Fast-growing enterprises face a fair share of challenges in 2023. And maintaining cost efficiency remains a top priority. As a CFO, you're no stranger to keeping a close eye on expenses. Your role is to ensure that every cost is justified, accurately predicted, and carefully balanced against the company's revenue - including your SaaS subscriptions.
Software is one of modern companies’ largest expenses, and managing it can be exhausting and frustrating. But don’t worry, we’ve got you covered.
In today's guide, we'll dive into a key concept that will add value to your 2023 SaaS management: Software ROI.
- What “software ROI” is
- Why software ROI matters for CFOs
- How to calculate ROI for software investments using some key factors
- 5 best practices to drive up your company’s software ROI
Ready? Let’s get started!
What Is “Software ROI”?
As a finance professional, you're probably familiar with the concept of software ROI. But, just to make sure we’re on the same page, let's take a quick look at its definition and key benefits.
Software ROI, or Software Return on Investment, is a percentage-based metric that represents the profit or benefits your organization gets thanks to your SaaS stack.
It’s worth mentioning that software ROI can be a bit more complicated than other investments. And the reason is that software can provide both tangible and intangible benefits.
Tangible benefits might include:
- Increased revenue
- A boost in employee efficiency & productivity
- Faster processes driven by strategic automation
- Lower and more efficient software spending
On the other hand, intangible benefits might include:
- Improved client satisfaction
- Better company reputation
- Increased employee engagement
- Reduced technical support needs
Understanding the Importance of Software ROI for Large Companies
According to a SaaS management survey conducted by Cledara, only 20% of CFOs are confident that all their SaaS subscriptions add value. It's common for leaders to think they're wasting money on tools that:
- They don't need
- Aren't fit for their purpose
- Slow down their processes
And it’s easy to see why.
Software pricing can be tricky to understand: though initial fees are usually small, changes in tiered plans and additional features can lead to actual costs exceeding quotes. All in all, the complex nature of software subscriptions makes quantifying business value nearly impossible.
As a CFO, this leaves you in a bind and poses two key questions:
- How do you know if all those software expenses are the best use of your budget?
- What's the best way to make sure future investments help you scale?
Here's where software ROI can be leveraged.
Tracking software ROI over time can help CFOs to:
- Analyze the potential impact of investing in particular software with strong data.
- Identify areas where the software is not fully utilized, avoiding wasteful or hidden costs.
- Boost efficiency and reduce costs by promoting conscious software use.
- Have a clear measure of success and determine whether their software investments are delivering expected returns.
- Help with SaaS budget planning, allocating resources more efficiently. Particularly, if the software does not yield the expected return on investment.
- Provide a basis for continuous application rationalization.
How to Calculate ROI for Software Investments: 5 Key Factors
As you can see, measuring ROI is a highly effective method for linking software investments to your overall company's performance. But how could you calculate software ROI?
You already know the formula for calculating ROI. Your ROI is the result of:
- Subtracting profits from your costs
- Dividing the total by your costs
- Multiplying the result by 100.
But software ROI isn’t so straightforward. As we discussed in the previous section and in our software business case guide, calculating the software ROI for a large company can be challenging. Especially because your profits may not be so straightforward.
In most cases, the positive financial impact of your SaaS stack comes from boosting productivity. These tools may allow your team members to do more in less time, or even prevent you from overhiring. This is the type of impact you should be looking to measure.
As for costs, software investments usually entail:
- Subscription/license costs
- Server storage and maintenance costs (if your stack is self-hosted)
- Training costs
- Integration and customization costs
Don’t underestimate the importance of setting the right time scale for measuring your software ROI. It may take you a couple of months to see an ROI from a tool, even if it’s a great fit.
How to Drive Up Your Company’s Software ROI: 5 Essential Best Practices
Now you know why software ROI is important to your role as CFO and how to calculate it. However, a goal without a plan is just a wish. To improve your software ROI, you have to work on it.
In this section, we’ll look at 5 key best practices to improve your company's software ROI. The secret? Assessing and rethinking your software stack.
We advise you to:
- Analyze your current software costs
- Measure performance with the right criteria
- Review software regularly and eliminate unnecessary tools
- Create a software evaluation process
- Provide software training to your team
Let’s take a look at each, shall we?
Analyze Your Current Software Costs
You can’t evaluate your software ROI if you’re not on top of your company’s software spending.
You can achieve that in three steps:
- Create an inventory of all the current software in use
- Check contracts and pricing structure
- Verify potential signs of "hidden costs"
Create an Inventory of Your Current Software Stack
Inventorying software might be easier said than done. If there’s no centralized software subscription data, you may have to go through business bank statements to identify each tool you’re paying for.
