Why Software Costs are an Outsize Problem for SMEs

5 Minute Read

Small to Medium Enterprises (SMEs) can find themselves with IT costs - and software costs in particular - that are out of proportion to the size of the company. This can be significantly reducing their profitability, but it can be something of a hidden problem, and one that it is harder for smaller organisations to address than it is for large enterprises.

Increasing Spend on Cloud Software

It's a cliché to say that all organisations are dependent on technology now, but it’s a cliché because it’s true. Software is so pervasive now that it doesn’t necessarily register as something that has to be managed if it’s going to provide an acceptable ROI.

Cloud computing is a key reason for the expansion of the use of software in organisations. Software as a Service (SaaS) applications can be purchased by anyone with a credit card and don’t require the involvement of an IT function in order to start using them.

This has had tremendous benefits in terms of agility – organisations can now adopt useful technologies very quickly. Look at how companies adapted to the need to support remote working during the pandemic; before the advent of cloud computing there is no way that this adaptation could have happened at that pace.

Naturally, there’s a catch. Without rigid control over technology, there’s the potential for mistakes to be made. The wrong software gets purchased, three software packages that do the same thing get bought by three separate groups, or the deluxe version gets purchased when the basic version would be good enough. Over time, other factors can lead to waste; services that are no longer used continue to be paid for as subscriptions auto-renew, or when fewer employees need an application the company continues to pay for the original number of seats.

Again, with reference to the pandemic, we can get a sense of how much the IT landscape in companies is changing due to the accessibility of cloud services. “Shadow IT” is the term used to describe technology that is bought without the IT function’s knowledge. A survey of UK companies in 2020, carried out immediately after organisations had reacted to the enforced change in working and trading conditions brought about by lockdowns and social distancing, suggested that shadow IT had grown by 59% due to the pandemic. The nature of shadow IT being what it is, this figure is probably an underestimate.

So, what does this mean in terms of costs for SMEs? There’s some good news and some bad news. There are lots of statistics on current spend on cloud services by organisations, and how it is growing. Industry analysts Forrester for example estimate that global spending on public cloud services was $446 billion in 2022 and will increase to $1 trillion by 2026. This is on the back of what has been explosive growth already. According to figures from IDC, in 2012 the total spend on Cloud services globally was  $54 billion, and by 2019 this had risen to $273 billion.

Therefore, we can get a clear picture of how use of cloud services is expanding overall. The bad news is that it’s not so easy for an individual organisation to work out how much more it’s spending on cloud than it was previously – or if that spend represents value for money.

Money Well Spent?

There are concerns about value for money; a recent survey suggests that 58% of organisations felt their cloud spend was too high. The same survey indicates that it’s not easy for organisations to understand the specifics of why and how spend is too high. Only 42% of respondents said they could estimate how much of their cloud spend goes to various parts of their business, and 20% have little to no idea. The generally accepted estimate for overspend on cloud services is 30%, but that is obviously going to vary a lot by organisation, some will waste a lot less money, while others will be wasting a lot more – and many (most?) organisations will not know what their overspend is.

Another recent survey demonstrated that organisations do have misgivings about their cloud spend, both in terms of its growth, with 59% of organisations reporting an increase in cloud spend over the past 12 months, and in terms of whether it represents value for money; over a third 37% believing that the cloud has “failed” to live up to its promise of “cost-effectiveness”.

Are SMEs In Control of Cloud Costs?

Getting to grips with cloud cost is particularly hard for SMEs. Bigger enterprises typically have a large IT function that, while it wasn’t involved in the acquisition of SaaS apps, has the resources, tools and knowledge to discover them and evaluate whether the money being spent on them is being spent wisely. In a smaller company the IT group may be fully occupied just keeping the lights on and would find it hard to justify the effort of having resources looking at managing cloud spend. That’s if they can get those resources – there’s a shortage of talent, as shown in this recent survey.

This doesn’t mean that the sums of money aren’t worth worrying about. The survey referenced above that suggested organisations are concerned about their level of cloud spend reported that mid-sized businesses, with between 100-499 employees, faced significant costs, with 54% indicating monthly expenditures ranging from USD $10,000 to USD $499,000. Of organisations with fewer than 50 employees, 32% reported monthly cloud bills exceeding $10,000.

Clearly, there’s a huge variation in spend between organisations, and the nature of the business will have a large bearing on this. Our experience suggests that for organisations with a significant proportion of white-collar workers, a spend of £2,000 per employee per year is typical. For a 250-employee company this means that a 30% overspend would equate to £150,000 every year.

How To Get Control of Cloud Costs

So, how does a SME get a handle on their cloud costs, and if those costs can be reduced? Costimised has the tools and expertise to enable smaller organisations do this in a cost-effective way. We can analyse spend on SaaS and other cloud services and create an action plan for reducing any waste we identify. To book a no-obligation discovery call where we can assess the potential for savings, please contact us at enquiries@costimised.com.

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