Ryan Neu
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Companies are hitting a considerable inflection point when it comes to how they assemble and manage their software tech stack. On one hand, the storm of pandemic-related IT changes is beginning to calm down, but on the other, many are facing an economic downturn that could further impact and strain business.
The resiliency and adaptability of any company that survived the pandemic is admirable. But the hard truth is that many of those very companies face a “pay-the-price” moment as the cost of their decisions and actions over the past 18 to 24 months come due.
That said, few parts of your tech stack will have as much exposure as your software license renewals.
The SaaS tsunami
Digital transformation came fast for most businesses — whether they were ready for it or not. The shift to remote work and the need to rapidly scale and onboard solutions pointed in one logical direction — cloud-based software. Lower cost of entry, minimal infrastructure requirements and quick implementation helped made moving to a SaaS tech stack the clear choice.
In 2021, Deloitte estimated that 94% of organizations were using some cloud-based SaaS products. According to our research, the average enterprise organization has doubled its SaaS outlay since 2018 and is now spending $35,000 on nearly 300 different tools.
In the heat of the moment, many companies focused on the immediate challenges that SaaS could solve without truly understanding how this digital transformation would impact how they find, buy and manage their tech stack over the long term.
Minimizing stack exhaustion in the face of a recession
The SaaS buying sprees of 2020 and 2021 have led to tech-stack fatigue, and IT departments are feeling the pressure of managing a complex and diverse set of tools and justifying ROI in the face of rising software costs.
SaaS companies used aggressive pricing to get a foothold in organizations that relied on and benefited from them during the pandemic. Many have been incredibly successful in helping businesses accomplish their goals, improve productivity and recognize ROI during considerably trying economic times. In fact, a large portion of these SaaS products have become ubiquitous. Those with sticky, “can’t-live-without-it” features (think Airtable, Monday.com and Slack) seek to leverage those inroads come renewal time.
Like everyone else in this economy, SaaS companies are looking to recoup their losses. Larger SaaS vendors increased prices by an average of 7.9% in 2022, while midsized and smaller vendors increased prices by roughly 6.3%. Moving forward, nearly one-third of SaaS providers said they plan to offer no, or very few, discounts to existing or new customers.
As organizations work to tighten budgets ahead of a potential recession, increasing capital efficiency has become the top priority. Visibility has improved dramatically in the last 18 to 24 months, and now is the time to reassess your needs and optimize your SaaS tech stack.
Here are four ways to optimize and future-proof your SaaS tech stack:
Let procurement lead the way
One of the best ways to help overwhelmed IT managers streamline their SaaS renewal process is to remove it from their plate entirely. Put an experienced procurement person or team in charge of managing your renewal process and lift that burden from your IT and LOB leaders.
Procurement professionals have the luxury of being impartial about your company’s software stack when it comes to negotiating renewal terms and pricing. They often utilize sophisticated AI and ML tools to gain insight on the effectiveness and utilization of specific SaaS packages and can stay focused on getting the best ROI on the software you need.
In addition to relieving bogged down IT leaders, procurement can also be a big asset for implementing change within your organization. With an internal SaaS buying champion leading the charge, we tend to see faster onboarding and improved utilization rates for new services, as they can clearly and concisely demonstrate the value of a tool to management.
Implement a vendor management framework
With procurement at the head of your software renewal process, it is time to implement a vendor management framework (VMF). A VMF is a set of processes, policies and procedures your company can use to evaluate, hire and manage vendors.
A VMF should be implemented to manage all vendors within your organization, but it can be particularly useful to wrangle the software tools you might not even know you’re still paying for.
Most companies will use one of three types of VMF:
- A centralized approach that assigns a dedicated team to oversee all vendor management.
- A decentralized approach that lets each line of business oversee budgeting, expenses, contracts and vendor relationships.
- A hybrid approach that lets business units pursue and identify vendor relationships, while a centralized team oversees compliance and best practices.
Whichever style works best for your company, of a well-designed vendor management framework can help improve performance, reduce security risk, maintain compliance and improve ROI.
Balance redundancy and diversity in your portfolio
As you improve your SaaS management and procurement processes, you may begin to experience an overwhelming desire to eliminate various tools. Similar to subscription services you didn’t realize you had (I’m looking at you, streaming media service), overlapping SaaS tools can increase software spend and reduce operational efficiency. In many cases, finance and procurement teams are unaware of their existence.
Once you realize how much you may be able to save, you tend to want to slash and burn. But focusing on a single tool or vendor will weaken your leverage come renewal time. To truly future-proof your SaaS portfolio, companies need two to three viable options for all SaaS tools.
Eliminating significant redundancies (you may not need six project management tools) can lower expenses. Diversifying your supplier base is a critical way to reduce risk and lower your exposure to price hikes and vendors falling short of performance expectations. No one likes to transition to new software, but with a few redundancies in place, the transition will create less friction.
Audit new and existing contracts to reduce risk
Reducing risk is a big part of optimizing your tech stack. Auditing your SaaS contracts and amending them as needed can help improve your compliance and mitigate risk. A few areas to focus on include:
- Weak service-level agreement (SLA) language: Ambiguity about the rights and responsibilities your supplier has for things like data security and software uptime should be clearly defined and include an acceptable remedy should they fail to be met.
- Renewal terms and termination penalties: SaaS vendors — particularly those with freemium models or those offering significant up-front discounts — are notorious for including less-than-client-friendly auto-renewal clauses in their contracts (and often piggyback them with hefty termination fees). Make these terms negotiating points. If the vendor doesn’t move if you want to amend renewal and termination penalties, then leverage them to get something else you want, like a shorter or longer contract, or a better SLA.
- Contract non-compliance: In much the same way you need to clarify SLA language, your contracts must clearly spell out the process for disclosing any product or service substitutions, changes in the SLA, or use of subcontractors. It also should define the penalties or remedies for doing so. Clarity and transparency help reduce the financial and potential security risks inherent in non-compliance.
The future of the SaaS tech stack
The proliferation of SaaS tools for business will continue growing in the immediate future. “Hockey stick” market estimates and the funding that follows will ensure that new vendors will also continue to spring up.
This is great news for organizations as competition drives up innovation and lowers pricing. Companies that have already implemented procurement and renewal best practices are well positioned to capitalize on this growth with optimized tech stacks that are efficient, effective and easy to manage and scale.
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