However, even that might not get you a complete picture. Why? Team members may have bought software using their own credit cards and asked for a reimbursement. Hence, there are probably additional costs you may not be aware of.
Want to learn more about informal software spending? Check out our post on how to prevent shadow IT costs.
Check Contracts & Pricing Structure
Want to make sure you’re forecasting costs accurately? Once you’ve identified your company’s software subscriptions, check the contracts and pricing structures of each of them.
Why? Oftentimes, there are additional fees that kick in after a certain period or if usage exceeds thresholds.
Verify the Potential Signs of “Hidden Costs”
The final step is to check for signs of “hidden costs”. There's a good chance that your SaaS stack includes software that’s not adding value to your team.
We suggest you look out for:
- Duplicate -or very similar- software subscriptions, also known as tool redundancy
- Software subscriptions with no owner or owned by someone who’s left the company or their job position
Measure Performance through the Right Criteria
When analyzing the impact of a tool, do so through comprehensive and relevant criteria.
We recommend analyzing:
- Employee experience - Does it have a positive impact on the way your team works?
- Data interoperability - Is the data produced by this tool usable for relevant means, such as reporting? Is it hard to adapt that data, or is it seamless and precise?
- Data security - Is the tool making you vulnerable to security risks? Does it use software encryption, authentication, access controls, network security protections, and data backups?
- Business process automation & improvement - Is this tool freeing up your team’s agenda so they can spend more time on mission-critical tasks?
- Customer acquisition - Is the tool improving customer acquisition?
- Customer experience - Is the tool having a positive impact on the end customer?
Overall, you must focus on metrics that matter based on your business model. You could also review the ROI metrics that you mapped in the past and evaluate if they're still relevant.
With those metrics in mind, you'll be able to analyze peaks and pitfalls in your software investment performance and diagnose what works well and what could have been better.
Review Software Usage and Remove Unnecessary Tools
It's important to closely manage and reevaluate software on a regular basis. That way, you can make sure that it keeps adding value over time. And usage is an important factor to consider.
Why? Let us shed some light on it. Fast-growth businesses invest in software at an alarming rate. According to a Cledara survey, on average, our scaling customers add 5 new SaaS applications every quarter. That means managing 20 new subscriptions every year.
However, these companies rarely churn. Up to 30% of software spend is wasted on forgotten, unused, and redundant SaaS tools. Therefore, your team is likely buying better tools and abandoning old ones without canceling their subscriptions. Getting rid of these wasteful subscriptions is key to protecting your software ROI.
Create a Software Evaluation Process
Your team will continue to try out new tools. So create a software evaluation process that can help you prevent inefficient spending.
After a team member proposes adopting a new application, check whether:
- Your team doesn’t already have similar software
- The suggested new tool integrates well with your existing stack
Moreover, the best way to ensure new software helps your scaling process is to conduct thorough SaaS vetting.
We recommend you focus on:
To understand SaaS applications’ functionality, ask yourself these questions:
- Does the new software enable you to automate tasks and free up team time for more valuable work?
- Can it drive improvements against key business metrics, like customer conversion rate or churn?
Specifically, make sure whoever needs a certain piece of software can clearly articulate its value. Teams often get stuck with tools that look great, but don't deliver.
Cost, compliance, and scalability should be considered upfront to avoid hidden costs later on. If the tool of choice is not ISO27001-compliant, or can't handle high activity volumes, it’s not worth buying just because it's at a low price point.
Especially when it comes to scaleups and large companies, amazing SaaS tools that add value today may not continue to add value tomorrow.
Provide Useful SaaS Training to Your Team
To get the most out of your SaaS investment, you must involve your team at every stage. That means teaching them how to use SaaS tools effectively and being open to receiving feedback if any of them doesn’t fit their needs.
You can do this by:
- Offering clear guidelines and training on each tool's use and purpose.
- Developing policies that emphasize avoiding shadow IT and hidden costs.
- Leveraging internal communication channels to bring visibility to successes or issues related to software adoption.
Improve Your Company’s Software ROI with a SaaS Management Tool
In this post, we shared some vital tips that will help you maximize your software ROI. To get a sense of how software is performing, you could speak with subscription owners individually. But that could be time-consuming and unsustainable.
So what’s the alternative? A good SaaS management solution.
Cledara is a SaaS management tool that enables you to:
- Get a whole new level of visibility across all your SaaS applications, allowing you to detect all informal SaaS company-wide and take action right away.
- Centralize all software purchases in one platform, increasing visibility over your total software landscape.
- Evaluate requests for new tools, and build the robust processes needed to assist with budgeting and compliance tasks.
- Create virtual cards with pre-approved spending limits for each individual subscription, so costs are clear, trackable, and kept under control.
Maximize your software ROI. Book a Cledara demo today.