Software Spend Is Surging: What Can A Business Do?
Software costs are on the rise. How can businesses succeed without overspending?
Unlike anywhere else across our economy, the cost of software has soared. How can businesses ensure they are leveraging the right tools for the job while avoiding hidden, unexpected and rising costs? Eldar Tuvey, CEO and co-founder of Vertice, discusses strategies to manage rising software costs better.
When it comes to reducing business costs, oftentimes, payroll and operations are first on the chopping block. An area of spend that is often overlooked, however, is software, despite the fact it now accounts for $1 in every $8 of total business expenditure. The cost of software is rising so fast it’s outpacing today’s market inflation by four times, according to our SaaS inflation index. From 2010 to 2020, spending on software products grew more than tenfold, increasing from $13b to $157b annually.
Almost every organization relies on software to conduct business. This includes collaboration tools like Slack and Zoom, productivity suites like Microsoft 365 and Google Workspace, or department-specific platforms like NetSuite and Salesforce. Many of these tools have in fact become critical to day-to-day operations, but the decentralized nature of business software selection, management and renewal typically results in software sprawl across an organization. This is both inefficient and costly.
Fast-rising Costs
Today, software is crucial to overall business productivity and continuity, yet the spiraling cost has outpaced rising inflation. It has taken only five years for average software spending to double. If the average increase in software spend rose along with economic inflation alone, it would take 18 years for the cost of software to double. Unfortunately, in today’s world of automatic renewals, it’s only taken five years for software spend to double. That means if you were spending $100 per month on Microsoft in 2017, by 2023, it’d jump up to nearly $200 per month. Comparatively, if the cost of software had risen in line with inflation in the U.S., it would only be $120 per month.
Software spend will only continue to rise as organizations transition to the cloud, which enables employees to remain productive in today’s work-from-home era, but organizations must get a handle on their purchasing strategies. New software innovations, expanded licensing and richer functionality will all drive business growth, but a single view of significant software product investments across the entire organization is paramount. Especially when you consider visibility helps identify instances of platform duplication or license under-utilization.
1.Unexpected auto-renewals
You may expect the explosion in software spending to be caused by the adoption of new tools or the need for additional licenses and functionality, but predominantly, vendors are simply charging customers more. And too often, it’s through deceptive auto-renewal tactics. When it comes to rising software costs, too many vendors let the legal terms do the leg work. An analysis of 10,000 software contracts over the past five years, the SaaS inflation index mentioned above, found that 88% of vendors have clauses that allow them to change their pricing at any time. In some cases, they don’t even need to notify customers.
For example, according to the Terms of Service for one leading business communication software company:
“We may change prices at any time, including changing from a free service to a paid service and charging for Services that were previously offered free of charge; provided, however, that we will provide you with prior notice and an opportunity to terminate Your Account if we changes the price of a Service to which you are subscribed and will not charge you for a previously free Service unless you have been notified of the applicable fees and agreed to pay such fees.”
Software vendors are more effective at retaining customers when there are longer-term contracts, which is why discounting is more likely to occur for deals signed over two, three or four years. When an organization knows it’s going to be relying on a tool for an extended period, it’s in its best interest to negotiate longer-term deals and thoroughly understand the renewal terms.
See More: Supporting Remote Workforce Productivity by Mitigating IT Troubleshooting
2. Lack of transparency
In addition to broad inflation across software and unknown auto-renewals, software vendors also have a sophisticated set of levers they can pull to sustain their own revenue growth. This typically comes at the expense of the customer. Only 45% of software vendors publish their pricing, with the remainder obscuring the cost of at least some of their licensing, leading to ambiguity for the organization. This is most apparent for enterprise solutions, where buyers are less likely to be sensitive to pricing.
How Can Organizations Address Software Sprawl?
Software has transformed organizations, addressing accessibility, security, scalability and independence from IT. Software emperors employees to benefit from a well-stocked arsenal of tools that help them work more effectively. When implemented properly, many of these products lead to significant increases in productivity, which typically results in more sales, better operations and a more efficient go-to-market organization. Naturally, this has also led to a major increase in spending, and total spend on software has exploded.
As employees across departments add new software tools into their day-to-day operations, the organization as a whole loses oversight of its software stack. As a result, they waste money and are even susceptible to potential security risks and data breaches. So what can businesses do to avoid losing money and putting their organization at risk?
A typically arduous process, they need more insights into the real cost of their software stack. Software pricing database tools are available, some of which include features that can negotiate pricing on a business’ behalf. Otherwise, it will likely fall on procurement or finance teams who’ll need to find out what other comparable companies are paying for their licenses. Additional questions include the price of enterprise products and what is the average discount rate for similar customers. Answering these questions is a challenge involving informal peer networks or arcane online research methods instead of a trustable benchmarking solution.
The amount of control a business has over any software agreement depends on how much control it has over two key factors: time and leverage. Leverage comes from a number of places, including pricing intelligence, awareness of a vendor’s sales cycles and overall business health, or insights into the competition. Simply knowing what options are at your disposal with a particular vendor can help generate leverage because vendors are generally willing to alter their pricing based on the length of contract. Being aware of the minutiae of each vendor’s pricing practices can go a long way at the negotiation table.
The goal is to create as much leverage as possible, often requiring taking a step back and thinking about the bigger picture. Whichever finance or procurement team is taking the lead on software spend must ensure they’re employing tools that are flexible enough to address future needs, scalable to grow along with the business and offer price certainty so you know what you’re paying and when it needs to be renewed.
How are you managing software costs without compromising on success and security? Share with us on Facebook, Twitter, and LinkedIn. We’d love to hear from you!
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