7 Best Practices to Save on your SaaS Spend and Increase your Cash-flow in 2022
There’s an undeniable economic downturn happening in 2022. There have been significant changes in capital markets, and business valuations. This article aims to gently place a hand on why hyper-growth startups should cut on SaaS spending to not only survive but thrive in today's financial landscape.
The decline in tech stocks is cascading into the startup world. As valuations take a downturn, investors are changing their focus from growth at all costs to profitability.
Public markets are facing a recession in the first quarter of 2022. The blue chips are down by 18%, and the tech-heavy Nasdaq Composite has fallen by over 32%. The finance gurus have already sounded an alarm bell that predicts a great recession to most likely happen by the end of 2023 or 2024.
As inflation is out of control, the SaaS valuation for giant public companies is declining.
The reasons for the economic downturn include post-pandemic inflation, stock market crash, and a geopolitical crisis.
“Coinbase has dropped to 11.6 billion this year compared to 54 billion last year”
To balance the economic recession and thrive during the downturn, Netflix, Coinbase Inc, and 24 other companies are taking measures to cut SaaS costs in 2022.
Why is managing SaaS spend in 2022 more important than ever?
Companies spend 25% of their budget on public cloud and other SaaS solutions, on average. Because 93% of business owners believe cloud adoption can help their business grow and achieve goals. Ironically, SaaS companies like Coinbase and Netflix are looking to cut cloud spending on AWS - to compensate for their value loss due to the stock market crash.
Now, if you’re thinking about how cutting supply chain costs will help increase the value of a company - keep reading.
First, let's understand what determines the valuation. A company’s value is the result of EBITDA (net income before interest and taxes ) minus the Capex ( which includes all your business spends)
Valuation = Gross Margin = EBITDA - Capex
So the valuation comes down to the estimation of your net profitability or gross margin after eliminating all your company’s spend.
In a nutshell - to boost revenue growth, increase cash flow, raise funds and grow your stock price, you should extend your runway.
SaaS services and tools occupy a significant part of your budget and expenses. As a CFO, you know the role it plays in your company's valuation.
Many software companies using cloud services like AWS find it difficult to increase profit, because the cost of cloud services is high. Even though your EBITDA estimation might be quite good in the records, the gross margin after eliminating the expenses paid back to clouds (Capex) is alarmingly low. Higher capex leads to decline in the stock value of your company.
Martin Casado- the general partner at Andreessen Horowitz, wanted to analyze the other side of this scenario. He looked at 50 public software companies and tried to estimate their gross margins when they cut (hypothetically) the total cloud costs by 50%.
It turned out that saving on cloud spending would increase their stock price by a whopping $200 Billion.
So if you are a Series A-D company with $250K to a million in SaaS you and manage to cut cloud costs, you can 1.4 X your valuation and stretch your overall runway by at least 18-24 months.
Luckily, Spendflo SaaS buying and optimization platform guarantees savings up to 30% on your annual SaaS expenses with a minimum of 2-3x ROI.
In the following sections of the article, you will find different ways to save on your SaaS tools during these economic tough times, without compromising on the efficiency of your cloud services.
7 best SaaS cost-cutting strategies to grow your startup in 2022
1. Forecast Consumption
A consumption forecast is a rough estimate of the requirements and the outcomes of a SaaS model, it helps understand the purpose of each application and the value it delivers to your organization.
You can’t control your procured SaaS expenses if you don’t find the ROI on each of them. Setting an expectation and goal upfront creates a baseline against which you can measure your company’s consumption.
It includes discussing with the stakeholders, determining the key metrics, conducting a comprehensive study on the problem and trying to identify the optimal solution. A good solution fits the operational, security requirements and is within your budget.
Forecasts will not only prevent you from procuring services with overlapping functionalities but also help you to have a bird’s-eye view of your spending.
Create expense forecasts for each application you migrate from on-premises into a cloud.
