Enterprise software spending is expanding rapidly and becoming a bigger slice of IT budgets, challenging IT organizations to manage it more effectively.
The trend stems from several sources, including a greater reliance on SaaS platforms and a proliferation of software offerings across categories from AI to IT operations. Better software adoption guardrails and governance structures could help control spending and get more out of software investments, but those measures can prove challenging to deploy.
Recent reports shed light on the software spending issue:
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A Boston Consulting Group (BCG) paper, citing Gartner worldwide IT spending data, pointed to a 50% increase in software’s share of overall technology budgets between 2019 and 2025, growing from a 13% contribution to a 21% slice. The paper, published in October, noted that “software procurement has become exceedingly complex, and companies are struggling to reduce spending in an increasingly fragmented landscape.”
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A West Monroe survey of 310 procurement, IT and finance executives found that 93% reported rising enterprise software costs. The consulting firm’s B2B software spend survey, published in September, also noted that 46% of the respondents reported software price hikes above the 10% industry average.
Multiple Factors Account for Software Price Hikes
While inflation has ramped up the cost of IT commodities in recent years, the software spending increases aren’t necessarily tied to broader macroeconomic patterns. Enterprise software prices have consistently risen faster than the U.S. inflation rate, as measured by the consumer price index, noted Ashwin Bhave, managing director and senior partner at BCG and a co-author on the research paper.
Instead, Bhave cites the growing enterprise dependence on SaaS platforms. Using SaaS to automate core business functions makes it difficult for customers to change providers. This opens the way to vendor price hikes.
“These products are getting more and more widely adopted, and they are quite embedded in the clients they serve,” Bhave said. “It is not that easy to switch, and so it is more feasible to pass on price increases.”
SaaS subscription renewal rates are also driving up costs. Ironically, the rising rates are, at least in part, a reaction to software cost-cutting measures. Dhaval Moogimane, high-tech and software practice lead at West Monroe, said enterprises have adjusted the number of seats and trimmed unused modules in the last year. Vendors have jacked up their fees in response.
“Software providers are seeing their customers push back on the number of seats they want to use, the number of users,” he said. “So, pricing for renewals has gone up.”
In addition, software vendors, recognizing higher renewal pricing, are throwing in new capabilities or modules as a negotiating tactic, Moogimane said.
The arrival of more software, in general, contributes to the growing software spend.
“There are entire categories of software today that simply didn’t exist five to 10 years ago,” Bhave said.
He cited the proliferation of cybersecurity tools and products for developers and noted the leading cloud providers’ expanding suites, which even include quantum-as-a-service offerings.
“There are simply more things to buy and more capabilities that companies are deploying, which is also driving up software costs,” Bhave said.
How CIOs are Dealing with Software Tool Sprawl
One step CIOs can take to keep costs in check is addressing software sprawl. But containing the tool spread is not all about trimming expenses. Organizations are finding they can also improve data consistency, boost product quality, and simplify training. They can also free up time to focus on innovation.
Mark Booth, CIO at Perdue Farms, a food and agriculture company, has been reducing tool sprawl as part of a broader digital transformation program. The company implemented Dataiku’s data and AI platform, which has helped consolidate data preparation, ETL and spreadsheet tools. Dataiku is one element in a standard set of data-destination tools, the others being Snowflake, and Microsoft’s Power BI data visualization offering.
(Source: Perdue Farms) Mark Booth, CIO at Perdue Farms.
Booth described this approach as having a “snowplow effect” on its transformation journey.
“We’re plowing a path, making sure our associates understand what tools we use for what [purposes],” he said. “Things fall in line in the path behind it, so we are sunsetting systems and spreadsheets.”
Purdue Farms’ data pipeline provides one example of the unified data strategy. The data flow has been transferred to Dataiku, which extracts data from internal and external sources, transforms the data as needed, and moves it to a Snowflake repository.
The goal is to “streamline both the tools and the process of putting data in a data lake,” Booth said.
