As inflation and general economic uncertainties spur C-suites to identify cost-cutting areas within their organizations, software-as-a-service (SaaS) spend is becoming a prime target.
SaaS is obviously a broad category, covering any centrally hosted software that’s licensed on a subscription basis. But no matter the flavor, SaaS is a growing line item in companies’ budgets — a line item that’s threatening profitability.
According to a recent report from SaaS purchasing management platform Vertice, SaaS pricing inflation is growing four times faster than global inflation. Moreover, customers are putting 53% more toward licensing than they were five years ago, the survey found, with $1 in every $8 that enterprises spend today going into SaaS products.
“Most organizations have grown their portfolio of software vendors dramatically over the past 10 years … it’s not uncommon to have more than doubled that vendor portfolio.” Stephen White, senior director-analyst, Gartner
That might sound like an enormous pile of recurring cash. But it’s not surprising when you consider the average organization now uses around 110 SaaS solutions, according to BetterCloud, with large companies using an estimated 447.
Management has come down aggressively: Fifty-seven percent of IT teams told Workato in a 2022 poll that they’re under pressure to reduce SaaS spend — a task that’s easier said than done in organizations where teams and even entire divisions rely on SaaS suites to get their work done.
To get a sense of the SaaS landscape in a time of cutbacks and cost reductions, we spoke to analysts at Gartner and PwC who study trends in the software procurement market.
Stephen White, a senior director-analyst at Gartner, partially blames the rising cost of SaaS subscriptions on vendor lock-in. White pointed out that companies often become dependent on SaaS apps and are forced to renew lest they risk burning valuable time and capital on migrations to alternative services.
“The SaaS revolution and revenue model is as much a product of the very dependency and renewal dynamic as the cloud delivery model it runs on. The capacity to increase prices at renewal is certainly a factor of competition and switching costs; that equation is most in favor of monopolistic vendors,” White said.
Cenk Ozdemir, the cloud and digital leader at PwC, listed three other factors he sees as contributing to climbing SaaS subscription prices: inflation, labor costs and increased energy spending. To his points, IT executives continue to cite the talent shortage in tech as a significant blocker to internal benchmarks, while climbing electricity costs — a symptom of the war in Ukraine and climate change — are sending cloud costs correspondingly upward.
Ozdemir added that new paradigms like sovereign computing, an architecture designed to provide data access in compliance with local laws, are forcing SaaS companies to proliferate their global data center footprints, adding to their operating costs — which they’re passing onto customers.
So what are corporate SaaS buyers to do in light of soaring SaaS expenses? Ozdemir emphasized the importance of “optimizing the cost of the existing IT landscape” by understanding where to reduce spending and running diagnostics of which apps employees are actually using.
It sounds like common sense, but in a company juggling hundreds of different SaaS apps, it isn’t always easy to figure out which are getting regular and consistent usage. SaaS management apps like Zylo, Beamy, Josys and Torii can help — for a price, of course. Alternatively, IT teams can embark on manual audits of SaaS contracts and analytics.
White agreed with Ozdemir on the optimization point but noted that some SaaS agreements might preclude cost reduction because they’re multiyear or have minimum commitments attached. “The most viable reduction of all is any SaaS which uses a consumption-based billing model, where as soon as the usage drops, invoices follow suit,” he added.
White also said that it makes sense for companies to eliminate what he calls “shelfware as a service” in cases where SaaS software licenses have been over-procured. He argues organizations that’ve invested in identifying low-hanging SaaS fruit will reap the benefits over the long term as subscription prices inevitably rise.
“Most organizations have grown their portfolio of software vendors dramatically over the past 10 years … it’s not uncommon to have more than doubled that vendor portfolio,” White told TechCrunch. “Rationalizing the portfolio is a reasonable consideration to eliminate costs where there is excessive overlap of capability and duplication. Similarly, there is an opportunity to leverage economies of scale; where different functions within an organization use competitive titles from alternative vendors, by rationalizing and consolidating with a preferred vendor, the customer can leverage their scale more effectively, eliminating cost by improving unit pricing as a result.”