How to manage runaway SaaS spend
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How to manage runaway SaaS spend
Do we really need four project management tools? Vendor sprawl and orphaned apps
70% of costs at SaaS companies walk on two legs.
Take the P&L from any venture backed tech company, and you’ll realize that anywhere from 2/3rds (on the low end) to 3/4ths (on the high end) of all spend is wrapped up in what I call “total effective labor”.
That’s the aggregation of payroll, commissions, benefits, bonuses, contractors, and consultants your company hires…the “people”.
Total Effective Labor = Payroll + Commissions + Benefits + Bonuses + Contractors
That leaves roughly ~30% of company spend that’s wrapped up in “stuff” without a heartbeat.
Each department within the org has a different mix of non people “stuff”. It’s common for teams to call people spend “direct” spend, since it’s linked directly to people, and broadly classify everything else as “indirect” spend (kinda simple, I know).
But we can go a level further and come up with some general rules of thumb, or ratios, at the department level to split out those direct and indirect costs.
Cost of Goods Sold:
33% people
Customer support and Customer Success (if not in Sales)
33% tools or data
Customer support tools (Ask Nicely, Zen Desk, Churnzero)
33% hosting infrastructure
AWS, GCP, Snowflake
Sales:
75% people
Payroll + Commissions
Note: if you have commissions showing up in any other department, you are doing it wrong. Commissions should be reserved specifically for sales. Any other variable comp should be classified as a management by objective (MBO) bonus.
15% tools
CRM (Salesforce, Hubspot)
Sales Efficiency (Gong, Zoominfo, Linkedin Sales Navigator)
Meeting Management (Calendly, Chilipiper, Vidyard)
Contract Management (Docusign, Linksquares)
10% travel
Revenue generating travel: Client facing meeting, conferences
Non revenue generating travel: Small hands, all hands, QBRs (quarterly business reviews)
Marketing:
50% people
40% programs
Includes tools, advertising, campaigns, swag, conference sponsorships
This varies by company scale - you need people to deploy the marketing programs and campaigns, so at first this skews towards people (60% / 40%).
But overtime the ratio starts to slide in the direction of programs (40% / 60%) once you have people to spend it
Generally speaking though, you won’t see it move more than 70% / 30% in either direction
Tools you’ll commonly see pop up in your vendor report include Hubspot, Mailchimp, Marketo, Jasper.ai, SproutSocial, Podium
10% travel (and shipping)
Lead generating travel: Conferences, and anywhere you ship that booth
Tangent: Sadly, it’s sometimes cheaper to buy a 42 inch Vizio TV for the booth a local Best Buy once you land, and then just leave it in the hotel room as a gift for the hotel staff, rather than paying to ship it all the way back.
A CMO once told me he had been doing this all year. I got wicked mad at the waste, ran the numbers, and discovered he was right by a factor of almost 2x. 🤷🏽♂️
Product:
70% people
25% tools
Project Management (Miro, Clickup, Asana)
Design (Figma, Fullstory, Adobe)
5% travel
Customer studies: meeting with clients first hand to understand their needs. This may include advisory committees.
Conferences: often working hand in hand with marketing to man the booth
Internal travel: Product people really f’in love their small hands meetings, where they talk about activation metrics and gather around campfires to play the banjo.
Engineering:
93% people,
5% tools,
Gitlab, Docker, Postman
Surprising tangent - a lot of dev tools are actually relatively cheap (as a CFO, I rarely ever say this. It actually hurts that I’m writing this).
Most start as free. And if you are an org that’s under 200 people, there’s a good chance that more than half the tools your engineering team is using are still free.
Very minimal travel (2%?)
If your engineering team is traveling a lot, something is very broken.
There are no customer facing opportunities for engineering teams, and Product and Marketing people should be representing the company at conferences to better communicate the story (sorry if I’ve offended any Toast Master developers)
Finance
60% people
25% tools
Money In, Money Out (ADP, Bill.com, Brex)
Finance / Accounting (Quickbooks, NetSuite, Xero)
Treasury and Procurement (Kyriba, Coupa, Ivalua)
Cap table management (Carta)
12% professional fees
Lawyers (Cooley, Fenwick, Goodwin, Wilson), Tax (BDO), Audit (Big Four)
3% travel
HR
80% people
10% recruiting “advertising” / “program” spend
LinkedIn, BuiltWith, Indeed, Monster, Glass Door
I think of this as effectively marketing program spend but for the org’s overall brand to attract talent
7% tools
HRIS tools (Workday, Bamboo HR, Gusto)
3% travel
“G&A” / “Exec” / “Operations”
40% People
CEO, COO, Admins, facility workers etc.
30% Tools
This is where I’m throwing shared tools (Zoom, Slack, GSuite) rather than allocating out to the departments
As you get past ~$25M in ARR you can start to allocate the larger shared costs (like rent) so G&A doesn’t look like an absolute albatross
And I’m also throwing all security and compliance tools here (Crowdstrike, Jfrog, DataDog)
20% Rent and Overhead:
Also includes utilities, office expenses, snacks, the disgusting Flavia coffee I had to drink at PwC etc.
