Understanding SaaS Spend Management: Best Practices & Strategies

August 29, 2022

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SaaS spending has been on the upswing for decades. But it’s only recently that we’re seeing SaaS spending overtake traditional software investments. Depending on who you ask, it’s estimated the cloud will become the predominant delivery model for all software within the next three years. Gartner estimates SaaS spend to grow 20% in 2022 alone. And perhaps most telling is more and more enterprise software vendors are phasing out perpetual licenses altogether.

For all the benefits of SaaS, the cost advantages are still hotly debated. Renting versus owning has its price over the long term. But SaaS spend management challenges don’t end there. SaaS offers good cover for a lot of unintentional cost waste and enterprises must be well-versed in how to minimize overspending risk.

What is SaaS Spend Management?

To gain a better understanding of SaaS spend management, one must first acknowledge how the purchase of software has evolved in the SaaS era. With on-premise software, the enterprise’s IT and IT procurement teams were involved closely in nearly every software purchasing decision. Once they had a list of business requirements and goals, they would evaluate potential candidates, determine their vendor of choice, and negotiate pricing and terms. IT would install, configure, and maintain those applications throughout the software’s lifecycle. Rinse and repeat.

With SaaS, things changed significantly. In many cases, nothing needed to be installed. In some cases, nothing needed to be maintained. SaaS vendors began marketing to departmental users. It wasn’t long before many SaaS purchase became largely decentralized. A marketing or finance department could easily bypass IT and procurement and subscribe to the features and functionality they needed at a fixed monthly rate. The term “shadow IT” emerged. And with it came a concerning lack of visibility into what the organization owned, how it was being used, if best practices were used during vendor negotiations, and general spend oversight.

Which is where SaaS spend management enters the conversation.

SaaS spend management refers to the ways that a company both monitors and controls the amount of money it is spending on various SaaS subscriptions on a regular basis. As SaaS spend has become more unwieldy, organizations have realized they have a visibility problem – particularly among their largest software estates. How many licenses do they own? Who is using them and how? What is the process for spotting and decommissioning inactive licenses? Are there redundant features and capabilities among different deployments?

Current SaaS spend management best practices address these challenges and make it easier for companies to spot and eliminate “toxic spend” in their organizations.

Why SaaS Spend Management is Important

To understand why SaaS spend management is important, let’s look at the current state of SaaS sprawl in the enterprise. A recent article from CIO Dive shares the following:

  • Departments are managing more enterprise applications than IT, accounting for 56% of all company app ownership and management, up from 4% year over year, according recent report.
  • Most departments use between 40 and 60 different applications. Companywide, departments use an average of over 200 apps.
  • Gartner estimates that 30% of SaaS spend is toxic – meaning it’s spent on unused licenses and features.
  • Studies show many businesses have between two and three times more SaaS and cloud-based applications than they assume they have.

Having said that, without the proper governance in place, the risk for material overspending on SaaS is alarmingly high.

SaaS Spend Management Best Practices

NPI recommends enterprises focus on the following SaaS spend management best practices:

Conduct a SaaS license optimization assessment: For large SaaS estates like M365, Adobe Creative Cloud, Salesforce, ServiceNow and Workday, it’s important to gain a clear picture of what you own, who’s using it and how it’s being used. Assessments should be performed at least once a year – or more depending on workforce changes. They are particularly useful in advance of a renewal event. Establishing an accurate optimized usage baseline can help you more clearly define renewal demand and align cost and usage. Using standard inputs from your existing applications and tools, NPI’s SaaS license optimization assessment services provide a detailed analysis to identify specific, actionable cost reduction opportunities in two areas:

  1. Reclaim inactive licenses: A license optimization assessment reveals inactive licenses. Examples include employees that no longer use a license, ex-employees and contractors, multiple licenses assigned to a single user, or even “no pulse” users like printers and conference rooms. Identifying these instances allows you to liberate inactive licenses for redeployment instead of purchasing additional licenses to fulfill changing requirements.
  2. Right-size and realign underused licenses: The assessment also reveals licenses that are overpowered, and recommends realignment of best-match license type to users based on task, role and utilization. More often than not, enterprises will find they are paying for at least some licenses that provide more functionality than needed at an unnecessarily high cost. Examples include Microsoft 365 customers who deploy a one-size-fits-all E3 or E5 subscription across thousands of users rather than leveraging frontline worker SKUs or other lower-cost options for workers that need less functionality.

All of the SaaS license optimization tactics in the world can’t fix SaaS overspending if companies are paying more than they should at the SKU level. One mistake enterprise SaaS users make is assuming SaaS pricing is inflexible and cannot be negotiated. This isn’t true. SaaS vendor pricing disparity between customers is frequent. To make sure you’re paying a fair price for the SaaS services, perform IT price benchmark analysis on your next SaaS renewal or purchase. This will identify gaps as compared to best-in-class pricing that can reduce costs significantly.

If you’d like to find out more information about SaaS spend management best practices, or how NPI can help you implement them for fast SaaS cost reductions, contact NPI today.