However, the forecasts you create are often not accurate as your actual bill. There might be errors, but this will set a strong foundation for the macro-level expectations of your cloud spending.
"Without such forecasts, you won’t be able to understand whether you’re spending less or more than you expected, and you won’t be able to improve your forecasting ability"- Wall Street Journal
However, forecasting is easier said than done. Here are some crucial factors to not ignore while successfully predicting your future outcomes and spending.
Shadow IT occurs when your company already has various tech services that are managed and used without proper approval from the stakeholders. These services don’t have any record of purchase and usage. With this, you’ll have no idea what and where you are spending your budget. To prevent a last-minute cost cutting, ensure all tools are continuously optimized.
Another way is to amend a strict spending policy and announce all your employees to abide by it.
“Roughly 21% of organizations in the United States do not have a policy around the use of new technology - IT Startup employees admit that they have around 970+ unknown cloud services”
Your spending policy should mention:
A. Who should purchase goods and services?
B. What signing authority do your managers from each department have?
C. What is the new way to request for a new purchase ?
D. Do we currently have internal tools that serve the same purpose, deeming this tool unnecessary?
Watch your SaaS stack
Dive deeper into your existing stack and visualize an accurate end-to-end list of your SaaS applications 一 the cost, the outcomes, and the profit.
Having this vision will allow you to understand the broader aspect of your revenue. If you need to buy or renew more licenses, purchase fewer applications next time, go with a different combination or continue using the same set of services.
Finding and having a record of all this data will make your SaaS forecast process for this year a breeze.
Don’t forget to monitor the actual activity of your SaaS spend to make sure your forecast is holding. If you encounter unexpected downturns, make adjustments along the way.
2. Visibility into Cloud Spending
Many companies save money by simply gaining visibility into who is spending money and for which goals. With the right control over data among all departments, your organization may understand whether all SaaS tools are adding value, and if they are necessary.
- 35% of cloud spending is wasted due to a lack of visibility and control
- 80% of enterprises struggle with cloud spend management
Tracking spending doesn’t mean simply monitoring your issued bills -it involves :
Tracking SaaS metrics.
Allocating costs to each consumer or department.
- Besides the SaaS spend, you must track related metrics like the utility, performance, capacity, and availability. Visibility into cost metrics can raise internal awareness of SaaS spending. When you use the right dashboards and reports, you can reduce spending by just influencing your behavior and choices. These reports can help identify spending trends and identify the outcomes, waste, and redundancy.
Pro Tip: Instead of tracking manually, use Spendflo to keep track of broader metrics such as overall spending and savings. Drill down for finer insights such as department-wise expenses and have all your procurement metrics in one place.
- Often, resources are shared between multiple projects, departments like IT, marketing, or by the entire organization. For example - shared resources like AWS or Microsoft Azure are used by all departments in your organization to access cloud applications. Assign a specific budget to the relevant consumer in such cases.
3. Streamline your Procurement process
It’s a no brainer to automate your SaaS spend. With automation, you can save thousands of hours in procurement effort and eliminate up to 40% of desk interactions. According to a survey by Gartner:
- 63% of the total tech companies say digital transformation allowed their business to improve customer experience and skyrocket their revenue even during the economic crisis.
- 66% say automation, in obtaining goods or services online, is a must for running their business.
- Automation eliminates human errors and saves your business a ton of money and time. It uses Artificial intelligence - to reduce operational costs. By automating repetitive tasks, organizations can help employees to complete other tasks more efficiently.
Automation helps complete SaaS procurements in minutes as opposed to hours or days. It helps reduce the workload and increase revenue.
The only downside with automation or using the software is their hidden costs (operational, learning, maintenance, and adoption costs)
“While adopting clouds for portfolio companies is becoming more popular, all software is shifting from On-prem to SaaS. But in many cases, companies are finding it difficult to get their margins because the cost of cloud services in the backend is very high” - Martin Casado
You will have to be informed about selecting cloud based software. With an un-informed choice, you will end up spending more resources on buying multiple software with overlapping functionality and very little margin and revenue.
