Did you know? Over the past five years, SaaS spend in enterprises has grown considerably, from 11% to 16%, four times higher than the inflation rate.
Businesses have rapidly adopted SaaS applications for their flexibility, ease of use, and availability. However, these benefits came with their fair share of challenges, such as managing multiple applications and uncertainties around the right spending levels and ROI optimization.
Anyone with a corporate credit card can purchase a SaaS application within an organization without the knowledge of the IT and finance teams. This activity, called "shadow purchases," is one of the reasons that heavily contributes to excess SaaS spend.
When finance teams lose visibility and lack oversight of SaaS purchases and applications, making cost optimization decisions are harder.
But that doesn’t mean it's impossible. SaaS spend optimization is not rocket science. It can be achieved by following the appropriate framework and practices. This article will explore how finance teams can take charge of their SaaS stack and optimize SaaS spending.
SaaS spending by businesses
Before diving into the details of SaaS spend optimization, let’s look at how businesses have been spending on SaaS applications.
SaaS spend being the #3rd biggest expense might seem welcoming, but unfortunately, reports show that 90% of companies are overpaying by at least 20%–30% on SaaS products.
This happens because most businesses don’t have a centralized SaaS spend monitoring system to show how much they are spending on each app.
So, how much exactly are businesses paying for SaaS apps?
On average, companies spend $2,623 per employee per year on SaaS.
Average SaaS spending (CloudEagle survey)
- Small companies (1-100 employees): $260,000 on SaaS apps
- Midsize companies (101-1000 employees): $2.8M-$5M on SaaS
- Enterprises (1000+ employees): $5-$10M on SaaS.
So, what’s your employee size? How much are you spending on SaaS?
If you’re overspending on SaaS applications, does that mean you must cut back on SaaS applications? Are businesses doing that?
So, it doesn’t look like businesses are going to stop adopting SaaS applications. These apps provide a competitive edge for business leaders to innovate quickly and run seamless business operations, meaning SaaS adoption will continue to accelerate.
However, considering SaaS inflation and the economic downturn in 2023, your priority as a finance team is to find clever ways to optimize SaaS spending without hindering SaaS adoption and productivity.
Lowering the number of SaaS applications or preventing employees from using SaaS applications should be your last resort.
Surprisingly, there are various ways to optimize SaaS spend, but before that, let’s look at how companies are overspending on SaaS.
Reasons why companies tend to overspend on SaaS
There are various ways you are overspending on existing SaaS apps; identifying the areas of overspending will result in significant SaaS savings.
Choosing the wrong pricing tier
How many SaaS apps are your team using? And what’s the pricing plan for all the applications?
This is what you must look into first. The reason behind increased spending might be the wrong pricing plans.
For example, let's say your team subscribes to Mailchimp's Premium plan, which allows unlimited users to send up to 150,000 emails per month at a cost of $279 per month.
However, upon close analysis, you discover that only five users are using MailChimp and sending just 5,000 emails monthly. It becomes apparent that a standard plan priced at $13.96 per month would have sufficed.
Employees might have overstated their requirements and ended up purchasing a ridiculously expensive plan with features they barely use.
This is the case in most businesses. You can downgrade the plan to a lower tier based on the requirement, resulting in significant savings.
Each pricing model has its pros and cons. Most companies should opt for usage-based pricing as it gives them more control over SaaS spend—pay for what you use, but with this, your unit price may be higher.
But as a finance team, you must consider your team's requirements before paying for the product to avoid overspending.
If the finance and procurement teams appropriately vet purchase requests and requirements, why are the wrong pricing plans chosen?
In most cases, it is not the finance, IT, or procurement teams that select the incorrect pricing tier but the employees who engage in shadow purchases.
If your business lacks a SaaS management system, you won’t be able to identify shadow application or shadow purchases very easily.
Gartner's survey found that around 30%–40% of IT spend resulted from shadow purchases. And 80% of employees admitted to purchasing applications without the approval of IT.
