Cost Reductions in the time of Covid-19

By Alex Geuken. April 30, 2020.

Software expenditure is one of the highest business costs along with employee salaries. During the pandemic, you can furlough employees – if that is applicable for your business, but how do you reduce the significant costs of software?

In these unprecedented times, companies are doing everything they can to cut costs, which includes reducing employee headcount, terminating consultants and furloughing employees. This helps reduce monthly costs but what about software? Being one of the highest costs of the company, how can you reduce the spend on software and licensing?

Today, companies spend huge amount on software, such as ERP, CRM, BI, CAD, Productivity, Communication and specific industry software. Midsized companies (revenues between $50 million and $2 billion) spend $13,100 per employee on IT, large enterprises (revenue greater than $2 billion) spend $11,580 per employee.

Small and medium-sized businesses often outspend larger ones – per employee. The average small company spends 6.9% of its revenue on IT, midsized companies spend 4.1%. In contrast, larger enterprises spend approximately 3.2% of revenue.

Interestingly, the projection is that the spend will increase. Enterprise software spend grew by 8.5% in 2019 and is projected to grow by 10.5% during 2020.

The challenge with software spend: How often do you clean up your closet?

When was the last time you looked in your software closet and cleaned out all old software applications, stopped paying for licenses/subscriptions and terminated support renewals? How much are your employees really using these software applications? Why do you pay money for something that is not being used?

Where is the software money spent?

Do you have different software applications with same functions? How many BI applications do you have? Do you have multiple CRM systems? How many different versions do you have of the same CAD application, perhaps 2016, 2017, 2018 and 2019? When did you clear out your software closet? Typically, we only add more vendors and software applications and, of course, licenses, but when do you clean out all the legacy or unused software applications?

Take your phone for example, when did you clean out all the applications you are not using? With a phone it’s simpler to ignore because majority of the applications are free, but let’s pretend that they all cost money. I bet you would keep better track of the ones you don’t use. The challenge with software is that it’s very common that this mentality is spread out throughout the organization.

If the business orders a function or software application from IT, the Purchasing and Security teams reviews and authorizes the purchase of the license. The software application gets delivered to the Infrastructure team, that deploys it and the requesting department uses it. Where is the SAM team in this process? That’s right, it is missing, and it should be responsible for this whole process to make sure the software application is correctly purchased, installed and used. Otherwise it should be uninstalled, and the allocation, terminated.

You are always overlicensed and overspending on software!

How software vendors make you overspend:

  1. The Discount Trap: “If you commit to this purchase volume, we will give you this discount.” Over-committing investment in Azure, AWS, MS are great examples of overspend. You commit to a higher number than you need. We recommend that you base your SAM decisions on Active Usage and trustworthy data.
  2. The Feature/Functions Trap – Module Based Pricing: Software vendors sell parts of their solution knowing that you’ll miss out on key functions/features or encourage you to buy higher suites/bundles than you actually need. Why do you give your employees Microsoft 365 E3 or Adobe Creative Cloud? Do they actually need them? What are you basing your decision on? (Again, Active Usage & trustworthy data)
  3. Software Insurance: Support/Maintenance or Software Assurance? Are you paying for expensive maintenance/support contracts but running a 3 to 6-year-old software application? (e.g. paying for the newest version but still using a 3 or 6-year-old version) Some vendors force maintenance on all products, or you must rebuy the entire license; but there are alternatives such as 3rd party support. If you can, stop paying if you don’t upgrade the software application. Have a clear strategy when are you going to migrate to a newer version? What are your resources and update cycles? Can you keep up with the updates or should you buy without support?
  4. Usage: Are you using your software applications enough? Have you put a minimum usage limit to software applications or vendors? If the software application is used less than this, on average, stop paying for it. The same goes for more expensive editions. For users to get the Enterprise or Professional edition, define the minimum duration of usage on a daily/weekly basis for it to be justified.

Overspend is a way to feel safe with vendors who conduct a lot of audits. Generally, if you haven’t had an audit in several years, you are overspending. Software vendors’ goal is to make you spend as much money as possible on them.

Legacy Software Challenge

After time, software becomes obsolete as they reach End of Life (EOL) and Extended EOL. One good example is Windows 7 becoming obsolete from 14 of January 2020. Legacy software comes with several challenges; first it is a security risk. The vendor will no longer provide patches with security updates/fixes.

Besides security, you also have compatibility with integrations; either you can’t update other software connected to the legacy software or the legacy software can’t integrate anymore with other software creating a need for manual tasks. Then you also have the challenge with User Competence on older software; what happens if you lose technical skills around a software application that has reached its End of Life? Maybe you can’t access the data in that product anymore? In essence, the data gets taken hostage by legacy software, meaning you can’t export or work with the data anymore.

When to Buy Perpetual and When to Subscribe

Software vendors usually offer both an Opex and a Capex alternative. But how do you know when to purchase perpetually and when to subscribe? Sometimes you don’t have an option – you must purchase perpetually and then pay maintenance, while other vendors only offer different versions of the subscription. A lot of vendors are pushing you to subscription based licensing where the latest one is, for example, Autodesk. Autodesk will completely stop with perpetual and network licenses as of August 2021, and if you are about to renew now you will get a price increase with 20%. Adobe did it, Microsoft does it and we will see more and more vendors continue to do it. They will do as Autodesk or Microsoft with inevitable price increases for perpetual or other license metrics, besides Named User Licensing. You will also see audits to push for the Cloud; Oracle does this to push Oracle Cloud for example.

What is your plan to decrease software spend?

The task of decreasing software spend is an on-going engagement. Companies are increasing the amount of software/hardware all the time; new vendors and new applications are added, continuously increasing spend on enterprise software. IT purchasing is also moving away from IT departments and into specific business operations/departments. The biggest key to actively decrease software spend is knowing your USAGE. Why pay for something you don’t use? Why are you paying for enterprise editions of software applications when you are only using standard functionality? It is essential that you make decisions based on trustworthy data, and define standard functionality in different software applications (categories).

SAM Compounding

Gartner says you can save 30% in the first year after deploying a SAM solution. Whilst that is 30% in the first year, those cost reductions live on year 2 and 3, which are then augmented by the additional savings on top of the already saved 30%. This means you are adding savings on top of the savings you already made. The problem is if you don’t realize savings in the first year, you continue to overspend year 2 and 3. See example below.

You spend 5 million USD/year on software. You do 30% cost savings year 1 and the 5% cost savings YOY. Not taking in consideration YOY software spend increase.

Scenario A – No SAM is implemented. Software spend is static over 3 years, total cost 15 000 000 USD.

Scenario B – SAM is implemented. 30% cost reduction year 1, then 5% YOY, total cost 9 983 750 USD.

Total savings done: 5 016 250 USD (Entire software budget over 3 year saved)

YOY Saving. 33% 1 672 083 USD (Compounding)

How can Xensam help?

With Xensam you will get trustworthy normalized data, together with Active Usage. Now you have the data to start cleaning your environment. You also get prebuilt reports for cost savings, such as; all unused software, all applications with low active usage, optimization reports for Adobe and Microsoft 365 and much more. Xensam’s solution comes prebuilt with prices so that you will get potential savings values immediately.

Learn where you get the best results for license optimization in your network by using Xensam.