SaaS services are one of the biggest drivers of OpEx (operating expenses) for modern businesses. With Gartner projecting $247.2 billion in global SaaS spending this year, it's no wonder SaaS budgets are a big deal in the world of finance and IT. Efficient SaaS utilization can significantly affect both the bottom line and employee productivity.

In this article, we'll break down this topic that sits at the intersection of finance and IT and walk through what SaaS budget planning is, why it matters, and how you can avoid common SaaS budgeting mistakes.

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What is SaaS budget planning?

SaaS budget planning is the process of creating budget plans for SaaS expenses within an organization. The process typically involves collaboration between finance, IT, and SaaS application owners.

On the surface, that sounds pretty simple. However, SaaS budgeting comes with some unique quirks and "gotchas" that can prove costly if you're not careful. Understanding SaaS value, measuring utilization, and complex SaaS pricing models and contracts can make SaaS budgeting challenging. The right combination of strategy, collaboration, and SaaS budgeting tools can help organizations address these challenges.

Why SaaS budgeting is important

Effective SaaS budgeting is important because it helps organizations become efficient with their SaaS investment. A relatively conservative estimate from TechCrunch suggests SaaS spending per employee ranges from $1,000 to $3,500.

While it's true that a significant portion of SaaS spending is beneficial and enhances employee productivity, the objective of SaaS budgeting isn't to eliminate SaaS expenses entirely. It's to ensure that every dollar spent on SaaS contributes maximally to your organization's return on investment (ROI). And, when you couple those numbers with a Flexera report that suggests 33% of SaaS spending is waste, you have a real opportunity for meaningful savings.

"A seemingly tight budget often signals untapped savings. With a strategic software asset management approach, backed by data and expertise, you can uncover these savings and reinvest them in projects that advance the company's growth strategy," says Raksha Matthias, Director of Software Asset Management at Softchoice. "That's what smart SaaS spending is about. It's more than choosing low-cost solutions—it's about ensuring these solutions optimize your IT budget to solve broader business problems."

With that in mind, organizations that spend tens of thousands of dollars or more on SaaS licenses have started creating SaaS spend management strategies, to ensure they stay on track.

Otherwise, you could risk serious waste related to:

• Unused SaaS applications
• Wasted licenses
• Duplicate SaaS solutions
• Missed savings opportunities

Creating a SaaS budget is just one part of that overarching strategy

How to create a SaaS budget

Once you've recognized the need for a SaaS budget, it's time to create one.

Here are the five high-level steps to do just that.

1. Understand your business needs

SaaS licenses should provide solutions specific to your business problems. You should begin your SaaS budgeting process with a thorough understanding of end-user needs and business context. Without a grounding in context, it can be easy to make SaaS spending decisions that are penny-wise and pound-foolish.

For example, cutting $10,000 of license costs for a premium wireframing tool might look good in a spreadsheet, but if it slows product development down by weeks, it's probably a bad business decision.

2. Create a SaaS inventory

One of the best parts about SaaS is how easy it is to get started. If you have a credit card and an email, you can be up and running with a SaaS tool in minutes. Unfortunately, that's also why SaaS-based shadow IT is so prevalent. Well-intentioned employees can quickly find solutions to business problems and add another SaaS expense that isn't visible to IT.

Of course, it can be challenging to get started if you've never created a SaaS inventory before. The table below summarizes 10 essential elements of a solid SaaS inventory.

As your SaaS management processes mature, you can layer in inventory elements such as SaaS lifecycle stage, risk, and utilization to help improve your SaaS decision making.

Creating a SaaS inventory will give you visibility into your current SaaS usage so you can account for SaaS costs that may have been flying under the radar. Additionally, now that you understand your business needs and have a SaaS inventory, you can assign app owners for each SaaS subscription.

There are two basic approaches to creating a SaaS inventory:

• Manually, usually a spreadsheet
• Automatically using SaaS inventory management software

Generally, manual inventories are useful for small operations with limited complexity. For example, smaller MSPs and IT teams with a few dozen users may be able to keep things under control with a spreadsheet.

But considering that companies use an average of 371 SaaS apps, you can see how discovering and then maintaining a manual inventory will quickly get out of hand. Not only will it be hard to scale, but a manual SaaS inventory process can lead to poorly maintained data, stale information, and waste. Not to mention, pulling precious IT resources away from more valuable efforts.

"Successful organizations are defined by their people. Building a world-class organizational culture starts with empowering employees to focus on fulfilling and impactful work that supports their career growth. Eliminating manual and complex software tracking processes frees IT resources to work on meaningful projects that advance organizational success and professional development," says Raksha Matthias.

SaaS inventory management software helps teams improve data quality and freshness with less manual effort.

3. Forecast future growth

Gartner forecasts that global SaaS spending will grow by more than $38 billion in 2024 to exceed $243 billion overall. Given these upward trends, organizations should account for growth in their SaaS budgets.

There's no one-size-fits-all number you can use to predict SaaS growth, but you can adopt several useful indicators and techniques to make reasonable projections.

Here are some tips:

• Work with app owners to project needs over the next several quarters or years
• Align SaaS growth projections with larger growth projections for different business units
• Account for expected employee headcount increases for services used throughout the organization (e.g., Microsoft 365, Slack, etc.)

4. Set an initial SaaS budget

Now that you know your current SaaS inventory and have some growth projections, you can crunch numbers to create a realistic budget. You can set a budget for individual apps, business units, value streams, or other categorizations, but the key is setting an initial measure to keep costs in check.

5. Monitor and adapt

Notice that the previous step was about setting an initial budget. If you haven't tracked your SaaS expenses before, chances are you have plenty of opportunities to become more efficient with your spending. Monitor usage, bills, and business context to update your budget over time and reduce SaaS waste.

