The software-as-a-service (SaaS) ecosystem fundamentally changed how businesses license and source digital tools. SaaS applications are easy to deploy, scalable, and flexible. While the net impacts of SaaS applications have been overwhelmingly positive, subscription costs can spiral out of control.
Controllers and chief financial officers must be wary of hidden software subscription costs. If left unchecked, these expenses can eat away at an organization’s technology budget and leave businesses unable to invest in necessary IT upgrades and equipment. Familiarizing yourself with hidden subscription costs is the first step to finding and fixing these inefficiencies.
How SaaS Subscriptions Became a Runaway Train
The software-as-a-service model was a welcome change to traditional software licensing, which requires businesses to pay huge upfront fees for digital tools. The SaaS ecosystem exploded in the 2010s, prompting businesses to adopt dozens of niche applications.
Many of these apps addressed legitimate organizational challenges. Unfortunately, this rapid expansion also led to app overload, which has driven up subscription costs and inundated employees with too many tools.
In 2015, businesses averaged just eight SaaS applications. By 2019, that figure climbed to 41 subscriptions. The average number of SaaS subscriptions per company surpassed 100 in 2021 before peaking at 130 in 2022.
In 2023, businesses finally seemed to realize that the pendulum had swung too far in the other direction. Many organizations began consolidating applications and shedding unnecessary subscriptions, bringing the average number of SaaS apps per business down to 112.
5 Hidden Costs of SaaS Subscriptions
The hidden costs of software-as-a-service subscriptions that controllers and CFOs should be cognizant of include the following:
1. Unused or Underutilized Licenses
One of the most hidden costs in SaaS spending is unused or underutilized licenses. Many businesses pay for seats that employees no longer use due to turnover or role changes.
Underutilization issues can also arise as SaaS developers add new tools and capabilities to their products. For example, one SaaS vendor may add a new feature that makes a different application obsolete. To mitigate this cost, organizations should:
- Regularly audit SAAS usage and identify inactive accounts
- Implement automated license management tools
- Negotiate flexible user-based pricing models
- Reassign unused licenses before purchasing additional seats
Addressing utilization is the first step toward eliminating subscription waste.
2. Overlapping Tools
SaaS sprawl often results when different departments subscribe to similar tools. For instance, multiple teams may use file-sharing tools and project management applications. These redundancies can drive up subscription expenses and make life far more challenging for IT.
Unifying application purchasing and implementation decisions will reduce sprawl. Additionally, financial professionals should explore single, organization-wide platforms that address a multitude of needs. It’s also important to regularly review all software subscriptions to identify duplicate tools and eliminate redundancies.
3. Auto-Renewals and Long-Term Contracts
Many SaaS providers operate on auto-renewal models. While these models are convenient, they can also lock businesses into unnecessary commitments. Annual plans that are set to auto-renew and long-term contracts are especially problematic due to the higher costs.
Creating a centralized database of every SaaS subscription and renewal date will help finance teams address this source of hidden waste. Businesses should also avoid multi-year contracts unless they provide significant cost benefits and flexibility.
4. Disjointed Applications
SaaS application subscriptions are meant to make work more efficient while promoting greater productivity. However, when the apps are disjointed, they can have the opposite effect. For example, if your sales and marketing teams use separate tools for customer outreach, it can lead to inefficiencies.
Replacing niche applications with more versatile platforms can eliminate several redundant subscriptions. Finance teams should prioritize scalable SaaS solutions that include customization options and add-on tools. This can prevent future disconnects and reduce the risk of data silos.
5. Integration Expenses and Avoidable IT Costs
SaaS applications promise ease of use and out-of-the-box functionality. However, some apps will require businesses to invest in custom integrations, which can drive up costs significantly. Creating custom integrations is also time-consuming and can lead to major implementation delays.
Choosing applications that include pre-configured application programming interfaces (APIs) can help cut down on integration expenses. APIs are designed to simplify the integration process while keeping IT costs down.
Finance professionals will need to collaborate closely with IT to identify which existing apps can be integrated and which solutions should be replaced with more user-friendly options. It’s also important to account for secondary costs when budgeting for new software, such as training and support.
Audit Your Saas Subscriptions and Stop Financial Leakage
What is the state of your organization’s SaaS ecosystem? A thorough audit will most likely reveal that several unused applications and other hidden costs are negatively impacting your IT budget. Conducting a comprehensive audit will reveal where financial leakage exists so you can plug the gaps and enhance your organization’s financial health.
