Company Expense Management - Software

Pressures to Use More Technology

Much of the productivity improvements in the United States during the last 50 years is due to the “computerization” of the workplace. Those improvements include:

Personal computers
Multimedia computers
Internet
Smartphones and apps
Cloud computing
AI

All along those improvements, businesses have invested to drive productivity efficiencies from employees and business processes. Those efficiencies, hopefully, kept them competitive.

The explosion of the cloud has dramatically lowered the barrier for distributing and acquiring software. It seems as though for every pain in business, there’s a software solution to cure it. There seems to be constant pressure from across the organization to buy software. A company with 6-10 departments will likely leverage 25 or more software solutions.

There have been several companies with which I’ve worked where it seemed that every meeting brought a new request to buy another software solution. It was tough at first to enforce an investment strategy for the company. My belief is that investments by departments and companies should be in a specific order:

Process
Technology
People

If the department leader or the person requesting the software couldn’t tell me the process that they were trying to implement or improve, without the software, then I wasn’t going to approve the technology spend. Putting on my old auditor hat, I’d flesh out their process on a whiteboard or in my notebook. That meant asking how the problem was currently solved and what data was stored where and who did things with that data. These questions occasionally stumped the person asking.

If their process wasn’t in place or documented, was it really a process? Actually, yes because at many companies the processes that happen aren’t documented. This lack of formalization is a blessing and a curse. A less formalized process is quicker to adapt to demands from leaders, customers, co-workers, vendors, etc… On the other hand, the lack of formalization causes the process to drift and change and be applied inconsistently. Furthermore, a documented process can be analyzed and kaizened to see where improvements can be made. Often people that rely on software to solve their process issues don’t fully understand the problem or haven’t dedicated sufficient time to the problem.

Once the process is efficient, then perhaps technology can be applied to drive greater productivity. Determining the return on investment (ROI) of a software solution can be challenging. Part of the financial diligence when considering software is to ask the department leader to explain how ROI will be measured. Questions to ask include: Will it save time?; Will it lead to fewer mistakes?; Will it delay the hiring of additional headcount?; If so for how long? The leader should also be able to explain metrics to be used to measure performance.

The finance team should write down and track those metrics. Follow-up on how they are doing compared to those metrics. It’s helpful to let the department leader know you’ll be following up on those metrics. It’s happened to me in the past where a key metric was explained and months later when I followed up, I learned that metric had been abandoned months earlier during implementation. I then had to adjust and commit the leader to a new performance metric that seemed less advantageous.

Regardless, for many companies, these software costs have become a significant part of their overall operational budget, with demand for software solutions growing year after year.

The Growing Demand for SaaS Solutions

Companies today rely heavily on certain software solutions, often in the form of software-as-a-service (SaaS). Company critical solutions are often email, slack, file storage/sharing, office tools (MS Office or Google Workspace), CRMs, ERPs (accounting systems), marketing automation tools, customer support tools, engineering or production tools, etc… Often these key pillars of the company tech stack don’t do many important functions or don’t integrate with each other. Then other solutions are necessary to optimize those key tools. For example, as of writing this, I’m not aware of a native integration between SalesForce.com and NetSuite. Those are two key systems that don’t communicate. It’s super frustrating. You have to buy a middleware to get them to share data back and forth. If you want sales people to know whether a customer has paid their bills for an upsell motion, you either buy an integrator or somehow ask the accounting team.

Factors Contributing to Rising Software Expenses

Several factors contribute to the escalating costs associated with software spend:

