Best Practices for Managing Software Spend
Best Practices for Managing Software Spend
The OnlyCFO guide to managing software spend and improving efficiencies. Make sure your finance team is doing these things!
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Today’s speed of change in the technology industry is unprecedented. There has never been a time where old, outdated benchmarks are more useless because of this rapid change.
I am not saying financial benchmark data is useless (I love all benchmark reports!). A good CFO knows the benchmarks and how their company stacks up and they use that to help guide the leaders and company in the right direction.
BUT….by the time you see the benchmark data it could be outdated for how you should now be performing. Efficiency expectations will continue to increase, headcount numbers required at each stage will change, what it takes to raise VC funding will change, etc.
Don’t assume what good financial/efficiency metrics look like today will still be true in the near future. Leaders must use their brain (now more than ever) to determine what the company should be able to do versus what the benchmarks tell them to do.
In today’s post I am covering what I do to manage the second largest expense category: software costs.
Software costs: ~15-20% of spend
People costs: typically account for ~70% of spend
But it is impossible to completely decouple people and software efficiency. They can quickly become a very unpleasant merry-go-round ride of spiraling costs…
When you hire the right people at the right time those people make better financial decisions.
Below are >some< of my suggestions for keeping software costs in check.
I partnered with a CFO/accounting firm focused exclusively on software companies. If you are a startup that isn’t getting good benchmarks, financial models, advice, etc then reach out 👇
Vendor Contracts
Payment Terms:
Most enterprise software has annual, upfront payment terms. But if a vendor defaults to quarterly or monthly then ask for a discount for annual upfront. If the discount is higher than the interest rate you would get (~5% annually) then you are not only saving money but also saving your team’s time of dealing with monthly invoices😵💫.
I wait until I have pushed on all the other discounts (end of quarter, volume, etc) before pushing this one because it’s easily discussed as a standalone additional discount when separated.
Almost all software defaults to “Net 30” payment terms (i.e. due in 30 days). I usually don’t push on this unless it’s a bigger contract because it’s not worth it. For the larger ones if I can push a bit and get an extra month then it may be worth the ask.
Some other considerations:
Can you pay via credit card at the same price?
Can you run it through AWS marketplace at the same cost (and burn down AWS commitments)?
Multi-year contracts with all of payment upfront is often not worth it in my experience. Discount has to be quite a bit higher than interest rates to make it worth it IMO (more on multi-year contracts below)
Auto-renewals:
Below is how I handle auto-renewals…
It only takes one-time of getting auto-renewed and stuck in a contract you don’t want to learn your lesson.
My policy is to push to remove auto-renewal clauses every time. If the vendor refuses, then I will send a cancellation notice immediately after signing the contract.
When the vendor has you as churning because you sent them your cancellation notice they 1) engage a lot earlier before renewal and 2) tend to be more flexible on price at renewal.
So not only do you eliminate the risk of getting auto-renewed, but you also save money!!
Multi-year contracts:
I have a policy of no multi-year deals for the first year of a vendor. I rarely make exceptions because it only takes one mistake to blow up all the savings from all the other contracts.
After one year I will consider a multi-year if the vendor is critical with near 100% confidence that it will be used for the entire term AND the discount is worth it.
I make sure that the department leader knows their head is on the line so they are very involved and invested in the process.
Negotiating the deal:
So many companies have the wrong person negotiating vendor contracts and they leave tons of $$$ on the table.
Having been on both sides (customer and vendor) of negotiating a lot I have seen so many examples of this. The great negotiators can easily pay back their salaries in money saved on negotiating contracts alone.
Your sales people better be good negotiators because that is their job. If they are not then you should get them out. But frequently companies fail to realize how much money they are leaving on the table by using the wrong people negotiating vendor contracts.
Companies often leave it to inexperienced department leaders to run the vendor negotiations. At a certain size a company may have a procurement team in place, but I have worked with plenty of procurement teams that don’t push on price enough and/or have the authority, leverage, etc to be effective.
Below is interesting data from commonpaper.com about who is signing vendor contracts. While VP and above are most frequently signing contracts, it doesn’t mean they are the right people to lead contract negotiations. I have seen many busy VPs who just want to sign the deal and start working.
There is not a one-size-fits-all solution. Just make sure you have the right people on these deals.
Pro tip: I have saved a surprising amount of money by just saying we have hard budgets of $Xs for each tool. Obviously works best when you come from a position of strength….I don’t try this with my AWS bill :)
Ramping Contracts:
Ramping contracts is where the price increases during the contract as a result of ramping (increasing over time) seats, usage, etc.
Sales reps often push this one hard - “Since you are growing, I can get you a much better rate if you lock in the ramping now by buying more seats that start when you expect those to be needed”
I think these deals can sometimes make sense, but…A LOT of money was wasted from these ramping deals that closed in 2021 when growth expectations were still crazy high for all cloud companies and then that growth never happened.
Be careful with ramping contracts. The risk is often not worth the extra discount.
Driving Accountability
This is a very underappreciated (and frequently not used) way to drive down costs.
Make sure the team knows they can spend money but it better have strong ROI and it needs to be efficient. Hold the team (and particularly the leaders) buying the tool accountable.
Create a culture of ownership and efficiency
Make software spend public to the company. At a minimum I review all vendor spend with the executive team (including VPs) once every 6 months. When you know lots of eyeballs are on your spend then you will take it very seriously.
Make sure your teams have good benchmarks - where spend should be, how much other companies pay for software, etc.
Hold regular budget vs actual (BvA) reviews with department leaders. Make sure they all know that being over budget is not acceptable and they will have to adjust future months to be correct for the year. Then hold a more summarized BvA at the exec team level.
Other Thoughts
Don’t default renew. Company needs change, better products come to market, etc. Thoughtfully consider if you actually should renew a vendor (zero-based budgeting).
Stack rank your software.
Improves efficiencies
Increases revenue
Mission critical (e.g. cybersecurity, compliance)
“Candy” - nice-to-have tool that doesn’t really fit into the above groups
The cost of a tool just not just the sticker price. There is implementation costs (external and/or internal) and ongoing maintenance of the software which can be 2x the software costs. Beware of these additional costs when thinking about ROI.
Takeaways
Having the right people in roles at the right time/stage of your company is critical. They will make better decisions, including managing software spend.
Don’t forget to use your brain. With the speed of change in software we can’t solely rely on benchmarks to tell us what to do.
Make sure a good negotiator that has the right context is involved in vendor contract discussions. They can easily save a lot of money with little effort.
Create a culture of accountability and financial efficiency.
Footnotes:
Create your free Vendr account today and start controlling your software spend.
I partner with a CFO/Accounting firm focused on software companies. If you are a software startup (less than $15M in revenue), reach out today for a free consultation.