So, if your SaaS spending is higher than your peers', shadow purchasing might be prevalent in your organization. Unless you identify those applications resulting from "shadow IT," it may be hard to optimize your spend.
Purchasing surplus licenses
A poor practice followed by businesses even in 2023 is purchasing licenses beyond their requirements.
Instead of purchasing the required number of licenses, businesses tend to overbuy.
For example, the marketing team raises a purchase request for Hubspot and needs ten licenses. In anticipation of future growth, they end up purchasing 30 licenses for Hubspot instead of just fulfilling the immediate requirement.
After a few months, the team’s growth may not be anywhere near the forecasted growth, rendering all those surplus licenses useless.
There will be no ROI on those licenses, just wasted spend. Therefore, the key takeaway is to only purchase licenses based on the team’s requirements. Scale as you go.
Missing out on contract renewals
Contract renewals are frustrating if you don’t have an automated system that tracks upcoming renewals and sends constant alerts.
Missing out on contract renewals can cost valuable money, and as a finance team, you must be on top of it.
SaaS vendors will ensure you sign the auto-renewal clause in the SaaS agreement. This will enable them to renew automatically if you do not send them termination notices. And most of the time, this charge will be higher than what you paid at the start of the engagement, as SaaS vendors often increase their pricing.
If you’re wondering why you're overspending, check your contract renewals. It's possible that you have contracts on auto-renewal. And your team may have missed the renewal window, resulting in contracts being auto-renewed without proper consideration.
Going over the budget
As a finance team, you’ll have your yearly budget ready before the fiscal year begins. But can you ensure your teams stay within budget while requesting or purchasing SaaS applications?
Previously, we talked about "shadow purchases," where employees purchase applications using corporate credit cards. Teams will not consider budgets when they make shadow purchases.
If you don't allocate budgets for individual departments and establish spending thresholds on their cards, you may frequently encounter unexpected charges that exceed your planned budget.
What if a team formally raises a purchase request for an application where cost pricing is beyond the budget?
In such scenarios, negotiate with the vendor for multi-year discounts or opt for a usage-based or custom-pricing plan that is well within your budget, then scale it in the next fiscal year.
Lack of in-house negotiation expertise
If your team lacks negotiation bandwidth or expertise, then you are likely to overspend on SaaS. It's important to be proactive in negotiating prices with vendors and not shy away from it. Effective negotiation can result in significant cost savings of hundreds or even thousands of dollars.
Some best practices to follow while negotiating with vendors are listed here.
If you have a good negotiation team but are still overspending on SaaS, shadow purchases will likely be the root cause. The reason for this is that there is no negotiation whatsoever in the case of shadow purchases. Employees will immediately pay the list price quoted by the vendor.
In the earlier example, we discussed Hubspot, a great example of poor vendor negotiation and shadow purchasing. Such extravagant purchases are often made by employees without the approval of IT and any negotiation.
Clever initiatives finance teams can take to optimize SaaS spend
You know why you may be overspending, and here are some initiatives that can help you optimize SaaS spending.
Examine the overall spending of your organization
The first approach to SaaS spend optimization is to analyze your software spending.
It may seem trivial, but a common mistake made by finance teams is diving into the optimization process without fully understanding the actual size of their SaaS stack and the associated spending.
- How much is your overall spend on SaaS applications?
- What is your spend on each application?
- What is your spend on each vendor?
- How much has each department spent on applications and vendors?
- Which department spends the most on SaaS?
- What was your spend last year, and what is your spend in the current year?
- What is the spend by each entity (acquired companies)?
- What is the spend by each cost center?
- Who’s logging into these apps?
- Are all the licenses used?
These are just a few questions that you must have answers to before you start optimizing your SaaS spend.
You can directly retrieve data from applications, billing systems, invoices in your emails, or spreadsheets to gather the necessary spend information.