Adoption of Specialized Tools: As businesses grow, they often find that general-purpose software no longer meets their needs. This leads to the adoption of specialized software solutions, which come at a premium price. For example, companies might use an enterprise-grade data visualization tool or niche software tailored for a specific industry, adding to their overall software expenditure.
Licensing and Subscription Models: The subscription-based model that many SaaS companies use has shifted the way businesses budget for software. Instead of a one-time expense for software purchase, companies face recurring monthly or annual fees. This ongoing cost can quickly add up, especially for organizations with a large number of users or complex software needs.
Incremental Cost Increases: SaaS providers often increase their prices over time due to inflation, enhancements, or added features. A Flexera report highlights that many enterprises face unexpected increases in their SaaS bills due to price adjustments, especially if their software usage scales beyond the initial contract terms.
Redundancy and Overlap: A significant issue companies face is software redundancy, where multiple tools provide overlapping functionalities. For example, a company might have separate tools for project management, communication, and collaboration, when one comprehensive solution could suffice. Blissfully (now known as Vendr), a company specializing in SaaS management, reported that companies can use up to 40 different SaaS tools, leading to inefficiencies and unnecessary expenditures.
User Licensing Costs: As teams grow, so do the costs associated with user licenses. Companies may start with a small team using a particular tool, but as usage expands company-wide, the cost scales up proportionally. For larger enterprises, the additional cost of hundreds or even thousands of licenses can be substantial.

The Financial Impact on Companies

The ballooning software spend can be a challenge to a companies’ financial health. Here’s a closer look at the specific areas affected:

Operational Budgets: Software costs now constitute a significant portion of the operational budget for many companies. According to Deloitte, businesses are dedicating anywhere from 15% to 20% of their total IT budgets to software alone. This percentage has been steadily increasing over the past few years as new tools and technologies are integrated into business operations.
Profit Margins: For companies, especially those operating with slim profit margins, the rising cost of software can have a tangible impact on profitability. When software expenses increase disproportionately compared to revenue, businesses may need to make tough decisions, such as cutting costs in other areas or raising prices to compensate.
Budget Reallocation: Companies facing rising software expenses often have to reallocate their budget, diverting funds from other critical areas such as R&D, marketing, or employee benefits. This reallocation can stifle innovation and affect other areas of business growth, making it harder to compete in a rapidly evolving market.

Best Practices for Managing Software Spend

While the rising cost of software spend is a reality, there are strategies that companies can employ to better manage and optimize these expenses:

Audit Current Software Usage: Regularly auditing software usage is essential to identify which tools are being used effectively and which ones are not providing value. SaaS management platforms can help companies track software usage across teams, highlight redundancies, and identify opportunities to consolidate or eliminate underused tools.
Negotiate Contracts: Many companies don’t realize that software contracts are often negotiable, especially for large organizations. Negotiating better terms or bundling services from a single provider can lead to significant cost savings.
Implement a SaaS Management Strategy: Establishing a formal strategy for managing SaaS tools can help companies control their software spend. This includes designating a specific team or individual responsible for overseeing software usage, ensuring compliance, and managing renewals and contract negotiations.
Invest in Training and Adoption: Sometimes, the full value of software tools is not realized due to insufficient user training and adoption. Companies should invest in comprehensive training programs to maximize the use of the software they pay for, which can lead to better productivity and return on investment.
Leverage Open-Source Solutions: For some business functions, open-source software can be a viable alternative to expensive SaaS tools. While open-source solutions might require more in-house expertise to manage, they can significantly reduce software costs over time.

Will Software Spend Always Rise?

We’ll see. Software spend is likely to continue to grow as technology advances and companies seek out tools that give them a competitive edge. The jury is still out on some emerging technologies, such as artificial intelligence (AI), machine learning (ML), and advanced data analytics, but early results are promising. Likely they will become integral parts of many business operations and be seamlessly embedded into existing solutions. Unfortunately it’s likely these cutting-edge tools will come with a higher price tags and require tighter focus on ROI.

However, a legit question is: will a company ever reach peak software solutions? It’s very likely that at some point in the scale of a company that software solutions will be maxed out, barring some sort of major change by the company. Instead of adding a dozen solutions a year at a startup, and a half dozen a year at a scale-up, established companies may only add one or two solutions a year.

Conclusion

The growing software spend in companies is a double-edged sword—it enables operational efficiency, improved productivity, and better customer experiences, but it also represents a significant and growing cost center. Companies need to proactively manage these expenses by continually auditing their software stack, negotiating contracts, and seeking alternative solutions where possible.

Best of luck managing those expenses. Let me know what you’ve experienced.