SaaS waste begins to weigh on the budget

The use of cloud computing has grown, as have mobile applications, making the SaaS (software as a service) market a $205 billion market in 2023, according to Gartner, which could rise to $374 billion by 2028, according to a Statista report. This scenario shows the vitality of the market (there are now more than 30,000 SaaS companies in the world), but it also signals problems.

By 2024, SaaS revenue is expected to grow to $244.20 billion. After payroll costs, spending on software is the second most important expense for many companies, according to Vertice, a British start-up specialising in managing corporate SaaS portfolios. Companies can manage practically everything with SaaS and spend an average of $8,000 per employee per year.

That’s where the problems lie, points out a recent report released by Vertice:

• Depending on the size of the company, the annual financial waste with SaaS can vary from $500,000 (companies with 100 to 399 employees) to $4.3 million (over 2,000 employees).

• By waste, Vertice means the unnecessary or inefficient purchase of software, resulting from over-provisioning, under-utilisation, or the famous ‘shadow IT’ made without asking permission, using the corporate card.

• Productiv’s ‘State of SaaS’ survey shows, for example, that ChatGPT is on the list of the top 20 shadow applications used in 2023.

• The under-utilisation of SaaS licences in different areas of the company varies from 5% (in HR) to 52% (in sales). On average, we’re talking about 33% underutilisation, according to Vertice. In Productiv’s account, underutilisation is over 50%.

To complicate matters, Vertice’s SaaS Inflation Index 2024 shows that, even without buying a new licence, companies will spend 8.7% more on SaaS in 2024. This is ‘software inflation’ that has outstripped the inflation index in the US and many other countries. According to Vertice, almost three-quarters (73 per cent) of software vendors increased their prices in 2023.

For the first time, according to Eldar Tuvey, CEO and founder of Vertice, in 2023 companies spent more on software as a service than on employee health benefits. The figures were collated from Vertice’s database of purchases from 16,000 suppliers.

The startup, which bridges the gap between CFOs and technology with its Cloud Cost Optimisation tool for managing SaaS expenses, has just closed a Series B investment round of $25 million, led by 83North and Bessemer Ventures, a fund specialising in cloud startups. In total, Vertice has raised $51 million since January 2022 and its recurring revenue (ARR) grew 7x in 2023.

Today’s companies adopt software as a service to add features quickly, without large investments in infrastructure and staff to develop them in-house. A business leader chooses a service, signs a contract and quickly has a CI/CD tool, a complete HRM system or another business application.

Here are the steps to effective SaaS expense management:

1. Identify all SaaS applications in use, including those formally acquired, as well as applications resulting from misspending or inherited from mergers and acquisitions. For companies that don’t have an up-to-date record of all the applications in use, they can start by analysing recurring invoices. The challenge with this method is the various billing cycles. Some software is paid for quarterly, while others may be paid for annually or more, creating an extensive list of invoices that must be reviewed to identify any SaaS spending.
2. Gather relevant details about your SaaS spending so that you have an understanding of the metrics that drive costs. Once all SaaS applications have been identified, compile important data points from SaaS contracts, including.
   • Payment terms
   • Price structure
   • Contract term
3. Analyse the impact and use of SaaS spending. Identify areas of overspend, redundancy, underutilisation and invisible IT. This analysis can be done using various tools, such as spreadsheets or SaaS spending management software.
4. Develop a plan to reduce SaaS spending. This plan should include specific actions that the company will take to reduce its SaaS costs, including:
   • Negotiate better prices at current utilisation levels or find ways to consolidate suppliers, capture volume or discounts on various products.
   • Eliminate unused or underused software subscriptions or licences.
   • Find competing suppliers via review sites (e.g. G2) that can help identify cheaper alternatives to the applications currently being used.
5. Implement the plan to reduce SaaS spending. This may involve some or all of the actions listed above or the implementation of a SaaS expense management software or platform.

A solution for managing expenses in SaaS can automate the process of optimizing the stack and provide insights on how to reduce or allocate costs more efficiently. Considering the numerous applications used by organizations and the frequent renewals processed annually, utilizing a specific SaaS expense management tool can streamline operations, save resources, and offer immediate visibility into your SaaS ecosystem. While it may appear counterintuitive to invest in software to cut software expenses, a SaaS expense management solution guarantees that you consistently make the most of your SaaS investments.