Even if an organization’s SaaS application budget has been determined, taking the time to re-examine SaaS application spending can reveal hidden cost containment or savings opportunities – and improve budget forecasting accuracy.
Identify Current SaaS Spending Sources
In his excellent guide to practical IT management in modern businesses, Truth from the Trenches, seven-time CIO and current Okta CIO Mark Settle notes an obvious but often under-emphasized aspect of optimizing the financial management of technology. “Sound financial management ultimately relies on timely and accurate financial information,” Settle wrote.
Creating an accurate understanding of the current state of affairs for SaaS-based software spending in your organization offers the first step towards accurately forecasting a SaaS application budget. In general, because they are easy to acquire, simple to deploy, and frequently can be utilized by users of even low skill level, SaaS applications quickly become hidden or obscured.
With that in mind, answering these three critical questions can determine the current state of spending:
- Who: Who owns the applications purchased?
- Where: Where does spending occur?
- When: When does spending occur?
Identifying application spending ownership
The IT department no longer solely owns technology spending for business tools and software. Analyst IDC notes that 70 percent of all application spending now stems from line of business budgets, not IT. Business units have more choices than ever for new business tools, as cloud-based software and SaaS have evolved and flourished as highly specialized verticals.
For example, consider the increasing myriad of marketing technology tools. In 2011, 150 digital tools were available to marketing leaders. Today, the number of tools available to marketers count exceeds more than 7,000 applications. Specific tools for Human Resources, Finance, and other business unit functions have followed similar trajectories.
But while ownership is no longer solely in the hands of IT professionals, it’s frequently IT’s task to pinpoint each tool’s cost, ownership, and effectiveness for the business as a whole.
Zylo’s SaaS consultants recommend using financial transaction records as the source of truth for application ownership. For many organizations, this is the most universal form of record-keeping. The benefit is that nearly every application introduced to the organization is typically purchased, creating a paper trail. Sifting through large volumes of financial data may, however, prove daunting.
How to discover ownership
A SaaS discovery and management tool such as Zylo’s, which uses machine-learning algorithms to detect every instance of SaaS with nearly 100-percent accuracy, may be necessary when attempting to extract SaaS transactions from large volumes of data.
This process can track application ownership down to the individual business unit and employee. While application purchases may be led by line of business leaders, it’s noteworthy that employees also contribute to application purchases.
A recent Zylo data study shows that more than 30 percent of employees at the typical enterprise purchase SaaS applications on behalf of the company using expense reimbursement.
Identifying spending channel mix
For most businesses, it’s no surprise that most SaaS application spending falls into two categories: direct supplier purchases, or purchases sourced from company credit cards and expense reimbursement.
But when it comes to SaaS spending, what can be surprising is the number of applications acquired by employee-led spending. According to a recent Zylo study, employee-led spending created more than half of all SaaS applications in the average company’s inventory.
While the transactions associated with employee-led software spending typically cost much less than transactions created by direct supplier purchasers – $570 on average for employee spending compared to more than $37,000 for an application that originates from a direct supplier purchase.
Understanding this mix is crucial to planning future SaaS application spending and minimizing unplanned costs. Employee expense purchases are typically unforecast events, so any effort to prevent or reduce them (when feasible) can help ensure a more accurate budget.
Document spend timing by pinpointing SaaS application renewal dates
An enterprise-sized organization undergoes at least one SaaS application renewal every day, according to a Zylo data study.
Frequently, these renewals result from automatic renewal policies that may only be located in the original purchase agreement or contract. When undiscovered, unmanaged, and unplanned, automatic renewals wreak havoc on software and SaaS budgets.
The remedy: As mentioned above, it’s first essential to discover every SaaS application or subscription currently in use within the organization. Once the “known universe of applications is known, it’s then possible to identify individual owners and scour purchase agreements (or other application details) to find renewal dates.
Adding renewal dates to a calendar and then proactively planning renewal strategy can help technology leaders and application owners avoid unplanned costs, which helps maintain budget accuracy throughout the year.
