Back in early March, the U.S. was only beginning to grapple with the long term impact of the Covid-19 pandemic, and so it came as a bit of a shock when the influential VC firm Sequoia Capital published a March 5 memo labeling Coronavirus as the “black swan of 2020.”
The memo advised that “we should brace ourselves for turbulence” and predicted the disruption of supply chains, business activity, and all business-related travel. Sequoia argued this would result in smaller cash runways for most companies and simultaneously increase customer acquisition costs. Ultimately, the firm advised that now was the time to reduce costs. “In downturns, revenue and cash levels always fall faster than expenses.”
It didn’t take long for the entire private sector to recognize Sequoia wasn’t overreacting. CFOs all across the country began consulting their P&Ls for opportunities to slash spending. With most companies reluctant to lay off workers, they naturally turned to software as a line item ripe for cuts. After all, software costs have swiftly risen in recent years and now account for up to 37% of IT spending in some industries.
According to Gartner, enterprise software spending is projected to decrease by 6.9% in 2020, but many companies aren’t simply slashing their software budgets; they’re using the downturn as an opportunity to change the actual software purchasing process. And while the current crisis served as the catalyst for these changes, they’re likely to outlast the pandemic simply because they improved Saas buying for the better.
The old way of buying software prioritized growth over practicality
Before you can grasp how software purchasing has transformed, you first have to understand how companies traditionally approached it in the past.
Back when all software was hosted on-premise, the IT department facilitated most of the purchases simply because IT was responsible for implementation and deployment. But the rise of the SaaS market resulted in products that were both highly specialized and low cost. Because of this, department heads who were much more attuned to their own needs began purchasing software without much input from IT or finance. Under this dynamic, the individual stakeholder had most of the purchasing power.
The problem is that all these purchases, in aggregate, began to add up, a trend that many companies refrained from acting upon as the economy continued to grow. According to a 2019 trends report, the average company increased its SaaS budget by 78% between 2017 and 2018. That same report found that the average employee uses eight apps. SaaS is now a top five line item for many companies. But now that the U.S. has officially entered a recession, CFOs can no longer turn a blind eye to this unchecked spending.
Software acquisition is now owned by the CFO
After the onset of the Covid-19 crisis, companies changed their software buying virtually overnight. In many cases, the finance department took control of the process. But that doesn’t mean stakeholders no longer play a role. In fact, this new paradigm is likely to create higher efficiency across all software spending.
Before CFOs could improve software purchasing, they first had to get a better accounting of which software subscriptions were being used. They approached each department and charged it with turning over a list of all ongoing software agreements. This allowed finance to tally every product and its associated costs.
Next, CFOs needed to assess which products were actually critical to ongoing operations. Rather than conducting this assessment on their own, they turned to the stakeholders and asked them to make the case for which services were absolutely mission critical, in some cases by ranking them. By approaching it this way, CFOs actually empowered the individual department heads to choose their software products by identifying which services could be reduced or eliminated entirely.
Finally, companies transformed their operations so that the finance team is now brought in during the software buying process, removing the stakeholder from the commercial side of the negotiation. According to this new philosophy, stakeholders should not be buying things because it's not their job and they don't have the data or the time to buy effectively. Rather, the CFOs will empower these stakeholders to identify software solutions before enlisting the finance department to secure licensing agreements that fit within the company’s budget. In other words, the stakeholder owns the decision of what they want and the finance team owns the decision of determining whether the company can afford it and executing on the process of actually getting it. This creates a “church and state” dynamic that allows each side to become accountable to the other.
Why is this approach superior? Finance departments are better trained in the skills of negotiation and can leverage the company’s entire scale to secure better license agreements that are customized to the organization’s needs. This ensures a level of accountability and prevents the purchase of expensive products that are rarely used.
Handing the purchasing process over to the finance department saves time as well. Software purchasing and renewals can take up to 10 hours to hammer out all of the finance, security, and legal details. This is a very poor use of stakeholder time and is better suited for those who specialize in contract negotiating.
SaaS purchasing has changed forever
Eventually this recession will end. Scientists will hopefully find a vaccine, consumer spending will pick up, and companies will begin to recoup their losses. But that doesn’t mean a return to pre-Covid, anything-goes software purchasing.
Rather, the changes companies have pushed forward represent a reorientation of the software buying process. If there’s a silver lining to the current upheaval, it’s that companies have adopted a new level of diligence in how they spend money, allowing stakeholders to purchase best in class software while also keeping expenses in check.This sets the business up for higher profit margins -- making the company more defensible against future downturns. This is the new norm, and it’s a win for stakeholders, CFOs, and SaaS companies alike.