Runaway Software is a lot like streaming services. It’s easy to evaluate each service in a vacuum and think “It’s only $10 per month for XYZ service”. I recently audited our streaming platforms only to realize we were spending $150 per month without any live TV services. Funny enough, half of the streaming services we subscribed to were only to watch a single show or movie, and we just never canceled when we were done. In business, software platforms act the same way – it’s easy (and relatively inexpensive) to incorporate new platforms, but before you know it, software is one of your business's biggest costs.
I’ve been having conversations with many of my software connections to learn more about their biggest pain points and two key areas have come to the surface:
People – people are the life blood of every organization, and also the single greatest expense for software companies.
Software – Since software vendors aren’t manufacturing any physical products, their next biggest expense area is… software.
For the purposes of this series, we’ll be exploring runaway software costs.
Why?
Why is software one of the biggest expenses?
Sure, real estate is expensive, and obviously equipment is expensive too. If you go back a million years (or even 15), software packages were sold as a capital purchase meaning you only had to buy it once until the new version was released a year or two down the road, but it was still considered a capital purchase and you owned perpetual rights to it. These days, most software has transitioned to an operational-expense model, like SaaS. While this creates a more predictable business expense, you can expect to spend much more on licensing in the long run as you never actually own anything.
As time goes on, we are increasingly dependent on software, and constantly finding more ways for software to automate everything. This results in an increased reliance on more software platforms, which is further amplified when considering each business unit has its own essential platforms that require investment.
Don’t even get me started on AI. Yes, it’s bringing efficiency and reach to levels never thought possible, but it also requires more software to properly execute and manage these new processes.
That’s all fine and good, and for the most part, businesses have adapted to the changing landscape. Companies are still profitable, and there are conversations in the board room about how to control rising software costs, but it’s largely considered a necessary evil.
There’s one aspect many organizations don’t consider about consuming software as a service – it requires internal audits and attention to ensure costs don’t run out of control.
How it gets to the runaway state:
Imagine you’re a tech company that is in high-growth mode. You’re experiencing double-digit organic growth and your investors are pushing for faster growth, so you turn to acquisitions. You find a company that perfectly compliments your current offering and you purchase it. This company already has all their software platforms in place. Sure, you’re likely to find overlap where the same platforms are used across both companies, but you’re also going to find many platforms aren’t the same. It is a challenge for each business unit to decide which platform to standardize on, which platforms should stay in place (regardless if there’s redundancy), and how to properly bring outdated platforms to end-of-life.
This process gets complicated by the push for constant growth. Since growth is the focus, something has to give, and that’s usually the attention to older, unused software platforms. This gets more difficult when you factor in employee turnover. How many users of the platforms have left since the acquisition? How many users have expensed licenses for software to which they only have 1 seat? What if there were 100, or even 1,000 users that have done the same? Now, imagine you haven’t been diligent in managing your licenses in each business unit. How long before you’ve got so many orphaned licenses that you aren’t even sure where to start searching? This only compounds with each acquisition your company makes.
The larger the company, the more complicated this all becomes. It’s not at all uncommon for larger companies to have multiple agreements for the same software platform, but for multiple business units. Unchecked spending isn’t something common only to large companies either. I used to work for a SaaS company where we had to deliver demos. Our company provided each salesperson with a license to Zoom, WebEx, Goto Meeting and Join.me. Each of us preferred one platform and used it exclusively, leaving 3 licenses per salesperson unused.
What to do:
So you may be sitting here nodding your head in agreement knowing your organization is probably spending thousands per month on unused software. What do you do next?
Obviously we don’t live in a perfect world, but in an ideal state, each business unit would have established protocols to deal with onboarding and maintaining software licenses. These protocols would account for integration of newly acquired companies to evaluate existing software platforms and develop a strategy to standardize on a single platform while bringing old/unused platforms to end-of-life. There should be an annual license review to ensure that orphaned licenses are put to rest, and the business operates as efficiently as possible.
Since we’re speaking in ideal terms, each business unit should also report up to a greater team that oversees software licensing across the entire organization. Doing this will not only ensure that you’re only paying for software you need, but gives a method to evaluate new software across the organization.
If you’ve read this far, you’re likely not operating in an ideal state, so what do you do from here? If you’re a member of executive leadership, select someone (detail oriented!) who can run an evaluation process across the company, and delegate people in each business unit to perform audits of software. Each business unit needs to map out which software platforms they have, and how many users with which permissions, etc are needed for each platform. Once everything is documented, compare the established requirements with what you’re actually purchasing from each vendor, making sure to limit the number of unused licenses you’re paying for. At this point, you can also see if multiple business units are using the same software (with different agreements). This is an opportunity to consolidate agreements, and drive the per-user pricing down.
This is not a fun task. To ensure that best effort is made, consider offering a bonus based on the amount they’re able to save on orphaned licenses or platform consolidation. If you’re resigned to do this, know that the savings you find through this process could likely fund a team to ensure you’re always operating at peak efficiency (from a software license perspective).
A company that is near and dear to me recently embarked on a process similar to this. The project was taken on to prevent layoffs due to an economic downturn. The project took 18 months, but ultimately the company was able to find over 1.5 million per year in savings, resulting in zero layoffs.
These projects are incredibly involved and can be ridiculously complex. If you’re operating with a relatively lean staff or aren’t confident in your ability to execute a project like this, consider bringing in a consultant. Many consultants can do projects like this, and some specialize in exactly this sort of project. If you are going to consider a consultant, be sure to do your homework. Some larger consultancies will charge a premium (mid-5 figures) to even evaluate your software landscape, and then charge hourly to remediate. On the other end of the spectrum, there are consultancies out there that work entirely on a contingency basis, so they’re only paid on a portion of anything they’re able to save you. Sure, you’re giving over some of the savings you could have found on your own, but almost without exception, they can find more savings than you could find on your own and can execute the entire project in a fraction of the time it would take you to do it internally.
The bottom line is that software is one of those things every business relies on, but can also act as a minefield, waiting to blow your finances away. Regardless if your business is flush with cash, or you’re trying to figure out how to avoid layoffs, paying close attention to software management is crucial to long-term business health.
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Great article Kris!