However, here is the reality: getting all this data in one place is pretty time-consuming. Your team will spend most of their time looking for invoices and logging into each application. And by the time they are able to collate all this information, it might be stale and incomplete.
So, here’s what you need to do: read further.
Get complete SaaS app and spend visibility
To save time and increase the productivity of your finance team, you must use a SaaS spend management platform.
Retrieving all the data from apps or using manual methods is tedious. A SaaS spend management platform can deliver all the information you need within hours.
SaaS spend management platforms will integrate with your internal accounting, finance, or ERP systems to retrieve all the historical spend data from applications and vendors.
These integrations will give you centralized visibility into all your SaaS apps and relevant spending. You don’t have to visit each application to retrieve this data anymore.
You can see how much you’ve spent on each application and vendor. Department-wise and entity-wise spending can be checked using a SaaS spend management platform.
You’ll be able to compare year-wise spending, making it easier for the finance team to calculate the budget for the upcoming year based on growth and requirements.
Analyze your SaaS stack against your current budget
Now you have complete visibility into your spend and know how much your team spends on each application.
Just compare the spend against your budget and the pricing benchmarks to check if you’re overspending.
You’ll also be able to see why the spend exceeded your budget:
- Is it shadow purchases?
- Are you subscribed to the wrong pricing plan?
- Does the application have too many licenses?
- Did the vendor automatically renew?
Complete application visibility will reveal the apps purchased without the sanction of the IT or finance teams. You’ll be able to see how much they spent on it, what plan they chose, the renewal date for those contracts, and how many licenses were purchased.
Check app and license usage
Alright, you’ve verified your spend against your budget and benchmarks. It revealed that you are overspending. So, how do you optimize it?
Application and license utilization play a vital role in the SaaS cost optimization process.
Go ahead and check the usage data for each application. Verify if the apps are being appropriately utilized for what they’ve paid for. A SaaS spend management platform will display the usage data effortlessly through direct integrations.
SaaS management platforms will identify low-usage and unused applications for you. Analyze the poor utilization, talk to your teams, and understand their requirements.
In most cases, your teams would’ve found a better tool or might be using only a few features. Based on their requirements, you can either eliminate the application or downgrade to a lower pricing tier, saving significant money.
Check the usage of licenses, identify users with low utilization, deprovision users who have not logged in the last 30 days, and reallocate licenses to those who require them. Eliminate all redundant apps during renewal negotiations and minimize your spending.
Gaining visibility into spend and usage patterns will enable you to reduce a significant fraction of your SaaS expenses. Let's explore additional initiatives to optimize your SaaS spend further.
Centralize contracts and automate renewals
It's 2023, and it's time to eliminate spreadsheet-based contract tracking.
Decentralized contract tracking is one of the significant reasons for missed renewals. Spreadsheets will not send you alerts when a renewal date is coming up. You need an automated contract management system that reminds you of upcoming contract renewals.
A contract management system will centralize all your contracts and invoices in one place, making them easier to track and retrieve during renewal negotiations.
These platforms also come with automated renewal workflows. Based on the renewal dates extracted from the contracts, it’ll create a renewal calendar and initiate workflows 90 days before the deadline.
Get constant renewal alerts; the tasks will automatically escalate to various stakeholders in your team to ensure you don’t miss your contract renewals.
90 days will give you enough time to analyze the usage and create a negotiation plan to rightsize your licenses or downgrade your plan.
Do I need an individual contract management system?
No, all you need is comprehensive SaaS spend management software with a contract management feature and renewal workflows to renew contracts on time.
Streamline procurement and vendor negotiations
Shadow purchases are one of the major reasons you’re overspending. So, how do you stop it?
100% SaaS visibility will help you to an extent, but to ultimately end it, you need to streamline your procurement process.
