It’s welcoming to see enterprises admit that they’ve been overspending on SaaS applications and are now looking for ways to optimize them; it's better late than never.
Software spending by an enterprise used to be a closely guarded secret. But now they’re open about it, as they want to eliminate excess spending and keep it optimized in this volatile market.
SaaS applications are inevitable for businesses as they make business processes more manageable. As a result, businesses are not looking to cease SaaS adoption; instead, they seek to maximize the ROI of these applications and avoid overspending.
True cost optimization doesn’t begin after purchasing a product. You must start optimizing from the source. So, the answer to how to avoid overspending on SaaS is “create a culture.”
And this article will dive into creating a culture to avoid overspending and provide insights from business leaders and SMEs on how they enforce a culture.
How do businesses overspend on SaaS?
Let’s look at the cause before getting into the solution.
There isn’t one, but various ways businesses overspend on SaaS, like:
- Choosing the wrong pricing plans
- Rogue spend/shadow purchases/shadow IT
- Purchasing surplus licenses without considering the requirements
- Missing out on contract renewals
- Not sticking to the initial budget plan
- Poor vendor negotiation.
This is why creating a culture to avoid overspending on SaaS is highly recommended.
The culture we’re about to discuss in the next section is something businesses are enforcing right now to achieve maximum cost optimization.
Expert Voice: Creating a Culture to Avoid Overspending
#1. Focus on the ROI
“When a team requests an application, I first ask them to estimate the ROI for the product." "How will it be worth it to you, your team, and our organization?” says Terry Larock, the Head of Procurement at Tipalti.
“Considering the current economic conditions, most of the time, the team agrees with me." "They understand the risks of spending on applications with zero return on investment.”
We agree with Terry Larock, and as a SaaS spend management provider, we’ve seen customers with excessive spending. When we ask why they spent a hefty amount on the application, they just say, "We wanted to complete a task, and that’s why we purchased it."
Businesses must end this practice to avoid overspending. You should not purchase an application because it can help you complete a critical task.
Create a culture where the teams prioritize an application's ROI and value while raising a purchase request. When employees start thinking this way, you can significantly prevent overspending.
#2. Educating the team
“Educate the team about the risks of overspending and clearly state the penalties or ramifications for purchasing SaaS applications without the sanction of the IT, finance, and procurement teams,” says Dave Beckwith.
Dave Beckwith is the Vice President, Global Procurement & Endpoints at 8x8.
“I made it clear that every purchase request must go through a streamlined and transparent process." "Each team must review the requirements, ROI, and cost of the applications before approving the request to purchase.”
Dave recalls that it used to be the wild west earlier when senior managers were subscribing to $100,000 worth of applications without any prior research, request, or review.
But it doesn’t happen anymore. And even if it did happen, we made it clear that the person would face penalties and cancel the contract with the vendor immediately.
Yes, sometimes it is easy to create a proactive culture, but you have to enforce it in some organizations. Implementing strict policies and penalties for decentralized purchasing can be necessary to discourage employees from making independent purchases of applications.
#3. A standardized process
This is a follow-up to #2. Dave Beckwith recommends that businesses must create a streamlined procurement process to avoid overspending.
A purchase request should not be approved until all the stakeholders, including the IT, finance, legal, and security teams, have reviewed and acknowledged the request.
“I told the team to not come to me directly, go ahead and raise a purchase request, and let the process flow." "If everything is approved and green-lit, we’ll negotiate and purchase it for you,” says Dave Beckwith.
Every enterprise should have a streamlined procurement process to purchase SaaS applications. There are various SaaS procurement software solutions to help create approval workflows.
You can involve stakeholders from multiple teams in the approval workflow. SaaS procurement tools make the process transparent, so the requester can see the progress in real-time, which increases accountability and accelerates the purchase process.
#4. Rogue spend
Rogue spend/shadow purchases are one of the significant reasons for overspending. A survey says that shadow purchases account for 20–30% of total software spending.
“The lack of a streamlined procurement process and a delay in request approvals is what triggers the users to use their corporate credit cards to purchase unsanctioned applications,” says Mark Flowers, the Managing Director of Product Management & Operations, OneMarket at LogicSource, Inc.
“We had to formalize and really tighten our policies, and we made the users go through mandatory training to prevent them from rogue spending.” “I made it clear to the team that there would be no excuses for decentralized purchasing,” says Dave Beckwith.
Mark and Dave are right. Rogue spending is one of the primary reasons businesses overspend on SaaS.
