In 2023, startups and scaleups must operate more efficiently to stay competitive. Inflation is still a significant issue, especially in the U.K. where bank interest rates have increased 12 times in a row since December 2021 in an effort to stop the rising prices. The most recent increase takes the rate to 4.5% – its highest level in nearly 15 years.
Higher bank rates also create a challenging capital environment, with less funding available and more competition to receive it. Many investors are now recommending their portfolio companies secure sufficient capital to survive 18-24 months, whereas historically that range was 12-18 months.
To win in today’s market, companies need new strategies to extend their runways. One highly effective way to do this is by optimizing spending on SaaS (software as a service) costs.
7 ways to rein in SaaS sprawl and extend your runway
The average company uses an average of 130 SaaS tools, according to Sastrify data. For enterprise businesses, this number can be more than 1,000. Spending on SaaS is typically a significant expense for startups and scaleups — total spend on software reached $167 billion in 2022. This “spend” category can quickly spiral out of control, with duplicate software, unused licenses, poor renewal negotiations, unapproved tools and shadow IT as contributing factors.
Reining in that sprawl by optimizing SaaS spend is an effective way to extend your runway when economic conditions are tricky. Here are seven ways to do it:
1) Examine your entire SaaS stack
Transparency across your tech stack will help you understand how your team is using SaaS tools and where funds are being spent. It’s important to build a foundation of knowledge about your company’s software — and what is business-critical — before immediately cutting tools.
A good place to start is your enterprise resource planning software. The ERP should be able to show you itemized credit card billings as well as any line items being expensed by employees. Use this information to build a list of all SaaS tools you’re paying for and create a picture of the largest spend buckets.
2) Get rid of unused licenses
According to one study, 2 in 5 organizations report that up to 19% of their total SaaS spend goes to unused or underutilized licenses. Many companies we work with discover that more than 30% of their licenses can be eliminated on some tools before even starting to negotiate. That’s wasted money you can immediately save with the right strategy in place to address the problem.
To stop paying for unused licenses, assign a designated person on your team (or each tool owner) to go through each tool, then download and sort the user statistics by when they last logged in. You can either decide to cut all licenses that haven’t logged in within a chosen time period, or talk to each individual to see if they still need the license going forward.
3) Audit for shadow IT and set up policies to avoid it
Shadow IT is any IT hardware, software or services outside the control and ownership of an organization’s IT team. It’s a huge drag on IT, procurement and finance teams — and the bottom line. Gartner data shows that shadow IT makes up 30% to 40% of IT spending in large enterprises. Across all business sizes, over half (56%) of software apps aren’t managed by IT.
It’s a good practice to run a shadow IT audit across your organization to uncover undeclared and unapproved SaaS tools, with the added bonus of identifying other security, privacy, regulatory and budget risks. Be sure to set up policies to identify and manage shadow IT and educate employees on its risks and consequences.
4) Optimize spending for the most expensive tools first
The SaaS tools that cost you the most represent the biggest savings opportunities (and some quick, easy wins). I generally recommend using an adjusted version of the 80/20 rule here: you can uncover 80% of potential savings from 20% of the SaaS stack. Take a look at your most expensive tools and work with your procurement team and stakeholders to see if there is any wasteful spending or if more savings could be negotiated at renewal.
5) Know which savings opportunities come from which types of tools
Sorting your SaaS tools into buckets can also help identify specific types of savings to look for.
- Must-have tools — E.g.: Google Workspace, Slack, Microsoft, Salesforce. People often think that because these tools are used every day by their team, there isn’t anything to be done about the cost. But you might be surprised at the potential savings by, for example, eliminating unused licenses, negotiating better terms for a longer commitment, etc.
- Payment tools — E.g.: Stripe, Chargebee, Paddle. For any SaaS tool that connects to your revenue, negotiating better terms could be especially impactful.
- Tech and dev tools — E.g.: Snowflake, Twilio, Datadog. Don’t shy away from auditing complex tech tools. The software used by your tech teams is likely to have elements of usage-based pricing, meaning that better forecasting, negotiation and usage adjustment by users can lead to big savings.
6) Consider early renewals
For any SaaS provider you know you’ll keep in the long term — like those must-have tools that your team uses daily — consider asking for an early renewal. Many SaaS companies are trying to extend their runways as well, so offering to renew early and sign a longer commitment could get you some additional discounts.
7) Boost your negotiation capabilities
Winning a better SaaS deal can come down to the negotiators in the (often virtual) room. Simply accepting the first offer — or worse yet, the list price — is leaving money and other benefits on the table. Have your IT procurement team double down on negotiation training and consider bringing on a strategic SaaS procurement partner for support.
Extending your runway requires transparency, optimization and regaining control
It’s easy for spending to run rampant, particularly in a high-growth environment. The business expands, the team grows and employees add new SaaS tools to make their work more effective and efficient. This is a good thing; there are approximately 30,000 SaaS vendors, all of whom are continuously adapting to the needs of the end user and helping them progress to reach business goals.
But riding the wave of rapid growth without stepping back to evaluate all of your software usage and spending is a fast way to burn through cash and shorten your runway. Successful companies need to develop a strategic SaaS stack, with transparency across all tools, optimized spending and solid control of all software and procurement activities.
Sven Lackinger is co-founder at Sastrify, a digital procurement platform for software-as-a-service products. Founded in summer 2020, the firm supports numerous well-known digital-first companies in buying and managing their SaaS solutions. Before Sastrify, Lackinger founded evopark, the market-leading provider of SaaS solutions for parking operators.
