Software Export Compliance: Monitor Closely or Pay the Price

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While American companies struggle to find their footing in an economy still recovering from the deepest recession since the great depression, China’s GDP growth in the 4th quarter of 2010 hit 9.8%, and India’s, 8.9%. That makes Asia one of the hottest target export markets.

But while Asia may appear to offer “green fields”, high-tech manufacturers and software companies must beware. US Department of Commerce (DOC) export control regulations place tight restrictions on the types of software and technology that can be exported, and to which countries.

Export controls are designed to restrict access to dual-use items by countries or persons that might apply such items to uses harmful to U.S. interests. As a result, the DOC mandates that “Industry’s vigilance when exporting dual-use goods and technology is critical in protecting our national security. Such goods and technology can be used for legitimate purposes, but also in weapons of mass destruction, as well as by terrorists and in terrorism-support. They can also be diverted to unauthorized military end uses. In today’s post- 9/11 world, a broad array of actors – including terrorist organizations, proliferation networks, rogue states and other countries of concern – actively seek dual-use goods and technology for such purposes.” Breaches of export control regulations can result in severe civil and criminal penalties, in addition to denial of export privileges altogether.

For manufacturers of physical goods, compliance with these export restrictions is fairly straight forward: Do not sell and ship goods to prohibited parties or prohibited destinations. But for software and high-tech manufacturers, compliance is complicated by the Internet. Electronic Software Delivery enables companies to sell and distribute virtually any type of software product or embedded software for high-tech devices, anywhere in the world in a matter of seconds or minutes. According to the 2010 Key Trends in Software Pricing & Licensing Survey, conducted jointly by Flexera and IDC, nearly two-thirds of software producers will deliver their products electronically by next year.

Flexera has observed that Electronic Software Delivery is helping fuel increased software download activity in Asia. In the accompanying graphic, you will note a few trends derived from software download activity captured in Flexera’s FlexNet Delivery product line, which delivers approximately $40 billion in software products from leading software producers and device manufacturers to customers annually. The data reflects that based on the number of software downloads, business activity in Asia has picked up between 2007 and 2010 for the software producers we serve. For instance, Asian countries accounted for 10% of software downloads in Q1 2007 versus 15% in Q4 2010.

The data also supports the notion that compliance with DOC export trade restrictions is also critically important to software producers. With built-in compliance support, FlexNet Delivery is designed to automatically block software downloads to prohibited parties or prohibited destinations. The red line in the accompanying graphic shows how many such downloads were blocked per 1000 completed downloads. Our data shows that export compliance blocks peaked in Q4-2008 at about 2.8 blocked downloads per 1000 completed downloads. The trend of blocked downloads prior to Q4 2008 is closely correlated with growth in download activity in Asia.

Several factors explain the steep drop in export compliance based blocks of downloads in Q1 2009. First, software vendors used data from FlexNet Delivery On-Demand to cleanse their order entry systems of problematic end customers. Moreover, some ISVs reclassified some of their software products during this time period to use less strict export classification, which resulted in fewer blocked downloads. Finally, the discontinuation of some software product lines and software publishers also played a role.

This data indicates emphatically that sooner rather than later, producers exporting software and high-tech devices to Asia or other regions with export restrictions, will run afoul of DOC regulations and face strict and painful penalties. Unless they have a reliable compliance management program in place. For exporters that utilize electronic software delivery, industry best-practice for export compliance includes implementing an electronic software delivery system that incorporates a prohibited parties and prohibited destinations screening engine.

About Flexera’s Application Usage Management Benchmarking Report

Flexera’s Application Usage Management Benchmarking Report provides insights on the global software industry and the evolving use of increasingly strategic applications. It analyzes anonymized data collected through FlexNet Delivery On-Demand, Flexera’s on-demand electronic software delivery platform, to gain insights into global application usage trends. Flexera’s licensing, compliance and entitlement management solutions are used by thousands of software producers and high-tech device manufacturers around the world to deliver software and software updates to millions of customers and to manage software subscriptions and entitlements. They support new revenue models easily and efficiently while streamlining and automating complex back-office processes.

The software producers and high-tech device manufacturers that deploy Flexera’s licensing, compliance and entitlement management solutions are responsible for more than $50 billion in annual software sales, and deliver their products to more than 3.5 million customers around the world. Our solutions are embedded in more than 20,000 software and high-tech device applications. With such a broad base of activity and corresponding transactional data captured by our systems, Flexera is in a unique position to identify and report on larger compliance and entitlement management trends of importance to market players and market watchers.

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