We are excited to share this guest post from our partner Connor.
Whether through intentional under reporting, gaps caused by outdated or manual processes, or simple human error, many licensees do not accurately report payments due under their license agreements. Given the potentially significant financial benefits of a license compliance program to a licensor’s organization, any company that generates royalty and/or license revenue should evaluate whether a license compliance program makes sense for it. During this evaluation, you may encounter several common misconceptions about license compliance audits. With the background below, you can confidently dispel these common misconceptions and make an informed decision as to the viability of a license compliance program for your organization.
License compliance program myths
License compliance programs are costly and inefficient
This myth is perpetuated based on a view of long and costly audits. However, those licensors who have partnered with experienced firms to structure a license compliance program that fits their licensing model and licensee base have in fact been significant revenue drivers for their organizations. Historically, my clients have seen a return on investment of 10x every dollar they have spent with my firm. In fact, my clients have seen up to 24% of their total revenue driven by license compliance efforts. These returns have been achieved by taking a data driven approach to compliance and utilizing a variety of audit techniques to complement the traditional full scope onsite audit (i.e. limited scope audits, desk audits, market data, etc.)
Launching audits will damage my relationship and future business prospects with my licensees
This myth is perpetuated based on the view that an audit would only be launched at specific licensees where there is significant mistrust, and the audit is followed by heated negotiations regarding unpaid amounts. In fact, license compliance audits are such common practice that I have seen cases where a licensee requested a short delay in the audit visit since they had four other licensors who launched audits prior to my client. Additionally, partnering with an experienced audit firm will lead to an efficient audit process that can provide value to the licensee in understanding gaps in their own processes. Over 10% of my firm’s clients have actually been companies whom we audited for a licensor, which helped these companies see the strategic value in a well-run license compliance program. Finally, the results of the audit can be balanced with other strategic priorities at the licensees. Even if the decision is made to not pursue certain findings due to their impact on future business deals, the knowledge gained during the audit (for instance of differing interpretations of contract terms) can be valuable in structuring future deals across the licensee base.
I have trustworthy licensees, therefore a license compliance program is unnecessary
This myth is perpetuated by the misconception that all audit findings are driven by a licensee who is actively avoiding paying the proper amounts under their license agreement. In fact, a large portion of audit findings arise based on unintentional errors made by the licensee during reporting, or differences in interpretation of a contractual clause. In my experience, over 80% of license audits resulted in an under reporting of royalties. A large driver of the under reporting was the licensee using manual processes to identify royalty bearing products, and calculate the royalties due. Therefore, the reality is that even with the most trustworthy and ethical business partners, audits can uncover significant under reporting of royalties.
My budget for a license compliance program is small, therefore a program wouldn’t make an impact
This myth is perpetuated by the misconceptions that a license compliance program is solely audit driven, identifying the right licensees to audit is a very low percentage exercise, and an audit’s impact is limited to the under reported amounts identified at the specific licensee. The reality is that effective license compliance programs use a number of techniques outside of audits to identify revenue. Additionally, leveraging the right data within your organization along with the market data will provide a high likelihood that your limited audit budget will be spent reviewing the licensees at highest risk of under reporting. Finally, licensees within a given industry tend to be very knowledgeable within their space. News of an active license compliance program at a specific licensor will travel fast throughout the industry and may lead to other licensees reviewing their reporting to identify any gaps in anticipation that they may be subject to an audit in the near future.
A well-run license compliance program is self-sustaining and provides significant value to a licensor’s organization in both the short and long term. My goal in debunking the above myths is to encourage licensors to explore the potential of a license compliance program for their organizations as my experience has shown that a program tailored to a licensor’s unique circumstances can be instrumental in an organization’s profitability.