The Hidden Cost Of The SaaS Revolution For Businesses

Do you know how much your business is spending on software-as-a-service products? New research suggests SaaS costs are spiralling out of control, with many companies struggling to track spending or to limit the power of individuals to buy whatever tools they like. The average business is now spending around $3,500 per employee on SaaS tools, according to procurement platform CloudEagle.

Its statistics echo other analysis of the booming SaaS market. The market research group Gartner is expecting spending on SaaS tools to reach $197 billion this year, an increase of almost 18% compared to 2022.

The result is that SaaS has become the third biggest cost centre for many companies (after staff and office costs), says Nidhi Jain, CEO and founder of CloudEagle. “Digital transformation accelerated during the pandemic and that hugely increased the take-up of SaaS solutions,” she explains. “Now people are beginning to count the cost.”

The appeal of SaaS is also its Achilles heel. The traditional approach to buying IT was cumbersome, with business functions expected to get each new purchase signed off by the finance and IT departments. The advent of SaaS, by contrast, enables individual business users and departments to buy affordable tools for specific jobs direct from the provider. That has provided valuable agility and functionality, but it has also taken control of spending away from finance and IT.

“In this tough economic environment, we’re going to see the pendulum start swinging back,” predicts Jain. “Finance leaders have understandably become more conscious of cost; and they’ve recognised that SaaS is one area that requires much greater scrutiny.”

The problem for many businesses is that finance lacks visibility of SaaS tools. The relatively low cost of licenses – particularly at the outset of contracts – means business users are able to make a purchase without referring it to finance for authorisation. And since the whole point of SaaS is to offer tools that are simple and easy to integrate, even for non-technical business users, IT often doesn’t know what is being bought either.

Even businesses that do try to maintain records of SaaS licenses often have an incomplete picture, Jain warns, because the cost and terms of these deals varies over time; adding extra users or spending more time on a tool, say, may take the business into a higher price by bracket, or an introductory deal may simply come to an end. “Many companies are still trying to map their SaaS exposures on spreadsheets,” Jain warns. “What they actually need is a real-time inventory.”

Another concern is that many businesses aren’t getting good value from their SaaS purchases. Business users may not have to assess metrics such as time-to-value or return-on-investment when making a purchase; they may simply stop using a tool but fail to cancel the license. In some businesses, users in different functions are buying different SaaS tools to do the same job, incurring unnecessary expense through such duplications.

Jain believes that the growing financial pressures businesses now face is likely to prompt a backlash, with some companies announcing budget cuts of up to 30% for software spending. The problem is not limited to large enterprises, she points out. CloudEagle’s data suggests even relatively small businesses – those with between 10 and 100 staff – are typically spending $250,000 to $1 million a year on 50 to 70 apps.

CFOs now focusing on how to tackle this problem are putting much tighter controls in place; while businesses are keen to continue taking advantage of the benefits of SaaS tools, they’re also determined to get better value for money. “Spend analysis, streamlining procurement and building a cost-conscious culture will enable companies to make informed choices and reduce overall software spend,” Jain argues.

The potential backlash against SaaS spending will also have an impact on providers, who may find churn rates increase – and recurring revenues fall accordingly – as businesses try to rein in their spending on less effective tools. That will require them to work much harder to articulate the value their solutions offer. “Vendors are going to have to be 10 times’ better to avoid that churn,” warns Jain.