Perdue Farms’ ability to combine data in a single location promotes consistency. Having consistent data helps the company draw the right conclusions in areas such as food safety, where it pulls data from numerous family-owned poultry farms, Booth said.
Data tool consolidation also simplifies training, since employees can focus on a core set of tech resources. It lets employees spend less time reconciling data and more time analyzing data and identifying opportunities for improving business outcomes, Booth added.
OpenText cuts tool count, boosts quality
Shannon Bell, CIO and chief digital officer at OpenText, meanwhile, says the information management software company is “dramatically simplifying” its tool landscape.
(Source: OpenText) Shannon Bell, CIO and chief digital officer at OpenText.
She noted that about 18 months ago, the company launched an initiative to deploy more of its own technology in-house. As part of that effort, OpenText examined every business domain, from engineering to customer support. The company found that it had 1,600 tools, which it has since reduced to about 1,200.
“The goal was to rationalize and decommission systems,” Bell said.
In one example, OpenText’s 8,000-plus developers had been using around 50 tools. The company has replaced those products with one toolkit, OpenText Software Delivery Management.
The cost savings proved to be a significant benefit of that consolidation. However, “it also helped us improve the quality of the products because everyone was using the same tool set,” Bell said.
In another nod to simplification, developer training and onboarding could revolve around one set of tools rather than a multitude of offerings, she added.
Bell said establishing target states across OpenText’s business domains was critical for reducing tool sprawl. A target state might be a strategic tool selected for a particular domain.
“If you don’t have a target state for each domain, the tendency is that another tool will get acquired for that team or that use case,” Bell said.
She noted that every effort to switch from multiple tools to a strategic platform must include a decommissioning phase. If the project ends with a business unit still using its existing tools alongside the target system, the organization is just increasing its cost base.
Bell said addressing tool sprawl ultimately unlocks time and capacity for more meaningful work.
“Having sunk costs in tools that aren’t delivering a lot of value is an easy area to focus on clean-up, so you can actually put your people to work on more innovative, high-priority projects,” she said.
The Challenge of Controlling Software Spend
Bhave said many organizations struggle with tool proliferation because they lack a systematic software spend management function. Indeed, responsibility for software outlays tends to be distributed across different decision-makers in business units. However, some companies are beginning to show interest in establishing oversight functions that manage costs across the enterprise, he noted.
“You might have a body that specifically looks at software sprawl, sets goals over a two- to three-year time frame, and sets some guardrails,” Bhave said.
Begin With a Software Inventory
Enterprises should focus on the essentials when trying to tame software spend. An inventory of software assets is a place to start.
“Just having hygiene and discipline in asset management is super important,” Moogimane said. “What do you actually have and how much are you actually using?”
Booth also pointed to the “basic hygiene” of publishing an enterprise catalog. A catalog encourages business teams to check what they have on hand before acquiring yet another tool.
“In very large, far-flung enterprises, people don’t even know what is already being used,” he said.
Stepped-up Management Efforts Needed
Another issue is the complicated nature of SaaS vendor pricing, which makes it difficult for IT leaders to reapply cost-cutting levers they use in other aspects of IT. FinOps practices, for example, have helped enterprises trim cloud infrastructure spend. But those measures, such as optimizing usage and workloads, might not readily translate into SaaS management.
“It isn’t possible to have a standard playbook that you can have for the [top three to five] cloud vendors,” Bhave said. “In software, you have to think about 50-plus vendors if you go category by category. How they manage pricing and how [customers] buy from them varies.”
Against this backdrop, CIOs and CTOs can expect to spend more of their management efforts on software.
“The growth of software has caught tech leaders by surprise,” Bhave said. “If you think about the total tech budget, labor is going down. Infrastructure is disappearing and going into the cloud. Cloud costs, themselves, are going down because hardware and hosting are getting cheaper. The only thing that remains, actually, is software.”
In the next decade, software could become half of the IT budget, if not more, Bhave speculated.
“In which case, the entire job is going to be about how do you manage software,” he said.
