SaaS gives companies of all sizes access to enterprise-level solutions without large upfront costs. It frees them from spendy, ongoing management, and over-hiring IT staff.

One CFO at a 500-person design firm sums up his attraction like this:

“We didn’t want to buy any more hardware. We were concerned about ongoing support and management costs and headaches—and one more issue for IT to deal with.”

Executives widely embrace this vision for simplicity, cost-efficiency, and speed. But this vision for low “total cost of ownership” (TCO) is failing inside many companies.

Why TCO Matters

According to Hurwitz & Associates, Total Cost of Ownership, or TCO, factors the total cost of purchasing (or in the case of SaaS, subscribing to) and operating a technology over its useful life.

Their research on TCO helps companies evaluate costs not reflected in initial pricing – and offer an ‘apples to apples’ comparison. For example, in a traditional software environment, initial server costs (like operating systems, database software, and storage) account for just 8-17% of the long-term costs to install, maintain, upgrade and support the technology over time. A TCO analysis uncovers overlooked factors that add expense, like maintenance (upgrades and patches) and user training.

Because SaaS adds economies of scale that are difficult in traditional, on-premise deployments, companies like it for a variety of use cases. It looks particularly attractive when considering functionally similar on-premise software.

On the surface, SaaS looks like a bargain. Its value proposition is compelling. But realizing this value is not guaranteed.

Getting value from SaaS takes work.

Web-based access means fewer IT resources, and support delivered by a vendor. Implementation is often rapid and pay-as-you-use – theoretically, limiting overspend.

So why are so many IT and finance leaders frustrated?

These execs shifted to SaaS for its simplicity and affordability. Quickly, their SaaS deployments swelled. The headaches they left behind in an on-prem world were replaced by unmitigated spend, underused subscriptions, and security concerns.

In 2018, the average US-based SMB wasted more than $1M on unused or overlapping SaaS services. In a thriving economy, this spoilage can go unseen. But in a recessionary season, reining in the actual cost of ownership for SaaS matters.

Chart of growing number of apps employees used annually in 2019 as SaaS spending tops $13,000 per employee, per year.
State of Business SaaS Spend reports average employee uses 44 cloud apps and cost tops $13,000 per employee, per year.

In The CIO’s Guide to Saving $4,000 per Employee, we found that SaaS spending tops $13,000 per employee, per year. That’s over $1,000 every month.

Top reasons for SaaS wasted spend in 2019 found by Cleanshelf

Estimates suggest that 30-35% of that is wasted. The typical 800 person company now deploys 141 apps, on average. Company execs wonder: did we ever spend that much on “traditional” IT?

As TCO rates grow, the vision for savings dissolves. Over licensing eats margins. And soft benefits, like productivity and collaboration, nose-dive with redundant apps and services.

The issue with soaring TCO isn’t the SaaS, it’s the way it's managed.

Reducing TCO with Discovery, Assessment, Optimization and Control

In the dawn of the cloud era, companies created new KPIs, tactics, and strategies to modernize their infrastructure and go all-in on SaaS. Now, companies need to make another shift. This shift isn’t about migration as much as management (And, fortunately, is less complex and more affordable!). Understanding what SaaS is owned and needed, while optimizing the use and controlling spending is the new shift.

Discover what SaaS you own and need

There is a roadmap for this, and it begins with a dedicated SaaS subscription management platform.

A SaaS management tool specifically targets those factors that spike TCO. For example, tools can connect to expense and accounting systems to provide instant visibility of software services and license counts. As well, some platforms offer an AI engine that monitors login activity. This identifies unused, underused, or unmanaged licenses to automatically rightsize SaaS deployments.

Eliminate overlapping services

This insight leads to standardization, another key to lowering TCO. Here, leaders boost collaboration by eliminating overlapping services. Many companies unknowingly use redundant tools, like Zoom, Uber Conference or WebEx, driving up costs and adding communication friction.

Negotiate SaaS contracts

Once visibility is automated, TCO-reduction extends to vendor management. SaaS management platforms have thousands of data detailing contract terms and use. This market intelligence lets leaders negotiate effectively – and use benchmarking to their benefit. Cleanshelf finds that up to $3,000 per employee may be saved through license claw-backs and right-sizing. This SaaS vendor negotiation step may unlock another $1,000 in savings per employee.

Taking control of TCO

Conversations around SaaS are one-sided. Every Google search for “SaaS TCO” returns content applauding benefits like scalability, simpler budgeting, easy configuration and deployment, seamless upgrades, and bundled support. Only buried in one article, we find a caveat teased:

“While the initial costs of SaaS solutions might be significantly lower, the year-on-year costs of SaaS subscriptions can add up to a large amount of money in the long-run.

As great as SaaS is, THIS is why Cleanshelf and other SaaS management platforms exist. While the concern rarely registers in a SaaS-crazed world, growth companies are losing hundreds of thousands – even millions of dollars – every year from mismanagement. No SaaS fan talks about these “gotchas.” Yet, every company with SaaS feels them.

 

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About Cleanshelf

Cleanshelf is the leading enterprise SaaS management platform focused on tracking, controlling, and benchmarking SaaS applications. Their SOC 2-compliant and AI-powered technology helps companies save up to 30% on their SaaS spending by automatically identifying unmanaged contracts, duplicate licenses, and wasted cloud software subscriptions. Based in San Francisco, Cleanshelf provides an enterprise-grade solution to over a hundred clients, including Hilton, Looker, and CoStar Group.

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