The Insidious Effects of SaaS Subscriptions on Your Business
insidious: (adjective)
harmful but enticing (merriam-webster.com)
operating or proceeding in an inconspicuous or seemingly harmless way but actually with grave effect (dictionary.com); proceeding in a gradual, subtle way, but with very harmful effects (oxforddictionaries.com)
Insidious? That may sound somewhat melodramatic. Perhaps, but let’s take a look at the effect that SaaS subscriptions are having on your business.
Over the past decade, we have been inundated by a plethora of SaaS, business and technology service offerings — which we will refer to as “services”. Service vendors offer customers a smorgasbord of options that suit every conceivable taste and requirement, delivered by way of an experience that is almost too good to be true. No need to purchase and commission servers and desktops. No need to license, install and configure operating systems, web servers, databases and end-user applications.
Connect to a service and try it out. Sign up using your email address and your credit card. It only costs a few dollars each month and you can terminate anytime. Or even better, use your G-Suite login to sign up for a 30-day trial, no credit card required. What could be simpler? A no-brainer….
Yet only one or two years down the line, we find ourselves paying thousands of dollars every month for services that cost more than expected, yet often fail to deliver the value that we were counting on. They may introduce unwanted complexity and impact negatively on our application architecture and governance processes. We may find ourselves locked into contracts that are difficult to terminate, and in some instances we may not be aware that we are even subscribed! How did our service subscriptions grow from innocuous trials into enterprise headaches?
Tendency for subscriptions to grow and for costs to increase
New users are added to existing accounts. The low-cost service that initially has a negligible impact on the budget becomes significant as the number of subscribed users multiplies. This is where monthly payment services can be deceptive. A few dollars per month for a single user translates into a large annual subscription fee for a large group of users.
The service plan tier gets upgraded because users are engaged with the service. Usually this means upgrading all users associated with the account, even though only a limited subset may require the enhanced functionality associated with the higher tier. Most service vendors do not allow subscriptions to straddle service plan tiers, and so all users are subscribed to the service plan tier that meets the requirements of the most demanding user.
Subscriptions are switched to longer term commitments that disallow early termination in an attempt to reduce the effective monthly cost. Service vendors typically discount subscription prices for annual (or multi-year) contract terms. The obvious downside of locking in a discounted rate in exchange for a longer-term commitment is that user numbers and the service plan tier can only be reduced at the end of the contract period.
Subscriptions are often deliberately oversized in terms of user numbers. Per-user pricing is often tiered, with lower effective rates for larger group subscriptions. Alternatively, the service vendor may offer flat-rate pricing for defined user bands — regardless of whether all the users are activated. Service subscribers often purchase larger subscriptions than they require based on the desire to obtain lower per-user pricing. This is driven by natural optimism regarding the successful implementation of the service and the assumption that a broader roll-out will soon follow.
Subscription costs tend to increase rather than decrease during the contract term. Service subscriptions that run from month to month can be changed each month, but longer-term subscriptions seldom allow the subscriber to reduce the number of users or downgrade the subscription to a lower service plan tier during the term of the subscription. Of course service vendors allow user numbers to be increased and service plan tiers to be upgraded during the contract term, and these additions to the contract are normally incorporated into the contract for the remainder of the contract term. In the case of yearly or multi-year subscriptions, this can have a significant financial impact. Changes in the business can lead to situations where the subscription needs to be scaled back, but the contractual terms explicitly disallow this.
Automatic subscription renewals and notice periods need to be carefully monitored. The less-obvious downside of longer-term commitments is that it is normal for subscriptions to automatically renew for a further contract term unless the subscriber explicitly provides notice of termination or intention to make changes to the subscription. The contract typically provides a notice window, often one month prior to the renewal date, during which the subscriber must notify the service vendor of impending changes or termination. So, if your annual service subscription ends at the end of November, it is quite likely that it will automatically renew on December 1 for a further year at the same level, unless you notify the vendor during the month of November of your intention to terminate or downgrade the subscription plan. Don’t assume that the vendor will notify you that automatic renewal is imminent, or that you are about to enter the notice window. When you are dealing with several subscriptions for a large user base, the automatic renewal terms and notice periods need to be carefully managed to avoid unnecessary and unwanted spend.
Duplication of services and subscriptions
Users create multiple subscriptions for the same service without realizing that the organization has an existing subscription. Certain types of services that do not fit into the “enterprise solution” category — such as personal productivity tools — are more susceptible to the multiple subscription risk.