10% exec travel
This is where you park the 150 hour NetJets card for your CEO and hope you get invited someday when you beat your revenue forecast
Taking our eye off the ball
Many of the tools move inline with the people - you can get a good grip on your Figma forecast by attaching it to the number of heads you think will be employed each quarter on the Product team. The same goes for Salesforce, Slack, Gong, and other tools that are easily attributable to real people in real departments.
But what I’ve noticed is that we spend more than 70% of our time on the 70% of costs wrapped up in headcount.
Why is that?
Headcount has the most “juice” to squeeze when you want to make a change
Travel, Software, and Rent are tied to headcount, so you can’t inform one without the other
You can cut people faster than you can bail out of annual software commitments
And - most importantly - Headcount can talk back and tell you when it wants more headcount on the team (Miro is slightly less vocal, but getting there)
But based on my research, it feels like there’s actually more juice than we might think in the SaaS bucket, as it’s growing even faster than headcount at most companies.
The average organization uses 110 distinct SaaS apps in 2022, which increased to 130 in 2023, per Vendr. And when you size up SaaS applications on a per employee basis, it’s jumped from 8 to 12 from 2015 to 2022.
And the chart above speaks for itself - not many companies are growing headcount by the equivalent of +60% y/y.
That’s why the top three things that keep me up at night are:
Stacking bodies
Orphaned and duplicative applications
Bears.
Number #2 is increasingly becoming #1B when you factor in the rate of change applications are undergoing and the leap of faith we take on multi year contracts.
I constantly am asking myself
“Will the application I’m signing up for still be best in class before the contract is up? Will my headcount forecast be right? Is the level of discounting I’m getting worth the cost certainty? Can bears really smell through three feet of ice?”
Most employees are at will. Most SaaS applications are 1.7 years.
I think a lot of CFOs realize their exposure to SaaS apps, and the underlying lack of flexibility, when the water in the Amazon fell and the piranhas came out (read: when the economy took a nose dive and companies stopped expanding their seat counts).
Oh, the irony
It’s a bit ironic that the biggest culprits of SaaS waste are SaaS companies. If you sell SaaS, you also waste SaaS. The stats I’ve referenced are for SaaS companies that are SaaS users.
In fact, about one-third of SaaS software spend is underutilized or wasted, according to Flexera’s State of ITAM 2022 report
It’s kinda like the fix is on - SaaS companies sell to other SaaS companies in an inefficient way. We’re all complicit.
Once we admit that to ourselves, here are five steps to manage runaway SaaS spend:
Consolidate the 30% on one platform
Brex's procurement capabilities keep much of the runaway SaaS vendor spend in check through advanced budget controls across invoices and purchase cards, without slowing down key business purchases with all the red tape of a purchase order.
You might recall that Brex offers similar controls for travel and expense management, so you'd also be able to keep those T&E line items in check on the same platform. You basically get the superpower of "visibility" for much of your non-payroll spend. It might not be as cool as the power of say, invisibility, but you'd be surprised what today's finance leaders wish for.
Weed out reimbursement requests for single licenses
As an FP&A professional, single licenses of Dropbox, Github, and Microsoft Office have dogged me. There’s a good chance that you are already paying at the enterprise level for licenses, and this person was just lazy and didn’t want to ask IT to provision a license.
Or, even worse, your org doesn’t want this person using that tool at all and they are going around guardrails.
I’ve personally been that guy when they tried to take my PPTX away from me in favor of Google Slides. I’d rather die.
Export vendor lists for department leaders on a monthly basis
Every month I meet with the CEO’s direct reports. And ahead of that meeting we send them an export with every vendor name and the associated spend linked to their department.
For example, this way the CPO can scan the list and see Miro, Dovetail, Full Story, etc. and call out any new ones that have popped up on the list and been attributed to their department.
You need eyes on the vendor names to appropriately manage the spend.
Offboard people who leave the company (maniacally)
It happens more than you think - an employee leaves the company and eight months later you learn you’ve been paying for their Pitchbook license the entire time (I’ve been both a victim as an FP&A leader, as well as a beneficiary as a former employee of this phenomenon).
Setting auto reminders for employee offboarding is critical to make sure you aren’t paying for extra licenses. I get pinged every time someone leaves so I can kick them off our TravelPerk account. The same should happen for Salesforce.
Build in better approval workflows
To weed out shadow IT, put the responsibility back on leaders.
It’s funny how quickly people become your advocates for cost reduction when there’s a visible approval chain linked back to them.
Tools like Brex can help you set up the proper workflows to not punish, but enable, your leaders to help with procurement.
What I’ve Been Listening to
The media tycoons over at Turpentine just dropped the hottest rap album VC podcast of 2023.
On Turpentine VC, host and venture capitalist Erik Torenberg delves deep into the art and science of building successful venture firms through conversations with the world’s best investors and operators.
The first episode comes out of the gates firing on all cylinders - Ben Horowitz, dripped out in a gangster bomber jacket, reveals insider strategies on decision-making, investment theses, and building firms for the future. I thoroughly enjoyed this episode.
Quote I’ve Been Pondering
“The demons hate fresh air.”
-Keep Going, by Austin Kleon
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PS, I have bought TVs at Best Buy and left them in Marriott. I can validate that statement.
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