With a recession looming and economic headwinds showing no sign of abating, many companies are scrambling to cut costs. Software is a prime category for optimization, and many organizations are paying 50% more on cloud technologies than they did just two years ago.
It’s tempting to over-invest in best-in-class technologies to drive efficiencies and stand out, but that technological desire to keep up with the Joneses can come at a significant cost. Companies currently carry hundreds of software contracts, mixing and matching apps, platforms and an endless array of SaaS vendors.
The result is that some of that spending is unnecessary. In fact, according to our internal data, which reflects over 10,000 contracts we’ve negotiated, companies are overspending on their software by nearly 30%.
The challenge is that most companies don’t have the right purchasing infrastructure in place — data, tools, experts and processes — to effectively navigate the nuance and complexity inherent in software procurement. They’re essentially in “DIY” procurement mode.
The question is not whether there is waste or inefficiency, but rather how much.
As a result, they don’t know how much they should be paying for each tool or what tools they really need, let alone if they’re actually using what they bought, where they’re storing the original contracts, or documenting when contracts are up for renewal. This disparate approach leads to massive inefficiencies, not to mention overspending.
How can you regain control of the process to make sure you’re making the best possible decisions around your software spend? Start by asking yourself these three important questions.
Do I know what I’ve bought and am I using it wisely?
Every company should be auditing its current tech stack. No exceptions! Most companies suffer from bloat from years and years of over-investing in software, and it’s essential to have a clear picture.
Start by getting an accurate count of the number of tools and software platforms your company actually has, and how much you paid for them. Next, make sure you know where the original contracts are and when renewals are scheduled. In addition, find out if you have a single source of truth by examining whether all your contracts and associated data are stored and accessible from one place.
In today’s climate, companies need granular understanding of their spending, and they need to know if their tech stack is being used to its fullest. The question is not whether there is waste or inefficiency, but rather how much. Being able to get direct and tool-specific feedback on your utilization is critical for every tool. Paying for 100 licenses but only using 50? Start by finding out who in your organization is actually using the tools, and who isn’t.
Once you’ve identified usage rates, you can then set your sights on understanding your level of waste (e.g., unused licenses, unused tools, etc.) and how to take action. For example, you could eliminate licenses not being used or renegotiate contracts to make sure your contract and usage parameters meet your needs.
Although this can be a cumbersome process that may even require CFOs to scan hundreds of spending records and systems, completing a companywide audit is absolutely necessary. Every day that you don’t have a clear view of your entire tech spend is a day that these budgetary overages could compound and eat away at your business.
Do I have an efficient purchasing process that employees follow?
Start by examining your company’s purchasing process to ensure that employees who need to buy software have a standardized process that protects your organization from compliance, commercial and security risks.
Software inherently requires many layers of approval and feedback from disparate stakeholders (economic buyer, technical buyer, end user), which only magnifies the importance of creating well-thought-out protocols.
Based on data from hundreds of organizations, companies typically require upward of 300 software contracts to operate their businesses and spend four to 12 hours on a single contract. This means that senior-level employees could be spending 1,200-3,600 hours annually on contract approvals and negotiations instead of focusing on important work tied to revenue growth, innovation and customer satisfaction.
Beyond the sizable soft costs involved (employee time and productivity), an inefficient purchasing framework enables what is called rogue or shadow spending to run rampant. Automation goes a long way in eliminating rogue spend and ensuring purchasing processes are centralized and enforced through automation and dynamic workflows.
When implemented well, this will ensure that a purchase only progresses when all selected criteria are met. These automated workflows and approvals serve as guardrails for companies to ensure any new purchase request meets the standards and compliance criteria explicitly set forth by the company to mitigate risks.
Without detailed processes in place, you could be putting your business and cybersecurity at risk, especially if there are auto-renewals or contract terms that you don’t know about.
Am I paying a fair price?
The lack of price transparency is another factor that causes ample confusion and frustration. The average company winds up overpaying by about 30% and can face price deviations as high as 80%.
Given the dynamic nature of software, prices, features, renewals and the number of seats you need for your team can change rapidly, making it hard to determine if you’re paying a fair price. An imbalance of power in this space gives software vendors the upper hand and minimizes the leverage software buyers’ have to negotiate.
An examination of hundreds of savings assessments determined that on an individual basis, companies are overpaying for software by between $700 and $1,200 per employee. The range reflects variables such as total number of contracts, the complexity of the software and the flexibility of the contracts themselves.
Even with that information at hand, pricing and negotiations remain a complicated process, which is why many organizations seek professional help. If you don’t have the staff or expertise to ensure you’re paying a fair price, there are a number of insight-driven technologies that can streamline the process and access the best price for your tools. These databases contain thousands of SaaS transactions that can serve as valuable competitive intel, restoring a balance of power between buyers and sellers.
Brad Veech, senior director of IT Sourcing at Walmart, makes a compelling argument in his new book that software is the silent killer of company budgets. But it doesn’t need to be this way.
Getting a better handle on your company’s tech stack, including what’s in it, whether you’re using it effectively and whether you’re paying a fair price, can ensure that your tech stack is doing what it’s set up to do without eating into your bottom line.