Latest / The Fiscal Policy Podcast with Fexingo: Government Budgets, Stimulus, and Public Spending / Why the Government Spends Billions on Unused Software Licenses
Transcript
- Lucas: So the federal government spends about three billion dollars a year on software licenses it never actually opens. That's not a typo. The 2025 Government Accountability Office audit — GAO — found that one agency alone, just one, had four hundred and eighty million dollars in unused Microsoft Office allocations. Luna: Four hundred and eighty million. For software nobody's using. That's not a rounding error, that's a whole mid-sized company's annual revenue just sitting there. Lucas: Right. And it's not just Microsoft Office. It's Adobe Creative Cloud, it's specialized data analytics tools, project management platforms. The GAO looked at sixteen agencies — and every single one was paying for licenses that employees had never even logged in to activate. Luna: How does that happen? I mean, in a private company, someone would notice pretty quickly if they're paying for a thousand seats and only eight hundred people are using them. Lucas: You'd think so. But government procurement rules are built differently. Most agencies are required by law to buy through a handful of massive, pre-negotiated contracts. Those contracts offer steep discounts — sometimes forty, fifty percent off list price — but only if you commit to a minimum volume upfront. So procurement officers buy in bulk to get the discount, and then they distribute licenses department by department. But nobody goes back to check whether those licenses are actually being used. Luna: So the incentive is to buy big to save on unit cost, but the total cost balloons because you're buying stuff you don't need. Classic tragedy of the commons. Lucas: Exactly. And there's a second layer. Government budgets operate on a use it or lose it model. If you don't spend your full IT allocation by the end of the fiscal year, you're penalized — your budget gets cut next year. So managers would rather spend on licenses they might not need than risk coming in under budget and losing that money permanently. Luna: That creates a perverse incentive where wasting money is actually the safer career move. If you save money, you get punished. If you waste it, nothing happens. Lucas: Nothing happens until the GAO shows up, anyway. And the GAO audit was pretty damning. They found that most agencies don't even have a centralized system to track license usage. It's all spreadsheets and phone calls. One agency was still using a paper form to request new software — you had to fill it out, get three signatures, fax it to IT. Luna: Fax. In 2025. That's not just inefficient, it's almost impressive in its dedication to an older way of doing things. Lucas: It is. But let me give you a concrete example of how bad it can get. The Department of Health and Human Services — the GAO found that over a three-year period, they paid thirty million dollars for software licenses that were never assigned to a single employee. Just sitting in a pool, unused, auto-renewing every year. Luna: Auto-renewal. That's the killer. Once you set up an enterprise agreement with Microsoft or Adobe, it just renews automatically unless someone actively cancels. And who has time to cancel when you're dealing with a hundred different license agreements? Lucas: Exactly. And the vendors know this. Enterprise license agreements are designed to be sticky. You sign a three-year deal, and after that, it's easier to just let it renew than to go through the procurement process again. The GAO report actually recommended that agencies disable auto-renewal by default — but that's been recommended before and nothing changed. Luna: So what would it take to actually fix this? Is there a model that works? Lucas: There are a few. One interesting case is Utah. The state government set up a shared-services organization for IT — basically a centralized unit that manages all software procurement and license allocation for every state agency. They track usage in real time, reallocate unused licenses, and negotiate enterprise-wide deals. Utah claims it saved twelve million dollars in a single quarter just by turning off auto-renewal on licenses that had zero active users. Luna: Twelve million in one quarter. That's not complicated. That's just turning off a switch. Why can't every state do that? Lucas: Because it requires political will and a bit of upfront investment. The shared-services model needs a centralized data system, staff who can manage it, and a mandate that all agencies participate. That's hard to push through when each agency has its own IT director who doesn't want to give up control. But the savings are real. The state of Washington did something similar and cut their software spending by eighteen percent in the first year. Luna: And at the federal level? Is there a pilot program or something that's working? Lucas: There's a pilot at the Department of Homeland Security. They started requiring that all new software requests be tied to a specific employee's ID — no more blanket purchases. And they do a quarterly reconciliation: if a license hasn't been used in sixty days, it gets flagged and the manager has to justify keeping it. In the first two quarters, they reclaimed about fifteen percent of their license pool. Luna: Fifteen percent. That's huge. And it's not even a technological fix — it's just a policy change. Lucas: Yeah. The tech exists. There are commercial tools that can scan a network and tell you exactly which licenses are active, which are dormant, which are underused. The federal government could buy those tools for a fraction of what they're wasting. But adoption is slow because there's no single person or office responsible for the problem. The waste is distributed across hundreds of agencies, so no one feels the full two billion dollar sting. Luna: It's the classic public sector challenge. The cost is spread across everyone, so no individual manager has a strong incentive to fix it. But the aggregate number is staggering. Lucas: Right. And it's not just federal. State and local governments are in the same boat. A 2024 report from the National Association of State Chief Information Officers estimated that states collectively waste another one to two billion a year on unused software. So total, across all levels of government, we're probably looking at four to five billion dollars annually. Luna: That's real money. Money that could be spent on roads, schools, public health. Instead, it's sitting in a Microsoft license that nobody ever clicks on. Lucas: And here's the thing — if you find walking through these kinds of economic inefficiencies with us useful, if it makes something click about how public money actually flows, there's a simple way to keep this show going ad-free. You can support us at buy me a coffee dot com slash fexingo. It's a low-key way to say this kind of public-finance deep dive matters to you. And it helps us stay independent. Luna: Yeah, absolutely. A small number of listeners doing that makes a real difference — keeps us from having to chase sponsors who'd want us to soften the story. So if you've gotten something out of this episode, that's the place. Lucas: Anyway — back to the fix. One more approach worth mentioning is what the private sector does. Companies like Google and Microsoft themselves use something called 'license optimization' — they have dedicated teams that monitor usage and renegotiate contracts annually. They treat software as a variable cost, not a fixed one. Governments tend to treat it as a fixed cost, and that mindset is what leads to the waste. Luna: So if a state or federal agency wanted to start fixing this tomorrow, what's the single easiest thing they could do? Lucas: Turn off auto-renewal. That alone, based on the Utah experience, could save ten to twenty percent of total software spend in the first year. Then build a basic inventory — just a spreadsheet of every license and who's using it. That's not rocket science. It's just a policy change and a little bit of administrative follow-through. Luna: But nobody does it because the problem is invisible. The money goes out, the software sits there, and no one notices until the GAO counts it. Lucas: Right. And that's the tragedy. It's not that we don't know how to fix it. It's that the system doesn't reward fixing it. Until we change the incentive structure — until managers are rewarded for saving money rather than punished — the waste will keep renewing, just like those licenses. Luna: So the next time you hear about a government IT project that's over budget, remember: part of that budget is paying for software that nobody's using. Lucas: Exactly. And maybe, just maybe, the next GAO audit will show a little less waste. But I'm not holding my breath.