Realizing cost savings by controlling or reducing software expenditures.

• Author: Khushalani, Samir
• Position: BUDGETING - Statistical data

When software demand management and strategic sourcing opportunities are addressed, the potential benefits can be dramatic, ranging as high as more than 40 percent in cost savings. Equally important, as technology continues to proliferate and become highly fragmented across a broad range of products and services, the need to manage software expenditures effectively continues to grow immensely.

Software--A Highly Profitable Industry

Software providers are among the most profitable companies within the S&P 500, with a five-year average gross margin of 78 percent, an EBITDA of 35 percent and a net margin of 21 percent.

The outsized margins are enabled by front-loaded product development costs, nominal variable production costs and complex pricing structures.

Once a solution is deployed, respective margins are further protected by high switching costs that are complex to navigate, allowing vendors to charge high annual maintenance and subscription fees for services that often lack clarity and can be difficult to measure. The annualized fees will often exceed the original license or upfront costs over the asset lifecycle.

A Complex Set of Challenges

Unfortunately, many customers are relegated to the role of "price taker," largely accepting terms imposed by vendors, versus addressing internal opportunities that allow companies to manage a situation more effectively. Common, underlying opportunities that can be addressed include: immature software asset management capabilities, organizational silos, insufficient strategic planning, weak enterprise architecture, thinly staffed procurement and IT functions, misaligned incentive structures, staff skill-set/capability gaps, and unstructured communication protocol with vendors.

While software buyers rarely wield the same buying power as commodity product buyers, they can generate significant savings and cost avoidance, while increasing operational efficiency, by employing a strategic, structured category management approach.

The aforementioned operational and functional gaps often are compounded by disruptive sales tactics. Vendor sales staff will often "divide and conquer" across an organization, fragmenting internal communication and coordination. In many cases, the vendor has a clearer, more comprehensive view of ongoing internal conversations than the client, because few companies monitor vendor conversations centrally.

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