You might also want to read :
- 10 Ways to Reduce Your AWS Spend
- How to Reduce Your SaaS Costs? : A Complete Guide to SaaS Cost Optimization
- 6 Questions to ask yourself before buying any SaaS Product
Pro Tip: Spendflo SaaS Buying and Optimization platform helps you control costs and increase savings on your SaaS spending. To understand how you can save up to 30% on your SaaS spend, get in touch with us today.
4. Renegotiate with your partners and vendors
If your team is already tracking your company’s SaaS spending- then renegotiating with your existing suppliers and vendors must be your greatest win.
The common myth is that you can only achieve discounts when you buy software in bulk. In many cases, your suppliers will be quite happy to offer you credits or discounts for their business growth- especially during the time of economic crisis.
Ask your procurement department to look at your highest SaaS spendings. Make a list of suppliers and come up with better pricing terms for a case-study or a testimonial in exchange. If you do not have a dedicated resource, you can outsource the process to procurement professionals like Spendflo to negotiate on your behalf and get you the best deals.
“In two months, Spendflo renegotiated almost all of the contracts for Airmeet saving $250K+ per annum, while also handling the new procurements”. Read the full case study here.
Before you renegotiate, research your vendors to understand their pricing flexibility and why they may offer you a better deal.
Having thorough market knowledge will also help early-stage companies to find what other competitor vendors are charging similar to yours for the same service.
You might also want to read :
- Leverage the Power of Competition - Negotiation Tactics For SaaS
- 5 alternatives to Auto-SaaS renewal: Building the right renewal strategy
We suggest you have a checklist with a few questions ready to communicate your intentions and negotiate bigger discounts
- What is the length of the agreement?
- The order processing time.
- The availability of customer service.
- Past client results and their contract terms.
Remember: Most negotiations will not result in one-way sacrifices. If you want to bargain with at least some level of profit, be ready to compromise with an equilibrium of success from both sides.
5. Look beyond cost savings in procurement
Procurement is not only about cost-saving. Here, we said it. The procurement process is dealing with many important aspects like quality, risk, security, support, and relationship.
“Total SaaS spend will grow from $100B in 2020 to $140B in 2022”: Gartner
We know your goal is to reduce cost and survive the down-turn. Cutting cost requires surgical precision as opposed to taking a hacksaw to your budget. The more recklessly you take measures to cut down costs, the faster your growth will be affected by poor performance, low revenue and poor customer relationships.
“Rather than limiting the definition of procurement cost savings to transaction or invoice, finance leaders should focus on the cost optimization efforts that result in an overall cost reduction (Total Cost of Ownership) for the organization, says Padmaja Santhanam - Growth Manager at First Principles, to ensure the company’s and supplier’s best price”.
- Procurement leaders know cost optimization is a better approach than cost-cutting, and they know where optimization opportunities exist.
- Gartner says the price of the software is just the tip of an iceberg compared to all the “hidden costs” that begin after the transaction in the process of procurement.
So when you find suitable software from the lowest-cost supplier, ask yourself these questions:
- What will it cost you throughout its lifespan? -It includes learning, adoption, and maintenance costs
- Do you have flexibility? -how much control do you have to change up your workflows when needed without losing data and having to start over?
- How sustainable is it for your business? -Do they have a customizable pricing model and allow you to choose the deliverables?
- How innovative are they? - the update frequency, testing quality, and responsiveness to feedback
Pro Tip: Tracking your savings and spending is very crucial to your SaaS business, especially after your cost-cutting measures for continuous improvement, added value, increased revenue, and business growth. You can also use Usage tracking tools like Spendflo for granular usage insights, minute expenses, and savings tracking.
6. Waste Reduction
Nearly 29%, one-third of the SaaS spending is either underutilized or wasted.