Common SaaS budgeting mistakes to avoid

It's easy to let SaaS expenses get out of control. Usage-based services, contracts with confusing terms, overage fees, and other surprises can lead to unexpected SaaS charges.

Below are six common SaaS budgeting mistakes to avoid on your journey to improve SaaS ROI.

Being hesitant to negotiate

Many new SaaS buyers may feel uncertain about negotiating prices with vendors. While it's less common to see flexibility in B2C SaaS pricing, discussions around B2B SaaS contracts often include negotiations. Even if negotiating isn't your usual approach, opening up a conversation about pricing can sometimes lead to favorable terms. If the vendor can't accommodate a lower rate, you still gain valuable insights into their pricing structure, which can help you feel more confident when approaching finance with the overall business value.

Overlooking exchange rates

Exchange rates can complicate your SaaS budget planning if you do business in or with multiple countries. For example, consider a Canadian business that purchases SaaS services from a US business and pays the bill in US dollars. If the value of CAD depreciates relative to USD, the cost of the services in CAD goes up. Additionally, currency conversion fees can increase the overall transaction costs of international SaaS purchases.

Not understanding SaaS billing models

SaaS pricing typically fits into one of two buckets: per-user or consumption-based. Per-user pricing is common for tools like CRMs and cloud mailboxes. Consumption-based pricing is popular with API and automation-focused SaaS software like Twilio and Mailchimp.

Neither model is necessarily better, but each comes with its own set of tradeoffs. Here's a quick breakdown:

For per-user pricing, you can reduce waste and risk by monitoring usage and adjusting your license count accordingly. For consumption-based pricing, budget limits or alerts can help organizations reduce the risk of unexpected SaaS costs.

Wasted licenses and underutilized services

Predicting how many licenses a team really needs can be tricky. Additionally, SaaS pricing often encourages organizations to buy more licenses by driving per-user costs down as you purchase more licenses. As a result, it's common for organizations to pay for more licenses than they need and see some amount of their SaaS costs wasted. Even worse, in some cases, entire SaaS products may deliver little or no business value despite racking up a sizable bill.

Additionally, poor employee offboarding practices can lead to SaaS license waste. If ex-employees aren't offboarded from SaaS apps, organizations are wasting seats that could be allocated to other employees or removed altogether.

Usage monitoring, eliminating duplicate services, sound offboarding practices, and understanding the business problems apps solve can help mitigate the risk of this common SaaS budgeting mistake.

Missing contract "gotchas"

B2B SaaS contracts can be complex, and a poor understanding of a SaaS contract can hurt an organization's bottom line in several ways.

For example, true-ups are a very common source of unexpected SaaS costs. Many SaaS contracts and service agreements include a true-up clause that enables the vendor to review actual usage and charge an organization for consumption that exceeded their initial agreement.

Similarly, price-escalation clauses and automatic renewals can lead to surprises in SaaS bills. Avoiding this SaaS budgeting mistake starts with understanding your SaaS agreements, negotiating favorable terms where possible, and proactively tracking renewals and utilization.

Locking yourself in

Long-term contracts are a great way to reduce SaaS costs. However, they can potentially lock you into a service you don't need. Think carefully before you lock in long-term (year-plus) SaaS agreements.

When considering a long-term contract, ensure you're confident your organization will need the service for the entire contract period. If not, you might be locking yourself into effectively burning money a few quarters from now. This is particularly risky for startups looking to conserve runway and other cash-strapped businesses. Sometimes, the flexibility of month-to-month or other low-commitment contracts outweighs the savings from long-term deals.

How SaaS budgeting software can help

Auvik SaaS Management (ASM) offers a variety of reports to enable efficient SaaS budgeting.

The right tools can help teams streamline and scale their SaaS budget planning. Auvik SaaS Management (ASM) is a purpose-built SaaS management platform that helps MSPs and IT teams monitor and manage SaaS usage, secure their SaaS environments, and reduce SaaS waste.

Below, we'll explore three specific examples of how ASM enables effective SaaS budgeting.

Build and maintain an inventory

A SaaS inventory is the cornerstone of effective SaaS budget planning. Simply put, you can't manage what you can't see. Shadow IT stats—such as 41% of employees using tech IT can't see— make the SaaS visibility problem clear.

Organizations can use ASM's advanced SaaS discovery capabilities to create and maintain an up-to-date SaaS inventory that includes details on SaaS lifecycle stage, business purpose, environment, and service owners. Additionally, ASM can notify administrators when a new app is detected to help stop shadow IT early.

Understand production adoption metrics for renewal time

Data is your best weapon when it comes time to negotiate SaaS renewals. In addition to a detailed SaaS inventory, ASM provides administrators with detailed adoption and usage metrics to help the business make data-driven renewal decisions.

For example, suppose your organization uses a SaaS whiteboard tool with per-user billing and every user has a license. If you know only 30% of users ever use the license, you could reduce your costs by cutting the license count at your next renewal. If you rinse and repeat this exercise with SaaS tools throughout your organization, you can rack up meaningful savings without negatively impacting your legitimate users.

Become more efficient with SaaS licenses

ASM helps IT and MSPs solve the SaaS offboarding problem and become more efficient with SaaS licenses overall. Teams can use ASM to understand when users aren't leveraging their SaaS license so they can be de-provisioned and reallocated. Additionally, ASM supports offboarding reports and checklists to help ensure ex-employees are quickly offboarded from enterprise apps.

Final thoughts: SaaS is an active investment

SaaS spending is an active investment for organizations, and the focus should be on SaaS optimization rather than driving costs to zero. Tools like ASM can help you get your SaaS budget under control and improve your SaaS security posture.

To see how ASM can save you money and increase your SaaS ROI, sign up for a free (no credit card required) trial today!

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