Organizations without a centralized procurement process are the ones that face prevalent rogue spend. Procurement workflows can help you prevent rogue spending and avoid overspending.
You can also set a threshold for the credit cards based on the departments to prevent users from purchasing applications beyond the budget. And create strict policies to create a culture that refrains from purchasing unsanctioned applications.
#5. Ask the right questions
CloudEagle is a SaaS spend management platform with procurement workflows and assisted buying services.
Our co-founder Prasanna added, “We’ve noticed our customers asking intriguing questions to the users whenever a purchase request was raised." Instead of asking basic, high-level questions like "Why do you need it?" What are you going to do with it? Their questions were unique, like:
- Will you be using the software after six months?
- What happens if we don’t purchase the application right away?
- What is the ROI we can get from this application?
- What are alternatives to the application?
- Did you look for an app with similar features in our existing SaaS stack?
“These were some of the questions our customers included in the intake forms, and we heard that they’ve been working great." "They told us that by asking intriguing questions like these, we can gauge the requirement and ROI more accurately,” says Prasanna Naik, Co-founder of CloudEagle.
Often, employees will request an application to do a task. So, as a procurement team, you need to create a proactive questionnaire to justify a user’s purchase request. In that way, you’ll have more control over your SaaS stack and generate a consistent ROI across your SaaS portfolio.
#6. Poor negotiation
Finally, the one obvious reason you or most businesses are overspending on SaaS is poor negotiation skills.
SaaS vendors are masters of their craft. They’ll always quote upfront costs and weather you down to accept the pricing. It's a trap.
“We purchased 100 licenses for a product, costing us $178." And the demand increased to 4000 licenses, so we decided to switch to an enterprise-tier plan. And then when we negotiated for an enterprise label, we brought down the pricing from $178 to $48 for the same 100 licenses,” says Jinendra Jain, the Global head of finance at Tiger Analytics.
Dave Beckwith added, “Don’t be afraid to negotiate with the SaaS vendors.”
As a SaaS buyer, you shouldn’t be afraid or shy about negotiating with the vendor. Negotiation will open the door to cost optimization. Based on the licenses you purchase or the duration you’re willing to commit, you can ask for discounts from the vendors.
Most businesses forecast higher growth and purchase licenses and apps in surplus. But often, businesses might not reach their intended growth, leading to the waste of licenses and investments.
So, instead of paying upfront costs, consider your requirements and utilization and opt for usage-based, feature-based, or slab-wise monthly pricing plans.
Avoid overspending on SaaS with CloudEagle
CloudEagle is a SaaS spend management platform built to help businesses take complete control of their SaaS spend and maximize their ROI.
Spend visibility: CloudEagle’s integration library enables that platform to look deeper into your SaaS stack. It can see all your applications, how much you’ve spent on them, and how users use them.
With 100% app and spend visibility, you can easily identify unsanctioned applications resulting from rogue spend or shadow purchases in your SaaS stack.
Procurement workflows: CloudEagle also doubles as a SaaS procurement tool to streamline your SaaS buying process.
You can create workflows for various types of purchases and include multiple stakeholders from IT, finance, the legal team, etc. to review the purchase request and make well-informed purchasing decisions as a procurement team.
Instead of chasing approvals, you can automate the entire approval process and focus on more strategic procurement tasks. And once the IT and finance teams have approved the budget, you can proceed with the purchase.
Include an intriguing questionnaire in the intake form to gauge the requirements and ROI of the product requested to be purchased.
Assisted buying: Let CloudEagle’s SaaS buying experts negotiate the contracts for you and secure the best deal you’re looking for. If your team lacks negotiation bandwidth, you can outsource procurement to CloudEagle experts.
They’ll analyze your requirements, perform detailed vendor research, leverage the price benchmarking data, negotiate with the vendor on your behalf, and secure the right product at the right price.
Cost optimization: CloudEagle’s cost optimization features will automatically alert you to duplicate, redundant, unused apps with wasted and underutilized licenses.
You’ll get to know how users are utilizing your app and make the necessary optimization to avoid overspending on SaaS.
Businesses often overspend on SaaS without realizing it and end up losing money on needless expenses. There are various ways businesses overspend on SaaS, which we discussed in the article.
Also, we sat down with industry experts and asked them how to avoid overspending on SaaS, and they gave quite a lot of interesting insights on what they followed and what you must do to avoid overspending.
This article went into detail on the steps taken by experts to avoid overspending. The key to avoiding overspending is to use a SaaS spend management platform like CloudEagle for better visibility and to prevent shadow purchases.
Book a demo and talk to our experts to realize your SaaS savings now.