Determine Future Spending
Gartner data projections show that as a market category, on average SaaS will grow by 16 percent each year until at least 2021. By 2020, the total SaaS market will capture more than $116 billion.
A recent benchmark study based on the more than $9 billion in customer spending managed by Zylo’s SaaS management platform revealed a nearly identical growth curve: On average, Zylo customers spent about 16 percent more year over year.
While every company’s spending trajectory for cloud tools like SaaS will be unique, one constant holds true: Few if any companies will spend less year over year for cloud-based subscription software.
If the discovery process mentioned in the previous section can uncover financial transactions for software transactions over multiple years, charting a growth curve may be more manageable.
If not, it may be tempting to forecast next year’s budget based on a flat rate, such as the average 16-percent year-over-year increases noted above. However, consider cost-inflating factors such as the following to increase budget forecast accuracy:
- Increased need new applications or application quantity or for due to increased headcount or new initiatives
- Sunsetting or offboarding of existing tools
- Renewals of mission-critical applications that command significant investments, especially following multi-year terms
- Contractual price elevators or price increases for surpassing per-license or per-seat price brackets.
- Mergers or acquisitions
Increase Budget Accuracy with Savings
Considering that increased SaaS spending is virtually a given, optimizing and extending the value of currently deployed tools is a required exercise for budget forecasting. Ideally, while every business will experience a growth curve of increased spending, that growth curve can be “flattened” by identifying and managing previously unplanned or unmanaged spending.
As Gartner research director James Anderson noted in a recent ZDNet article, savings opportunities from technology spending can now be identified throughout most businesses. “It’s not looking at what’s in the ‘IT budget,’ but at all of those things across the business that can be influenced by IT, which is just about everything,” Anderson noted.
The distributed nature of SaaS applications and ownership can be problematic, but the same characteristics make it a target-rich environment for leveraging cost savings. Similar to strategic renewal planning, these cost savings and value optimization opportunities, once undertaken, can enable more accurate budget forecasting.
Here are a few–but not all–of the ways deploying a robust SaaS management strategy can lead to cost savings on current tools and lead to more accurate forecasting:
Reduce spending “leakage” through shadow IT discovery
Discovering shadow IT and its sources (such as employee-led acquisition) helps evaluate spending sources and can inform the creation of future software sourcing, acquisition, and deployment processes. For example, prohibiting employee expense reimbursement for software and creating a review board can effectively reduce unmanaged spending.
Standardize widely used applications
Competition is a natural force in the organic evolution of the SaaS tool market, and users often have the luxury of choice among multiple applications to solve business problems. Specific verticals such as web conferencing, productivity tools, and collaboration and messaging platforms are exceptionally competitive.
Consolidating this competition by standardizing around a single duly chosen application not only eliminates confusion and friction but can also lead to savings.
Seek enterprise license agreements
Once an application has been selected and subsequently standardized, existing disparate user licenses (such as those acquired under employee-led acquisition) should be consolidated under an enterprise license agreement (ELA).
ELAs are preferable because they leverage the purchasing power of the entire organization and enable discounts not available to individual end-user license agreements (such as multi-year agreements), which lead to reduced per-user costs.
An additional benefit from ELAs includes the ability to negotiate other contract terms such as enhanced security or privacy terms.
Examine utilization and evaluate SaaS application standing
Examining end-user utilization frequently reveals cost savings. Under-utilization of provisioned licenses or seats diminishes application value that, once identified, can be recouped by pulling back provisioning and redeploying to users who are more likely to utilize the application. If under-utilization is widespread (i.e., a majority of users do not use it effectively), eliminating the application altogether (and therefore its cost) can yield savings.
By accurately and examining the entire picture of SaaS application spending, including discovering sources of acquisitions, spending channel mix, and renewal planning, technology leaders can be enabled to more accurately forecast spending and deliver cost savings.
These actions and more become available only when these leaders commit to enacting a robust SaaS management strategy.