February 10, 2023
With a looming recession and high inflation combined with the tech talent crisis, SaaS spend optimization has become a key priority as companies seek to spend less but maintain functions and user experience. By following the 3Rs (remove waste, reduce duplication, and right-size requirements), enterprises can capture greater value. Read on to discover how using this framework can optimize SaaS spend.
SaaS (Software as a service) is perhaps one of the most widely used and discussed topics in large tech forums as well as large and small enterprises. This is logical, given the ease of use, versatility, and cost-effectiveness of SaaS offerings.
The days when software licenses were installed from a CD are long gone. Today, anyone with a personal computer and internet connection can buy SaaS licenses/subscriptions at the click of a button with a credit card and use it almost instantly.
The SaaS industry has rapidly expanded to include a plethora of plug-and-play applications for small, medium, and large enterprises. SaaS spend for enterprises continues to increase by 15-20% each year. On average, enterprises with more than $1 billion in revenue use more than 100 different SaaS applications.
However, this significant and rapid proliferation of SaaS has also eaten up huge chunks of IT budgets. While IT teams strive to enhance user experience and shorten time to market by leveraging the endless possibilities of SaaS-based applications, procurement and finance teams are focusing on maximizing their ROI.
Chief Information Officers (CIOs) in many enterprises are leading SaaS spend optimization initiatives. With the current macroeconomic factors of a looming recession, and high inflation coupled with high-tech talent attrition, enterprises’ need to scrutinize SaaS spend more closely has intensified.
Enterprises must understand the philosophy behind SaaS spend optimization before starting any cost savings initiatives. The goal is to find ways to efficiently reduce spend on SaaS products/applications without impacting functionality, usability, and user/customer experience. Let’s explore how to accomplish this further.
Negotiating with SaaS providers to get lower rates seems like the most obvious way to achieve savings. While this is one approach, enterprises can pull other levers internally to reduce their overall SaaS spend.
Our 3-R framework can help enterprises get started on SaaS cost optimization initiatives by identifying potential areas of value leakage that can be tackled immediately to realize savings. Using this framework, a large manufacturing client recently identified potential savings of 13-18% in its SaaS spend with multiple software providers.
Below are the 3Rs to examine:
- Remove waste: Research indicates that, on average, more than 30% of SaaS products that an enterprise purchases are unutilized. But most enterprises do not have a robust SaaS-usage monitoring and tracking practice to discover this. As a result, these unutilized products remain in the tech stack, and enterprises continue to pay for them.
Enterprises can start with a quarterly status check report on usage of all purchased SaaS licenses. If some of these licenses have not been used for more than 90 days, they likely are no longer required. After confirming this with the user department, these unused licenses/subscriptions can be terminated immediately
- Reduce duplication: SaaS licenses/subscriptions come at a fraction of the perpetual license cost and can be purchased on the go. Most of the time, departments across enterprises purchase SaaS licenses for their incidental requirements with little or no involvement of the procurement function. Since such purchases happen in silos, the enterprise’s tech stack has many applications with significant overlapping features. For instance, two different departments in the same enterprise might buy and use different SaaS applications for project management or team collaboration.
Enterprises can identify applications that have similar functionality using the tracking mechanism that we discussed in the point above to help them find potential applications that could be discontinued.
Using the same application at an enterprise level creates homogeneity and ease of maintenance. It also will result in a single SaaS provider garnering a large part of the spending versus smaller and fragmented spend with multiple SaaS providers for the same requirement. Enterprises can leverage a larger volume of business with a single provider to get better discounts
- Right-size requirements: Most SaaS providers have multiple editions of their products. For instance, ServiceNow has requester, approver, and fulfiller roles; Microsoft has basic, standard, and premium versions of M365. The nomenclature may vary from one SaaS provider to another, but the idea behind having multiple editions is to meet the requirements of different user groups. The basic edition typically has limited features and is the least expensive, while the highest edition has the largest number of features and is the most expensive.
Every user does not need the most feature-rich expensive edition. But enterprises often buy the same editions for all users, resulting in a lot of waste since many users might not require all of the purchased edition’s features.
Enterprises should leverage persona profiling to identify three or four user groups that will need different SaaS editions to optimize their bill of material for SaaS licenses/subscriptions and reduce total costs
As more and more SaaS-based applications get pushed into the market and used by departments across enterprises, SaaS spend will only grow. This creates an immediate need for increased transparency by the IT, procurement, and finance departments to closely examine how SaaS licenses are procured and used. By adopting our 3-R framework, enterprises can gain momentum in their SaaS spend optimization journey.
Are you focused on SaaS spend optimization and interested in exploring this framework? Reach out to Udit Maheshwari or Shikharjit Mitra to discuss the current SaaS market dynamics and how to get the maximum value from SaaS contracts/subscriptions.
Watch our webinar, Top Emerging Technology Trends: Six Things Sourcing Needs to Know in 2023, to align your sourcing teams with the latest technologies and technology optimization.