Cost Savings Toolkit – Software
Reducing Software Costs
As we mentioned in our last blog post on increasing marketing effectiveness, when times are tough, every penny counts. With this in mind – we have been working across the Susquehanna portfolio to help position our portfolio companies to save money without impacting performance.
The focus of these blog posts will be on non-headcount related cost savings for a software as a B2B service, marketplace, or data company.
This second blog post will focus on maximizing value from software investment – generally 3-4% of operating expenses for a $20M portfolio company.
What we are seeing
Our portfolio companies are bifurcating their software spend into 4-5 high-value contracts, the key suppliers of infrastructure and application software for the business, and other, lower-value contracts.
For high-value contracts, these tend to be more complicated negotiations with multiple savings levers, but the most common are:
- Seat reduction (in particular if there has been a headcount reduction)
- Usage optimization – e.g., optimizing for unused capacity/modules
- Contract extension for payment discount/deferral
The hit rate tends to be lower, but when successful, the savings are much higher. Your growth equity or financial sponsor may also have relationships (Master Service Agreements) with some of these larger providers that you can use to increase leverage and identify additional savings opportunities. MSAs tend to be most helpful when negotiating new or expanding existing contract agreements.
For complex, high-value contracts – these are essential technology partners for your business, and you must strategically approach renegotiation to maintain your long-term relationship.
We recommend the following framework:
For lower-value contracts, it’s all about efficiency, since any savings are likely to be quite small. First, identify software you are no longer using or that provides questionable value to the organization. If the software was purchased via “maverick” purchasing on manager credit cards, is it still used? Could you move to a broader enterprise agreement and reduce cost per user?
If you do use the software, we often see our portfolio companies utilizing “mass approaches.” Quickly review contracts to ensure usage/value, right-size seat counts, then ask for across the board credits (typically ask for 3-months), or payment deferrals. Here, the hit rate tends to be higher, since your vendor realizes your switching costs are lower, but the savings per vendor is much smaller.
Note: Based 35 successful software negotiations across SGE portfolio as of May 1, 2020
In summary – a checklist for you to use today
Undertaken thoughtfully, we have seen our portfolio companies reduce spend while maintaining the critical technology tools needed to run their business. Below summarizes ten best practices you can apply to your business today:
- The “quick-wins”
- Identify any MSAs or savings levers that may be accessible via your growth equity firm (disclaimer – these tend to be most helpful for new software purchases)
- Identify any software no longer in use and cancel contracts (in particular from one-off, maverick purchasing)
- Identify 1:Many savings opportunities (e.g., reductions in seat counts for software licensed based on number of users)
- The “big spenders”
- Understand 4-5 infrastructure and application contracts that are the most significant portion of your technology spend
- Develop a negotiation strategy for each high-value contract based on your ability to leverage alternatives and savings levers (e.g., reductions in seat count)
- Engage with your high-value vendors, explain your situation, express your desire to negotiate
- Undertake 2+ rounds of negotiations and asks to maximize savings
- The “blanket ask”
- Simultaneously more broadly review other software vendors more broadly and rank by spend
- For other vendors (not licensed on seat counts), develop a blanket ask that will go to all vendors (e.g., 3-month credit)
- Communicate ask to all vendors, track results and concessions
Stay tuned for the third installment in this series on managing rent expenses. We look forward to your feedback and hearing your growth journey.