SaaS Cost Management: Importance and Playbook To Reduce SaaS Costs

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Managing software expenses effectively is essential for financial success.

The formula is simple: lowering SaaS spend directly correlates with better ROI and higher profitability. However, SaaS cost management is more than just cutting costs; it's an intelligent cost optimization process without sacrificing operational prowess.

Have you ever been overwhelmed by many SaaS subscriptions, witnessing your budget gradually erode as expenses escalate beyond your control? Despite being cost-effective in subscription-based applications, unexpected spend often hides beneath the surface.

A 2020 SaaS trends report showed that the average company wastes around $135,000 on SaaS tools annually.

Don’t sweat it; SaaS cost management provides a solution to increased spending. It is a beacon of financial control to improve your cost management strategies and restore savings.

This guide explores how proactive SaaS cost management can help you revolutionize your financial approach, lead to strategic savings, and provide efficient ways to handle the intricacies of software spending.

What is SaaS cost management?

It is the process of managing and optimizing software-as-a-service (SaaS) applications and cloud-based subscription software, emphasizing cost reduction and optimization.

The practice includes monitoring, optimizing, and regulating the costs of SaaS subscriptions to guarantee that organizations get the most out of their software investments.

SaaS cost management aims to ensure you get the best value for your money by understanding each SaaS application's usage and ROI.

Identifying underused or underutilized subscriptions, negotiating favorable terms with providers, and implementing cost-effective techniques are all part of this process.

It is critical for businesses to avoid wasteful spending, optimize budget allocation, and assure a good return on investment from the software solutions they use in their operations.

According to G2 Track, 80% of IT professionals say their company overspends on SaaS applications. Gartner forecasts that in 2026, public cloud spending will account for over 45% of all enterprise IT spending, a massive leap from less than 17% in 2021.

Based on these statistics, it is apparent that cloud cost management is vital for organizations looking to stay competitive and leverage the power of the cloud without going beyond their budget.

5 Factors that increase SaaS costs

Shadow IT & SaaS sprawl

Gartner studies have estimated that as much as 30 to 40% of technology spending results in shadow IT.

Shadow IT is the software acquisition by individuals or departments without permission and approval from the organization. Since SaaS products are so easy to get and use, they frequently go undetected, resulting in security breaches and increased spend.

Moreover, the decentralized approach frequently results in software sprawl, leading to an uncontrolled increase of redundant and duplicate SaaS apps.

SaaS quickly becomes a hidden cost within organizations without a system to track these expenditures and resolve cost attribution or ownership issues. This lack of centralized monitoring leads to redundant apps, complicated cost management, and overspending on SaaS.

Auto-renewals

Subscription software is primarily reliant on automatic renewals. Automatic renewals can be surprising because most applications require notification periods of 30, 60, or 90 days to declare non-renewal intent.

While automatic renewals provide continuing service availability, they frequently result in unexpected renewals and fees. Firms risk automatically extending unused or redundant applications without a proactive approach to monitoring and preventing them, adding to unnecessary costs.

Unused apps and licenses

As per CloudEagle’s SaaS spend report, 40% of the SaaS licenses go unused.

Inefficient SaaS license usage contributes significantly to cost increases. Organizations frequently pay for unused SaaS products and features, depleting financial resources.

Identifying and resolving underutilization necessitates proactive monitoring and encouraging proper usage to optimize the value of SaaS investments.

Purchasing duplicate applications

Decentralized purchasing methods can result in unintentional software duplication. Users make redundant purchases because they are unaware of existing applications within the organization, resulting in duplication instances, contracts, and renewals for the same app.

Streamlining procurement processes and improving coordination can help minimize redundancy and save money.

Poor vendor negotiations

Poor negotiation strategies with SaaS vendors contribute to increased expenses. Organizations frequently accept quoted costs without exploring negotiation options. Vendors may upsell unnecessary features or licenses, resulting in increased costs.

Effective vendor negotiations ensure that organizations only pay for what is required, avoiding overspending and matching costs with actual needs.