1. Make it easier for your teams to raise purchase requests. They should be able to do it even through Slack.
2. Automate the approval process with procurement workflows.
3. Make the process transparent so the requester can see the progress in real-time.
4. Start negotiating with the vendors.
If your team lacks the bandwidth to negotiate, seek the help of SaaS buying experts. They analyze your requirements, compare pricing benchmarks, and negotiate with vendors on your behalf to purchase the right product at the right price.
This makes the procurement process swifter, and your employees will quickly get the right product they need.
This will stop them from going behind your back and purchasing an unsanctioned product.
Plan your next budget and conduct regular audits
While planning your budget, consider your current spend, usage, and existing SaaS stack. Talk to your teams to identify the requirements and segment the software budget for each department.
A spend threshold will prevent the team from exceeding the budget with their purchase requests. Ensure that you use a SaaS spend management platform while creating your budget.
Conduct regular audits on your SaaS stack and spend to check for shadow purchases and poor app utilization. Compare the pricing benchmarks to check if you’re overspending and make the right cost optimization decisions.
Challenges finance teams face during cost optimization
You will come across various hassles when implementing the cost optimization process. Here are some common challenges,
If you’re relying on manual approaches to optimize your SaaS costs, it’ll likely take most of your valuable time.
Most finance teams get into cost optimization without complete SaaS visibility. They just rely on spreadsheets and manually track spending across the organization.
If your SaaS stack is small, you can use a manual approach, but it is recommended that you use a comprehensive SaaS spend management platform to minimize SaaS spend effectively.
Employee's resistance to change
Employees might get used to certain applications, and when you try to eliminate those applications, you’ll face considerable resistance from the team.
For instance, if your company has officially procured Lemlist for email communication but the marketing team has independently purchased and been using Mailchimp, which offers similar functionalities at a higher cost, the marketing team may resist efforts to remove Mailchimp from the company's software stack.
In these cases, you must communicate effectively with the team and educate them about using overlapping applications and increasing SaaS spending. Consider their requirements and pain points, and purchase an application of their choice to satisfy them.
Decentralized SaaS purchasing
Shadow purchasing is one example of decentralized purchasing. This is a major challenge for the finance team, as they’ll have no idea what’s being purchased or how much it’ll affect overall spend
You need to have complete visibility into your SaaS stack to identify unsanctioned applications. When teams realize people are monitoring what they add to the SaaS stack, they’ll stop engaging in decentralized purchases.
In some businesses, each department will have its own SaaS procurement process. This will increase the number of duplicate applications in your portfolio. You’ll also have no control over their spend, further hindering the cost optimization process.
Forecasting growth and budgeting
The finance team’s primary objective is to forecast revenue growth and allocate the software budget accordingly. Without comprehensive spend data and usage analytics, it’ll be a never-ending hassle for the finance team to forecast growth and create a budget plan.
Also, without a platform to manage the spend data and analyze usage insights, the finance team will be spending most of their time chasing spreadsheets and invoices from email inboxes.
With 200+ apps in your portfolio, you’ll likely have a contract renewal every week. Without a centralized SaaS contract management system, it’ll be hard to track SaaS renewals, and your contracts will end up getting automatically renewed weekly.
As SaaS vendors are known to increase their pricing annually, this will result in increased spending unless you remove the auto-renewal clause from your agreements.
Businesses are overpaying for SaaS applications, but most of them haven’t realized it yet. If you're reading this, we believe you’re already on the path to optimizing your SaaS spend.
This article went into detail on why businesses are overspending and what initiatives finance teams must take to minimize SaaS spend. But you might encounter a few of the challenges we listed while trying to optimize your spend.
The key is to use the right SaaS spend management software to take control of your SaaS applications and spending.
CloudEagle is a comprehensive SaaS spend management platform with cost optimization, contract management, automated renewal, and procurement workflow features to help businesses save on SaaS spend.
Check out this exciting customer story: Sophie Wang from Wefunder recalls her experience of how CloudEagle helped her finance team save on SaaS spend.
Is you SaaS spend out of control? Book a demo now and our experts will help you optimize your software spend in this volatile market.