Understanding SaaS Spend Management: Best Practices & Strategies

April 25, 2024

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Enterprise SaaS spending has exploded in recent years. That’s not surprising as SaaS is the preferred software delivery model for most organizations. However, only in recent years has SaaS spending overtaken traditional software investments, with 64.5% of organizations choosing SaaS compared to 34.5% opting for on-premise. Estimates show SaaS revenues are expected to increase to $282.2 billion in 2024 and to $374.5 billion by 2028. 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 purchases 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.

A clear need for SaaS spend management emerged amid these concerns. 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 regularly. 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 organization

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 to a recent report.
  • Most departments use between 40 and 60 different applications. Companywide, departments use an average of over 200 apps.
  • Gartner estimates 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 of 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 who 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.

Benchmark SaaS Pricing

All 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 an 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.

Developing a SaaS Spend Optimization Strategy

A comprehensive SaaS spend optimization strategy should focus on the following key areas:

  • Centralizing procurement and oversight of all SaaS apps to improve visibility and control. This includes creating SaaS procurement policies and having a cross-functional team to evaluate new SaaS requests.
  • Conducting periodic SaaS license optimization assessments to identify and eliminate waste from unused and underutilized licenses. Assign clear business owners.
  • Benchmarking pricing on key large-estate SaaS apps before renewals to ensure favorable contract terms. Consider 3rd party sourcing assistance.
  • Creating and enforcing SaaS governance policies on subscription lengths, data ownership/security, and vendor management.
  • Developing processes to track SaaS ROI and business outcomes. Require insights into usage and adoption before renewal.
  • Providing self-service access to approved SaaS apps and automated offboarding for deactivated users.
  • Exploring SaaS management platforms that centralize procurement, spending analytics, and optimization.

How To Responsibly Reduce Your SaaS Spend

When companies set out to reduce SaaS spend, it can be tempting to take a blanket approach, such as cutting subscriptions across the board by a set percentage. However, this tactic generally backfires. Such cuts run the risk of eliminating software that employees need. This can hurt productivity and morale.

Instead, finance and IT leaders need a strategic, user-focused approach that balances savings with business enablement.

Conduct Granular SaaS Utilization Analysis

Before making any changes, IT and finance teams need to analyze adoption and usage patterns. Gather data on license activations versus logins over time. Identify applications with a high volume of unused or inactive licenses to cut first.

Align Changes to Business Goals

Review software applications individually through the lens of current business priorities and goals. Which supports revenue-driving activities? Which enable operational efficiencies? Consider the downstream impact and align proposed subscription changes accordingly.

Communicate Proactively, Phase Incrementally

Be transparent about why you are making these decisions and a timeline for changes. For example, if you are replacing E5 licenses with M365, employees may need to prepare. Also, consider phasing adjustments over time in smaller increments to give users time to adapt while allowing you to continuously monitor outcomes.

The key is maintaining open lines of communication. This balanced approach helps rein in unnecessary SaaS spend without disrupting operations.

How to Know When I Need SaaS Buying Assistance?

IT and procurement staff often feel overwhelmed with the work on their plate and lack the bandwidth to effectively negotiate favorable terms. There’s a lot that can be negotiated, even from boilerplate agreements. However, most internal teams lack this insight. Specialized consultants like NPI can provide industry benchmarking, licensing expertise, usage analysis, and spend optimization insights that internal teams simply cannot supply alone. The experts at NPI track thousands of deals across industries and know where opportunities are to improve negotiation outcomes for SaaS purchases and renewals.

How do you know if your organization will benefit from SaaS purchase and renewal optimization assistance? Signs include:

Expiring High-Value SaaS Contracts

If large SaaS renewals like Salesforce or Workday or ServiceNow are around the corner, outside help developing a cost, usage and license-optimized renewal strategy is prudent.

Pricing Disparity

IT price benchmark analysis comparing contract rates to peers can reveal significant pricing gaps. This indicates missed savings opportunities from less-than-optimal negotiations.

Shifting Usage

Growth, downsizing, or remote work transitions can drastically alter SaaS usage profiles. Consultants can rapidly realign subscription levels to evolving business environments.

Budget Surprises

Sudden or unexplainable spikes in SaaS spend signal lost visibility. External experts excel at auditing portfolios to identify cost-saving opportunities to reduce costs.

Siloed Buying

Disjointed procurement processes with disjointed SaaS buying teams can accelerate waste. NPI delivers economies of skill and scale to inform spend.

Why Do You Need a SaaS Spend Management Strategy?

The lack of cohesive SaaS governance threatens both efficiency and cost control. Decentralized buying leaves finance with limited visibility to overall spend. IT scrambles to integrate fragmented systems. Employees endure challenging workflows.

Without a strategy, unrestrained SaaS sprawl can quickly spread out of control. It’s a fact: enterprises will overspend for 85% of their IT purchases in the next year. IT pricing and terms are notoriously inconsistent, and most organizations have limited insight into complex choices.

Conversely, a tightly orchestrated SaaS management strategy delivers amplified impact across software investments – promoting agility while maximizing value extracted from each dollar.

Strategic oversight is critical because it:

  • Optimizes SaaS Investments: Identifies and eliminates redundant systems while right-sizing utilized subscriptions to ideal levels. This tailors investment to fit changing needs.
  • Speeds Deployment: With centralized oversight, procurement policies, and processes streamline the path to acquire and integrate new software.
  • Unifies Control: Top-down governance builds connections between siloed teams. IT, finance, and business units collaborate to optimize decisions.
  • Drives Visibility: Consolidated management and usage analytics provide transparency into SaaS spend. This allows course correction when waste emerges.
  • Mitigates Risk: Checks and balances for decentralized buying provide accountability. Standard de-provisioning minimizes the potential for bloat.

3 Steps to Creating a SaaS Spend Management Strategy

Like any major organizational initiative, developing an impactful SaaS governance strategy requires methodical planning and cross-functional collaboration. By rallying stakeholders across departments and systematically mapping current-state gaps, companies lay the groundwork for streamlined oversight.

Here are three key phases for constructing your SaaS management blueprint:

Step 1: Assemble a Team

Kick things off by pulling together an interdisciplinary working group. Ensure representation spanning IT, finance, security, procurement, and influential business units. This cross-section of leaders will weigh trade-offs and guide policy decisions from planning through execution.

Step 2: Understand the Landscape

Next, dig into the weeds of current SaaS spend from ownership to utilization. Catalog all active subscriptions along with associated costs and contracted terms. Paint a picture of lineage and connections across systems.

Step 3: Codify Standards and Systems

With clarity on scope and opportunities, define centralized processes governing request routing, vendor selection, license administration, and usage measurement. Detail policies for procurement, access controls, and de-provisioning. Develop dashboards to monitor adoption and spending.

Regulate Your SaaS Spend With NPI

NPI provides comprehensive SaaS cost optimization services grounded in license optimization, price benchmark analysis, IT asset management (ITAM), and workflow automation. By leveraging NPI’s assessment, advisory, and benchmarking capabilities, enterprises can effectively control runaway SaaS waste and spend. Our analytics-driven approach provides complete visibility into SaaS investments so you can make data-driven decisions that balance savings and business enablement.

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.