Finance
December 8, 2022

8 different ways you are overspending in SaaS

There are many ways in which companies end up spending excessively on SaaS licenses and products. More ways than many can think of. This article outlines the various ways in which SaaS optimization falls through the cracks and leads to unnecessary SaaS spending.

SaaS products are the future as we move to different working styles with a need for accessibility and ease of collaboration. The SaaS industry is booming. Gartner forecasts that end-user spending on SaaS tools is expected to reach $208 billion by 2023

In this age of information, everything is available at our fingertips. Organizations are spoiled for choice with a huge SaaS market. There are different SaaS solutions available for our ever-evolving needs. 

But in these times of economic uncertainty, it is imperative to do the due diligence before purchasing SaaS licenses, without eating into the SaaS budget.

Source

First, let’s try to understand why SaaS has grown so much. When the pandemic hit, SaaS emerged as a knight in shining armor to make things easier and accessible from anywhere. SaaS-based software doesn’t require a physical IT presence for maintenance and troubleshooting, and users can use it wherever they are.

Hundreds of new products have been launched ever since. Now that the world is moving to different working models, the situation has changed. But, SaaS, despite emerging as the solution, if not managed properly can cause problems. This is where SaaS management comes in. 

Organizations on average use 100+ SaaS tools and SaaS spend has become a major expense. Despite high revenue, a larger company with a large SaaS stack often finds itself unable to track all tools, struggles in managing licenses, and thus, ends up overshooting budgets. This is the result of unoptimized SaaS spend, and an indicator of why SaaS needs and purchases need to be looked into. The solution to such a problem doesn’t lie in the hands of one individual or a department even, but rather, is a collaborative effort within the organization driven by CFOs.

The goal is to have a mature culture in which ownership over the problems and solutions is in everyone’s hands in the company.” - Jeff Lawson, CEO of Twilio

Listen to our webinar on  SaaS Spend Management for modern CFOs

Overshooting a SaaS budget or losing track of SaaS spend is not because of a single problem or miss. There are many types of excessive SaaS spending. It is a combination of several commonplace mistakes made by the organization that become a larger problem. We’ll be tracing out what some of those issues and errors with SaaS expenses can be.

1. Choosing the wrong or multiple SaaS products

It’s not always easy to understand how to find solutions for specific needs and tasks. When there are more complex problems to be solved, one tends to jump the gun and reach for the fastest, most interesting solution. In some cases, the fastest solution is the most convoluted. But, given the number of existing products, it seems natural that people choose the tool they like the most with the limited information they have. 

Awareness plays a big part here. It is human nature to return to your favorite SaaS product - one that has served its purpose well. However, it is pertinent to point out that as organizations are evolving, there are new kinds of work being done. With innovations arise new problems and requirements. 

According to Statista, there were over 25,000 SaaS companies in the world as of 2021. That means there’s a SaaS product out there that suits the business needs of each organization perfectly - teams just need to find the best. 

This is just the Martech landscape as of May 2022 (Source)

The task of going through multiple SaaS tools does seem daunting. Going through each feature is even more exhausting, and there may be overlapping features and capabilities within the products that different departments are using. 

To solve this department and company-wide problem, businesses can use SaaS management platforms such as Spendflo that help them find the best SaaS product to suit their needs. 

2. Picking the wrong pricing plan 

There are several ways in which SaaS products are priced. It could be based on feature requirements, the number of licenses needed, and budgets that one can gauge the pricing that works best. A SaaS product’s pricing strategy can follow several directions - flat rate pricing, usage-based pricing, tiered pricing, and user-based pricing. Each of these pricing models comes with pros and cons. 

Both user and usage-based pricing models make sense on paper. However, it is important to get the most out of such plans. There is a large scope for optimization in pricing plans. 

Many businesses tend to get a single plan for users and purchase it for one or three-year contracts without considering how the needs of the business and work processes are constantly evolving. Taking long-term plans doesn't leave scope for re-evaluation. 

While choosing the pricing tier for consumption-based SaaS, you need to be able to forecast your SaaS usage to avoid paying expensive overages.

Unoptimized SaaS spending tends to chip away at the SaaS spending budget and cause the company to bleed money. Small steps taken at regular intervals will compound to help save money.

While talking about pricing, we must cover a forgotten expense - unrevoked licenses. 

3. Unrevoked license money pits

Employees get access to SaaS product licenses when they join an organization. The average employee in an organization uses at least 8 SaaS applications. During their tenure, SaaS licenses begin to pile up. When employees leave, these licenses don’t get revoked, which adds to the overspending.

Often, companies don’t keep track of the licenses they no longer need and focus on new licenses only. There’s a gap that occurs here due to siloes within the company. The IT department is responsible for issuing licenses upon request, while each department has an internal system to keep track of team members. The IT department has no way of knowing which employees have continued to work with the company and which have left without continuous discussions with the HR department. 

What seems like a small gap between departments can lead to compounding losses if remained unchecked. Increased communications between departments and making exit checklists is already a work in progress in most companies, but a SaaS management platform is the need of the hour. 

It may not seem like much. After all, what is one SaaS subscription in a much larger company? However, keep in mind the number of employees that join and leave a company. 

Even if companies solve this, another big issue is SaaS usage which remains untracked. 

