Building cost-consciousness and actively aligning spend to return-achieving initiatives is the holy grail target of financial management. Increasingly, it’s also the outcome for companies applying the resurgent idea of zero-based budgeting to supercharge their SaaS savings.
This budgeting approach forgoes the traditional approach where managers take historical budgets as a starting point, and debate subjectively over percent additions or cuts based on the business climate or stated company goals. Zero-based budgeting, instead, demands that all budget lines start at “zero” each planning year and expenses are justified anew for each period.
By itself, starting from zero won’t invite radical cost savings. Though thoughtfulness and simple review will offer some immediate benefit, the real benefit shows up when zero-based budgeting is welcomed as the default. This could mean that underperforming programs or products or services are automatically discontinued unless a leader proactively advocates for it in a defensible way. Or departmental leaders are given full access to data-built dashboards displaying program performance and collectively have to build consensus on what makes sense for ongoing investment. This shifts the burden of proof around cost savings to business leaders instead of finance or business office teams that are tasked with driving savings without sufficient context.
Zero-based budgeting: an ideal method for reining in SaaS
Considering the torrid pace of software and technology spend – particularly in digital-first startups – zero-based budgeting offers a helpful way to ensure SaaS investment is delivering on its promise of efficiency, productivity and cost-savings.
With software, cost disciplines are too often ignored. Tantalizing feature upgrades or the prospect of easier and faster ways of doing business prove too enticing for the frontline department budget owner armed with a credit card and good intentions. While fully centralized procurement is probably impractical, these staff are buying and deploying software without a sense of market pricing, contractual ‘gotchas’ or the broader company vision for a class of software. Bulk buying, license allocation and security risks are the least of the concerns for employees simply wanting better, faster, newer tools. Cost-effectiveness, optimization and usage-management are naturally lost.
One SaaS vendor advocates this budgeting approach, where all expenses must be justified for each new period, suggesting that:
“The idea is to really scrutinize spending in the context of value, instead of just doing rote increases annually. We've all seen budget processes where the status quo goes unquestioned, and there’s an attitude of, "We've been using this product or service for so long. Let’s just renew."
But questions should be asked, such as "is the product or service still being used?" And, if it's still being used, “how is it being used?” And, "are we paying the right price for it? Or have conditions changed? Are there newer, better alternatives?”
When zero-based budgeting is applied appropriately to tech investment it is not a “slash and burn” exercise. McKinsey again reinforces that costs should not be cut without regard for the expense being considered. But to do this effectively, companies need deep visibility into costs to make data-driven decisions built from granular views on what is being spent, where and by whom.
For companies considering zero-based budgeting, Cleanshelf built a SaaS spend management solution offering a complete view of all software applications easily broken out the department level. The platform supports a line item approach to budgeting, where every contract and license can be reviewed and each dollar investment in software can be accounted for. The company’s wide-reaching market intelligence also allows its customers to quickly assess competitive contract and license rates; meaning their software is being deployed at the best possible rate.
Any CFO or technology leader will tell you that as software is trialed, bought and deployed at the team or department level, visibility, usage and allocation are next to impossible to manage. This means that the very benefits zero-based budgeting introduces get smothered. Companies are left with no choice but to use past assumptions and ‘plus or minus’ guesswork around software spend priorities, usefulness and budgeting.
No matter a given bottom-line goal, zero-based budgeting will help identify low-value spending and enable finance and technology leadership to partner with the business to make better choices. And when applied to software acquisition, spending will reduce, security will improve, means for collaboration will be clarified – and finally, the tyranny of bought, used, discarded and forgotten licenses will be a thing of the past.
Give us a call or email today and see how zero-based budgeting and Cleanshelf can help you rein in your raising SaaS spend.
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