Unseen SaaS spending can chip away your company’s IT budget, bloating costs for even the most modern, digital enterprise. With more SaaS solutions emerging, it’s very easy to go on a SaaS-buying spree, leading to bloated SaaS spends that exceed your budget.
That’s why the balance for Finance and IT departments is to outfit consumers with the right SaaS tools while keeping spending under control.
It is also estimated that the headcounts involved within the organization in the SaaS purchase process will increase by 20% this year.
This would ultimately lead to additional administrative costs and salaries making SaaS management more daunting. That is why proper planning, inventory tracking, and management are essential to reduce waste and find which tools bring value to your company.
There are two ways to do this:
- Maintain an Excel or Google spreadsheet that lists all the SaaS products your company is currently using.
- Include :
• The decision-maker of each application
• Your current pricing model
• The need for the tool and the desired outcome
• The name of the department or consumer using it
• Renewal date
Once the sheet is finalized and circulated within the IT and Finance department, review them once in a while and look for opportunities to improvise and optimize your next purchase. This includes downgrading the pricing model, offboarding duplicate or overlapped tools, and cutting out underused tools.
This process is usually done manually and isn’t very effective when you are managing various SaaS stacks for different goals.
- Use a SaaS management platform like Spendflo to automatically discover all the SaaS tools you are using. Track your usage and revenue to reduce waste.
7. License Management
SaaS license management is a subset of vendor management that focuses on cloud-based services and apps. Simply put, it involves the process of optimizing, documenting, and monitoring total SaaS costs. The advantage of having a streamlined workflow to control all your cloud licenses is to save money.
The average cost of unused software per desktop is a seemingly harmless $259. If left unmonitored, this cost can quickly bloat your expenses and exceed your software budget. An important reason to track and monitor your license is to ensure that all your software is compliant with the end-user License Agreement.
“Even a single software noncompliant with the guidelines - you might have to deal with hefty fines and even legal trouble”
When the BSA (Business Software Alliance ) finds that you have disregarded failure to comply with the terms of the agreement, you are potentially at the risk of losing your money in thousands, or even millions of dollars in penalties.
It is highly recommended to have regular internal audits to cover all your bases to eliminate the risks of unexpected penalties, overspending, usage, and other possible damage. Here are some software license management’s best practices :
- Create strong policies: Craft and finalize a software management policy that specifies the controls needed to efficiently manage your assets while avoiding pitfalls. These policies should be created with consent from your vendors.
- Control the front door: With today’s cloud computing advancement it has been easier than ever to install and purchase software from a desktop. But these uncontrolled impulsive purchases become riskier for your company. Enforce controls regarding the software used within your company. Set strict guidelines on who is authorized to purchase or install the tools.
- Manage through automation: Consider leveraging the best license management automation platform that can reduce manual effort. When selecting the best license management tools, look for solutions that:
- 1. Speeds up compliance and processing of vendor checklists.
- 2. Cleans up your onboarding system and makes them more efficient.
- 3. Skip the inevitable last-minute for license revnewals and clearances.
Luckily, Spendflo tracks and manages all SaaS contracts and vendor data on a centralized platform, ensures faster approvals and onboarding, and helps make more strategic decisions on your company’s SaaS needs.
Measure your outcomes: Set a target and measure your growth rate against license cost-saving goals
Summing Up :
Fitting cost-cutting practices into your hectic daily routine can be difficult, but it’s a must to prepare for the worst, and now is the best time to bring visibility into SaaS expenses.
As growth-stage startups with poor EBITDA are unable to raise more venture funds, they are now looking to stretch their runways with existing funds. These strategies are some of the most effective solutions to increase cash flow and revenue for a higher valuation.
But don’t worry about getting started with all of them at once. Take baby steps, start with one strategy and one department at a time and you’ll see expenses coming under control.
To know more about saving SaaS Costs and preventing yourself from overspending, visit our blog section, where a handful of other blogs will guide you on the same.
And if you want to save up to 30% of your SaaS stack without worrying about hidden costs again, sign up for our free saving analysis today.
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