There’s a software tool for everything these days, and factors like digital transformation, remote and hybrid working after COVID-19, and rapid growth amongst startups have escalated SaaS adoption to never-before-seen levels. Sastrify data shows that the average number of SaaS tools per company was 96 in 2022, with 51% of businesses increasing SaaS spend in the last three years.
But without the proper strategy and guardrails in place, SaaS costs can spin out of control, from duplicate subscriptions to functionality overlaps to wasted licence spending. In fact, 78% of companies overspent on SaaS in 2022 – sometimes by up to seven figures.
In my daily interactions with both buyers and sellers of SaaS products, as well as my own SaaS stack optimisation efforts for the companies I’ve founded, I’ve learned the main indicators of uncontrolled SaaS spending: who’s at risk, how to spot problems, and how to fix them.
Types of organisations at risk for soaring SaaS spend
SaaS spend can balloon in any organisation, but there are three situations where it’s more common:
- Rapid growth – Most fast-growing companies will face challenges with IT governance and maintaining consistent rules for software purchasing
- Decentralisation – Organisations with distributed teams or a number of subsidiaries may have multiple procurement arms or poor communication about tools being used
- Autonomous culture – Many companies want to give their people the best tools possible, allowing teams to make their own decisions about what will help them achieve their goals – but this can allow spending to get out of hand without proper compliance
None of these attributes are intrinsically negative. In fact, many of the world’s top companies fit into all three of these buckets. But knowing the risk areas can help organisations understand to be on the lookout for future problems.
The one main indicator that your SaaS spending is out of control
All indicators of uncontrolled SaaS spending can fit under one umbrella: surprises. No one likes surprises, but CFOs and finance teams are especially wary of them.
Have you ever run across an invoice where one of the following statements of surprise applies?
- “I thought we didn’t use this anymore.”
- “I’ve never heard of this tool.”
- “This bill is larger than expected.”
- “No one has ever mentioned this to me.”
- “I thought we were on a lower tiered plan.”
- “These usage levels are beyond our forecasts.”
- “I wasn’t expecting a bill yet.”
These are all good indicators that your spend guidance and compliance might be out of shape and your SaaS stack needs to be revisited. Ideally, all your spending decisions would be deliberate and concrete: it’s not a problem for teams to spend money on software, but they need to know what the ROI will be for the company and follow spending guidelines to avoid surprises.
How to rein in SaaS spending
If you recognise some concerns with your company’s SaaS expenditures, there are a variety of options to tackle the issue.
1. Dig into your SaaS stack
Whenever I need to get a better understanding of SaaS spending, my first step is to go through the ERP to see cash outflows and significant spend items from the last three months. Take a look at all SaaS tools, sort by cost, and analyse where your teams are currently spending.
2. Use the 80/20 rule
Software cost optimisation tends to fit the 80/20 rule, also known as the Pareto Principle – meaning that 80% of potential cost savings can be achieved from 20% of your SaaS stack. On average, I recommend companies look at the 10 to 20 tools with the highest cost, as these can have the biggest impact on savings.
3. Talk to stakeholders
If you were to simply ask every team which software tools they need to keep from the current stack, most would reply, “all of them.” If you want a better understanding of which tools are actually must-have vs. nice-to-have, ask stakeholders to do a stack ranking. This can either be in terms of tool count (“If you could only have 10 tools, which would you keep?”) or spend (“If you had a hard budget line of X, which tools would you keep?”).
Forcing people to prioritise could help you spot unnecessary spending.
4. Check on tools with usage-based pricing
Pay attention to software with elements of usage-based pricing. These tools can lead to unexpected spending if your team didn’t accurately forecast consumption or isn’t keeping an eye on usage day-to-day, but they are also easier to scale down spending as needed by simply using less (without having to drop the tool entirely).
5. Spot and fix wasteful spending
Sometimes, small changes across a number of tools can make a big difference. Choose someone on your team (or ask each tool owner) to go through SaaS accounts and clean up unused licences. To do this, simply:
- Navigate to user statistics
- Download and sort by date of last login
- Reach out to users who haven’t logged in since your chosen date to discuss whether it’s necessary to keep paying for the licence
6. Focus on renewal negotiations
Negotiations play a key role in regaining control over SaaS spending. Whether your software renewals are being negotiated by procurement, finance, or a third-party procurement provider, there is always room to boost cost savings and achieve a better deal.
Keep in mind that SaaS vendors are also dealing with the uncertain economy right now and typically place the most emphasis on retention metrics. For any SaaS tools you know you aren’t dropping, consider reaching out and offering to renew early or sign a longer commitment in exchange for discounts.
Note: An extreme approach I’ve seen a few companies take to gain a handle on SaaS spending is to cancel all their credit cards. I don’t recommend this. First, it creates a ton of extra work, and second, it doesn’t really solve the problem. You still have contracts with those vendors, and not paying them doesn’t get you out of that obligation. It may create more transparency on where you’re spending money, but it also creates chaos. Rather than blowing up your SaaS procurement function, try one or multiple of the other options listed above.
Keeping SaaS spending intentional
Businesses that have heavily invested in SaaS to bolster digital transformation, weather the pandemic or ride the wave of rapid growth, now need to rein in spend and ensure tighter control of their SaaS stack to protect profitability. It’s time for finance and IT leaders to take a step back and reassess their tech stacks and SaaS procurement strategies to centralise, optimise and reduce spend.
When you stop encountering frequent SaaS procurement surprises, you’ll know you’ve got things under control.