The Need for SaaS Cost Management

Effectively managing SaaS costs is pivotal for an organization's operational efficiency and fiscal well-being. Here are five key reasons illustrating the importance of SaaS cost control:

Centralized Procurement Mitigates Risks: Often, decentralized software procurement leads to overlapping licenses and duplicated apps. Implementing a SaaS cost management approach centralizes procurement, reducing duplicate contracts and expired licenses.

Enhancing License Utilization: Unused SaaS licenses can incur unnecessary expenses and upgrades. Regularly reviewing accounts and licenses encourages optimal utilization, preventing overspending on dormant subscriptions.

Strengthening Negotiating Leverage: Active SaaS cost management empowers businesses during vendor negotiations. Analyzing usage patterns allows organizations to negotiate volume discounts or tailored agreements, preventing inflated costs and missed savings opportunities.

Preventing Renewal Surprises and Expirations: Failing to track renewal dates may lead to unexpected renewals, expired licenses, and service disruptions. Proactive management ensures timely reminders of renewal dates, averting unforeseen fees and interruptions.

Aligning Costs with Budgets: Proactive SaaS cost control streamlines financial resource allocation, curbing excessive overspending. Companies risk surpassing budget limits without proper management, causing financial strain and potential cutbacks in critical areas.

6-Step SaaS cost optimization playbook to reduce costs

Get complete spend visibility and analyze costs

To effectively manage SaaS costs, gaining complete spend visibility is paramount. Begin by conducting a thorough inventory of your SaaS tools - know what you have and who is utilizing it. Evaluate all financial transactions, including enterprise credit cards, staff expenses, and vendor payments.

Understand which SaaS tools are in use, who in your company relies on them, and the costs associated with them for each new app. This analysis helps determine the ROI of each subscription.

If a particular SaaS service is not extensively used, consider researching alternatives or consolidating under a single, cost-effective application. You must ensure that every dollar spent on software maximizes its impact and benefit.

Consolidate duplicate applications

Consolidating duplicate applications is a strategic step to streamline and optimize SaaS costs efficiently. Encourage various departments within the organization to use unified enterprise software for similar functions or reduce the number of choices with overlapping features.

Advocating for unified enterprise software has advantages like better vendor management, fewer contracts, and controllable spend. This streamlining enables IT finance teams to function more efficiently, offering competent technical and financial support and increasing productivity.

Furthermore, it contributes to compliance and security activities by enforcing organizational structures and standards, lowering the risk of non-compliance, fines, and security breaches. Consolidating duplicate apps reduces SaaS costs while improving operational efficiency and fortifying security measures inside the organization.

Use automation to streamline procurement and renewals.

Automation is essential for efficient SaaS cost optimization since it streamlines procurement and renewals. Monitoring renewal is essential to staying on top of the contracts, preventing auto-renewals, and initiating negotiations for spend optimization.

Failure to meet these due dates may result in missed opportunities for cost savings, enhanced negotiations, and adjustments to comply with current requirements.

Automated SaaS cost management platforms like CloudEagle guarantee that renewal dates are tracked effectively, preventing unwanted subscription renewals and needless overspending.

It improves productivity by reducing manual tracking errors, helping enterprises to save expenses, negotiate more effectively, and remain aligned with changing business needs.

Rationalize redundant apps and eliminate unused licenses

Over 56% of SaaS licenses in a typical SaaS application inventory are underutilized.

The next step in efficient SaaS cost optimization is eliminating unneeded licenses and rationalizing redundant applications. Identifying and eliminating licenses that are not actively used or are redundant is a crucial step. Often, organizations continue to pay for licenses that remain idle or have minimal usage.

By conducting regular audits and assessments, businesses can identify and eliminate these unused licenses, reducing unnecessary expenses and ensuring that resources are allocated more effectively.

Organizations commonly adopt multiple applications that serve similar purposes or functionalities. This redundancy can result from different departments independently purchasing their preferred tools without considering existing software. Rationalizing involves evaluating these applications to identify overlaps or functionalities that can be consolidated into fewer, more efficient tools or eliminating these overlapping tools from the portfolio.

This process helps streamline operations, reduce complexities, and eliminate additional costs for maintaining multiple similar applications.

Leverage price benchmarks while negotiating

When negotiating with SaaS providers, it's critical to be armed with industry benchmarks for fair pricing and optimal results. To guarantee you're getting good value for your money, compare the cost of each software subscription to the industry's standards.