4. Unmonitored SaaS Usage 

Even when organizations try to optimize the number and kinds of SaaS solutions it procures, another money pit is unmonitored SaaS usage. Organizations fall short when it comes to analyzing the SaaS apps which are used the most and the least, overall team-wise usage of apps, and duplicate apps.

Other specific areas in which there isn’t visibility are the number of active users that are using the app compared to the licenses purchased. Organizations don’t keep a track of when a SaaS app was last used. This is a strong indicator of how useful and necessary the subscription is. 

Read: Guide to track employee SaaS usage

Furthermore, all SaaS products come with security risks that aren’t always easy to foresee. Here are some of the ways in which those risks can become problems for the organization.

5. Security risks that haven’t been identified

SaaS tools have made many processes more efficient. Running after this efficiency, many company employees end up trying new tools every now and then. SaaS tools they think might automate some of their work or even pilot it without getting the IT team involved. This is called Shadow IT. 

In such situations, these employees may integrate with third-party SaaS applications and pass on data. Unsanctioned usage of SaaS applications would only lead to a higher likelihood of data leaks, and this can put the entire company’s data at risk. 

Ideally, some baseline measures for security are followed by the IT department, like multi-factor authentication and using strong, unique passwords. But when applications go out of the IT department's control, there is no way to plan for potential security breaches or the ensuing legal hassles - which can cost an organization tons of money!

6. Off-budget SaaS buying

While we are on the topic of Shadow IT, it makes sense to also cover off-budget SaaS buying. 

An organization reviews its budgets regularly to create a financial roadmap and ensure it’s on track. Budgeting time is also when organizations analyze where they’re losing money and where cutbacks need to occur. 

Normally, companies expect overshooting budgets and plan a contingency or keep an additional amount just in case. However, what happens when these overspending issues continue over time and the root cause is not found? It’s no surprise that this often happens for companies that spend large amounts on SaaS products.

The SaaS subscriptions to be purchased each year are usually handled by the IT and procurement departments. They consider the subscriptions that were chosen the previous year and the new ones required by each department in the new year. It is understood that these lists are not final, and more tools will be added. This all sounds very organized and within budget, right?

The on-ground reality of SaaS subscription purchases is very different. Though the budget is created and departments are brought into the subscription process, things can still go wrong. 

Employees, in order to save time and the back and forth with IT, sometimes also purchase SaaS product subscriptions on their personal cards and ask for reimbursement later. They do this in situations where the SaaS tool is needed immediately, and the process of waiting for IT or procurement would take much longer. Though such actions are not ideal, they are commonplace. 

What ends up happening between the entry and exit of new employees and SaaS subscriptions bought on personal cards is that things go beyond the SaaS budget. The department cannot budget for employees to use their own cards when the need for a SaaS solution is dire. And such purchases are now becoming the norm rather than the exception. To avoid an arduous back and forth with IT, department heads push employees to make quick purchases and follow up for reimbursement.

As a result, what began as a planned budget, with a reasonable reserve for extra expenditure, can become a landslide of uncontrolled spending that can’t be tracked.

7. Negotiations aren’t data-backed

Years in the field can lead one to develop a sixth sense about when a deal is a good one or when it’s giving you a run for the money. As per HBS, more than half of Americans rely on their “gut” in order to decide what to believe. Gut instincts, experience, and knowledge from the field are one thing, but actionable data holds a power of its own. The same article also pointed out that “highly data-driven organizations are three times more likely to report significant improvements in decision-making compared to those who rely less on data.”

With hundreds of different SaaS tools to compare, with different features, pricing tiers, and contractual clauses - it is not possible to make a data-backed decision on a SaaS tool by looking at a single contract. Without charting out all the options in a single place, it’s difficult to choose which subscription suits your needs better. This takes away leverages companies may have during negotiations. 

Without visibility into the entire requirement or SaaS product landscape, there is no way to do data-backed negotiations. Companies will end up choosing among the options they have and end up overspending compared to the other options out there in the market. 

Talking about lack of visibility, all of these problems also bring out another problem - no central SaaS database for teams to optimize SaaS spend. 

8. Lack of a Central SaaS Database

As has been charted out through the course of this article, it is evident that subscription procurement and SaaS management are complex. It’s a balancing act between management, employees, and many departments. Everyone has their own requirements and there is a gap in communication between all the parties involved. This leads to many difficulties, the worst of which is an overshooting of the budget. Another common issue that arises is duplicate SaaS subscriptions or many lower-tier SaaS subscriptions of the same software.

An overarching issue, in this case, is the lack of a centralized SaaS repository. No consolidated SaaS inventory that keeps track of subscriptions, usage, and the requirements of employees. This makes it impossible to be able to make any data-backed decision on which subscription to continue using and which to let go of. 

Read: Get the most out of your SaaS Spends with this guide to SaaS Cost Optimization

An intelligent SaaS management solution is the need of the hour

To bring all of this excessive SaaS spends under control, organizations must be aware of their software licenses and aware of their SaaS purchases. Spreadsheets don’t suffice anymore for the complex SaaS systems that large companies have.

SaaS buying and management platforms like Spendflo help companies track SaaS usage, do expert data-backed negotiations, manage company-wide licenses, and help you curb SaaS spends to keep it well within the budget. 

Try Spendflo today and save up to 30% on your SaaS Stack.

Vaishnavi Babu
Content
Karthikeyan Manivannan
Design

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