The SaaS usage costs contradiction

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Do you pay for what you use or do you fix your costs? Something to think about before buying SaaS solutions.

Breathing with the volumes

 SaaS licenses are usually marketed so as to allow you to increase or decrease the number of licenses on a monthly basis, allowing you to perfectly follow the trend of your volumes. Especially in volatile contexts, this is requested by the budget owners. The selling (or purchasing) argument that is made is that of the adaptability of costs against the need.

Higher traffic or demand volumes can be solved with temporary augmentation of licenses, whereas a decrease in volumes can be met with a decrease in number of licenses purchased. That sounds like the perfect solution for almost any organization. After all, most organizations are anticipating decline, growth, or even a seasonal pattern, not to mention a combination of a seasonal pattern and decline or growth.

But then the reality of purchasing and budgeting in an enterprise environment kicks in:

  1. Procurement has a target of shaving off costs from initial offers.
    The involvement of the procurement department leads to reduced license costs which in itself is great, obviously. However, the first requirement SaaS vendors set is that the number of licenses needs to be fixed usually followed by the second requirement of a minimum initial duration of the contract of three to five years.
  2. The purchasing departments’ budget needs to be clearly identified a year upfront.
    Budgeting cycles in enterprise environments usually don’t leave room for fluid future budgets. The costs need to be clearly identified upfront to allow validation in the process.

Both these issues lead to a fixed pricing of the SaaS licenses combined with a fixed number of licenses …

 

                                                                                                                … and gone is the premise of breathing with the volumes.

One way this is sometimes addressed by SaaS vendors is to allow you to buy a pool of licenses that you can consume as needed. That provides an alibi for procurement and the purchasing manager, but in real life this has nothing to do with the initial idea of SaaS licenses. After all, when your estimation of licenses needed is off you either bought too much and paid too much (even after procurement did their job) or you need to procure additional licenses which creates a budget overrun.

Another way in which SaaS vendors try to contain the costs is by setting a ceiling on the number of licenses/units (or $). This should ease their anxiety for unlimited spending due to a success of the implementation. However, in real life and when initially well estimated, an increase of licenses usually goes hand in hand with an increase in sales volumes or an increase in customer satisfaction. This can be compared with the range anxiety people show when first driving an electric car after driving a gas-powered car for decades. After a while, when they have changed their attitude and approach, they find that there is nothing to worry about. This applies to cloud licenses as well: Once you start working with them you find out how to manage them.

On top of that, if your number of licenses increases because you are more successful and you have, for example, more customer interactions, how bad is that?

Even in very strict budget regimes there should be an opportunity to point out that the increase of license costs is outweighed by a success metric (e.g., the increase in revenue or customer satisfaction).

So, how should you avoid the SaaS usage cost contradiction?

Do not treat SaaS licenses as they are on-premises costs than have to be estimated and validated upfront.

When it comes to SaaS licenses there are four steps:

  1. Start using some licenses and start small, but start! Having started will provide you insight in what works and what not both for your company and for your customers.
  2. Calculate what your costs would have been based on your volumes over the last two or three years and estimate the most likely scenario and calculate the costs involved.
  3. Take your finances department with you along the journey. Train them in the happy implication of being successful. Again: selling more means more costs are made but as long as the margin stays intact, what’s wrong with that. Then align with your finances department on how to manage your SaaS usage costs in an appropriate way with regards to budgeting and forecasting cycles.
  4. Negotiate rates for larger usage with the vendor of your choice but stay away from deals for many years when you are starting using SaaS products – don’t push yourself into a corner without knowing whether you like that corner.

Use professionals to help you out if needed for estimation of volumes, education of your finances department and to support you in getting the right deal when entering in negotiations with a software vendor.

I see many companies struggle with the SaaS usage cost contradiction. Applying the four steps above will help you avoid that struggle. I would be happy to help you getting started by discussing what your specific issue is. Feel free to reach out to me via remco.stolp@capgemini.com or connect via Linkedin.

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