Foster honest and open communication with the vendors by outlining the goals and context of the cost-cutting efforts. Take vendor relationships to the next level by seeking assistance from SaaS buying experts.

These negotiation experts will analyze your usage and requirements, conduct market research, leverage price benchmarks, negotiate with the vendor for you, and purchase the right product at the right price.

Platforms like CloudEagle provide assisted buying services, where a team of dedicated experts will work as an extended part of your procurement team, helping them expedite the process, saving time, and increasing your team’s productivity.

Use a SaaS cost management software

Finally, adopting SaaS cost management software is crucial to enhancing spend management. A spreadsheet is an excellent place to start, but a dedicated cloud cost management solution takes control to the next level.

If you're struggling with manual tracking of several SaaS subscriptions, the outstanding benefit of spend management software, such as CloudEagle, is its ability to eliminate manual monitoring using spreadsheets.

It’ll provide a comprehensive view of your apps, vendor, spend, contracts, etc. It has an extensive integration library to provide granular spend and usage details. It’ll organize all essential data in one dashboard, making it easier to analyze and optimize.

Utilizing SaaS cost management software streamlines manual tracking, offering efficient and swift procurement and renewal workflows. It proactively alerts against unsanctioned applications, curtailing shadow IT at an early stage.

This tool automatically detects and categorizes unused, duplicate, and cost-free apps, simplifying cost optimization. It enables detailed analysis of individual license usage, allowing for user deprovisioning in cases of low usage, and reallocating or eliminating licenses in subsequent renewal cycles.

Assisted buyers aid in negotiations, providing financial and usage insights to enhance understanding of the ecosystem and optimize negotiations. There are 37 types of custom reports to provide nuanced spending insights for effective cost management.

Challenges in SaaS cost management

Zero visibility

In cloud cost management, zero visibility implies a lack of comprehensive visibility of an organization's software expenses.

When there is inadequate transparency into expenses, identifying unneeded subscriptions, tracking usage, and optimizing costs become challenging. This lack of visibility impedes effective decision-making, perhaps leading to overspending and inefficiencies.

Shadow IT and decentralized purchasing

Shadow IT and decentralized purchasing occur when employees or teams independently procure software without seeking permissions/ approvals from central IT or financial departments.

This challenge adds complexity, resulting in unapproved applications and making it harder to track spending. It even results in a lack of standardized tools, security problems, and higher costs due to fragmented purchasing decisions.

Lack of automation to track purchases and renewals

The lack of automation in tracking SaaS purchases and renewals leads to bottlenecks, delays, auto-renewals and spend escalations. Manual tracking can be time-consuming, error-prone, and inefficient, especially when businesses grow.

This challenge limits the ability to manage costs proactively, perhaps resulting in missed renewals, unforeseen expenses, and problems aligning software investments with organizational priorities.

Poor insights into the app and license usage

Poor insights into the app and license usage occur when organizations struggle to understand how software resources are used clearly. The difficulty stems from the inability to effectively track and analyze user activity with applications and licenses.

This lack of understanding impedes license optimization, perhaps leading to overspending on unused resources.

Lack of negotiation skills

When businesses deal with vendors, a lack of negotiation skills poses a challenge in SaaS cost management. Ineffective negotiations can lead to accepting stated pricing without exploring potential discounts or optimizing license arrangements.

This difficulty contributes to higher costs since firms may miss opportunities to get better terms, resulting in unsatisfactory financial outcomes.

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Conclusion

Mastering SaaS cost management is essential for organizations navigating the ever-changing world of cloud-centric operations. As cloud-based apps become more common, a strong cloud cost management strategy can provide a competitive advantage by assuring optimal efficiency and cost-effectiveness.

Furthermore, effective cost management is critical to generating better ROI and cost savings.

CloudEagle emerges as a vital ally, providing streamlined procurement processes and comprehensive insights to improve your spending patterns.

In addition, it stands out as a prominent SaaS cost management solution, providing businesses with complete spend visibility and efficiency thanks to its user-friendly interface, real-time spending insights, and automated workflows.

Book a demo today to take advantage of these features and catapult your organization to success and growth!

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