-source, so it's free to use however we want." Not always true (see GPL).
- Hoarding licenses — Buying too many licenses "just in case" wastes budget. Buy what you need.
Practical Example: 40-Person Marketing Agency
Current software:
- Microsoft 365 (email, Teams): 40 users
- Figma (design): 8 users
- Salesforce (CRM): 5 users
- Slack (communication): 40 users
- Adobe Creative Cloud: 8 users
- Zoom: Teams/Enterprise
- Shopify (e-commerce): 1 plan
Annual spend: ~$18,000/year
Optimization:
- Migrated half the company to Slack free tier (messaging history is sufficient) → saved $2,000/year
- Negotiated Figma volume discount (10% for 8+ users) → saved $120/year
- Switched Microsoft 365 from monthly to annual → saved $300/year
- Cancelled unused Salesforce extra user → saved $150/year
- Total savings: $2,570/year (14.3% reduction)
Related Documentation
- Maintenance Strategy — Operationalize license tracking
- Cost Optimization — Broader cost management strategies
- Security Audits — Ensure licensed software is properly updated
This documentation is for informational purposes only and does not constitute legal or compliance advice. For license-specific questions, consult your legal team or vendor.