Sourcing professionals know that companies make significant investments in software to run and drive their businesses. They see first-hand how software subscription costs might run as high as hundreds of millions of dollars annually. Yes, the Office of the Chief Technology Officer and various business units collaborate to determine what software is needed, but typically it’s the procurement office that makes the purchase, and employees that use the software. Therein lies the problem. Once the purchasing decisions have been made, and the software is purchased and deployed, rarely if ever, does anyone keep track of actual usage, and renewals continue unchecked – along with the cash flow.
It is in this decentralized process of software evaluation, selection, purchase and use where the wheels come off. As a result, too many companies end up purchasing too much software – software that’s not even being used with many millions in hefty software license fees going right out the door.
One study of 149 organizations in the U.S. and U.K. across 16 different industries estimated the cost of unused software to be $34 billion, with an average waste per business of $7.4 million.
As a purchasing or procurement professional, you likely don’t have to ask: How can this really be happening? To understand its genesis, we must look at multiple factors converging to create what I believe has led to “software surplus,” otherwise known as software over-subscription.
Who or what tracks actual software usage?
Originally, the role of procurement was to buy “things” a business required, such as raw materials for manufacturing companies. But for service companies, it entails such things as office furniture and supplies, telephones, typewriters and later personal computers. These items were easily trackable via ID tags and serial numbers. Today, a large quantity of procurement purchases are invisible – software that is “delivered” via the stroke of keyboard.
It’s relatively easy to comprehend how many widgets are needed to be procured for the upcoming year if you can see how many widgets were consumed by the business in the previous year, but software volumes are harder to track.
Procurement uses the basic equation of rate x quantity – and must rely on input from across the enterprise offered up by the business unit – talented individuals in their specified area of expertise, but not necessarily in determining the number of software subscriptions needed.
How do budgeting processes exacerbate the issue?
Very few companies do zero-based budgeting. Most companies have a set annual budget cycle – a process that creates a culture of thinking within business units of “I better get it now or I won’t get it later.” As a result, department heads are forced to look to the future, and often overestimate their needs. They may anticipate the need for a software package for a specific project that maybe later gets shuttered. Likely, no one remembers to cancel those software seats.
And with few exceptions, because the annual budgeting process remains relatively static, overspending to the extent of several hundred percent for excess software seats can persist for years.
Existing remedies are ineffective.
There are more than a dozen companies on the market that offer “software metering” solutions. The way they work is they have APIs to interface to software packages, which rely on software vendors to essentially “self-report” usage. This is akin to putting the fox in charge of the hen house. Not surprisingly, the software vendors put forward only the bare minimum of information with no rigorous analytics. So, if an employee logs in once by accident, they’ll likely be counted in the reporting as a user.
Many CTOs know their organizations are over-subscribed and are over-purchasing software, whereas many Chief Procurement Officers – whose goal is to trim the overall spend of the organization – are powerless to do anything about this. Talk about opportunity lost!
Is there a solution?
By employing a data-driven approach to software utilization that provides real insight into what software is used at the employee level, organizations finally can put their finger on the who, what, where and when of their actual software usage. This can give procurement the number they need to negotiate software license agreements that are based on facts, not assumptions. And companies can recoup thousands, even millions, in software license leakage.
Additionally, they can also stem yet an additional cost of software over-subscription. Every dollar wasted on unutilized software and excess software licenses erodes competitive positions with that could go to other efforts to drive top-line revenue growth, investments in the workforce, and crucial IT infrastructure upgrades and/or digital transformation initiatives.
By reigning in runaway software subscriptions, purchasing and procurement professionals can help organizations re-appropriate these resources to drive better business outcomes.