Subscriptions for duplicate services. Because it is easy and simple to subscribe — or even to begin using a service on a trial or free-tier basis — it is common for different people in an organization to make use of different services that perform the same function. Sometimes this is the unintended consequence of poor communication with the organization, but in other cases it can intentionally result from different views as to which service provides superior functionality. Numerous examples come to mind, but the simple example of cloud storage services serves to illustrate this point. Users in organizations may use a variety of storage solutions to store and share files in the cloud. Some of these might be specialized storage services, whilst others might be included with broader platform services. Some might provide desktop synchronization functionality and other may not. Some might support multi-factor authentication, and some may support single sign-on functionality. Whatever the case, governance processes are not as effective as we would like them to be at preventing the uncontrolled replication of proprietary corporate information across a proliferation of cloud storage services.
Difficulties in quantifying and reconciling spend on services
It is difficult to quantify the spend on service subscriptions. It would be ideal if every service was billed to a single corporate credit card. That way, the card bill would reflect the total spend on service subscriptions. In many organizations, the corporate card is in fact the most accurate record of spend on service subscriptions, but trial (as well as paid) subscriptions are sometimes initiated on personal credits. Because of the low initial costs and the enrollment circumstances, employees are often happy to make use of their personal credit cards. They then submit expense claims for reimbursement of these subscription costs. Similarly, moves to higher service plan tiers and user bands sometimes involve the signing of contracts that require wire or ACH payments. Even if all subscriptions are billed to the corporate credit card, the mix of monthly, quarterly and annual billings makes it difficult to get a proper handle on these recurring costs.
Service subscription billings are often difficult to reconcile with the corresponding subscriptions because the billings might be augmented by overage or usage-based charges. Some vendors will include overage and usage-based fees in the monthly or annual billing. Others will bill usage fees and overage as billing line items that are distinct from the service subscription billing line items. Vendors also have different ways of dealing with billing that relates to changes that are made to the subscription during the contract period. Adding subscriptions to new services that are provided by an existing vendor may result in separate billing line items for each service subscription, or in a single consolidated billing line item. This unpredictability makes it difficult to reconcile actual billings with expected billings, and it becomes a real challenge to identify overcharges and discrepancies that might exist between the vendor’s record of your subscriptions and your subscription intentions.
Total cost of ownership is often underestimated. Service subscriptions need to be owned, managed, configured and maintained by people. Although the idea of subscribing to a service is to shift as much of the overhead to the service vendor, it is naive to think that there is zero in-house overhead. Enterprise services especially may require deep knowledge of the service offering, and subscribers may need to employ administrators, developers and integrators that have highly specialized skills, and they might incur greater training and certification costs than were budgeted for.
Compromised architecture and governance processes
Inability to enforce governance processes. Low-cost trial-based on-boarding usually means that the organization does not conduct a proper review of each service and its fit within the organization. The process for selecting an enterprise software application normally includes assessment of cost vs benefit, ROI, total cost of ownership, training, change management, integration with other systems, review of data schema and interfaces, ability to import and export data, analysis of compatibility with other software platforms, and even obsolescence planning. Low-cost services that are adopted on a trial or single-user basis are seldom subject to IT governance processes. Once users have integrated these services into their business processes and work habits, it becomes difficult to remove them. Additional users are on-boarded and the organization commits to higher-level service plan tiers. Subsequent governance reviews are almost always flawed because they are now after-the-fact. For the organization, the question becomes: “Now that we are using the service, what will the impact be it we move off it?”
Disruption of application architecture through overlap and poor integration.This problem is the SaaS equivalent of the application architecture boundary management problem. Because software applications tend to overlap in the functionality that they provide, they introduce unwanted architectural complexity. Two applications that should in fact provide complementary functionality can conflict because the first application provides elements of functionality that are the domain of the second — and inadequate interfaces are provided to support the effective integration of the two applications. Think about your CRM and help desk applications, and how these integrate, and how the help desk system overlaps with the paging and notification system, and how this interacts with the application availability and performance monitoring services. And how does the CRM platform integrate and overlap with the transactional, e-commerce, accounting, order management, shipping and logistics and digital marketing applications — all of which will inevitably overlap with one another? Application architecture governance is one of the most challenging problems that confronts CTOs and COOs. Service subscriptions further complicate the problem. Services are delivered in a way that places them outside of the control of the subscriber. This propels the subscriber organization into an application services ecosystem where architectural decisions are made by the service vendor — whose interests will seldom align with those of the subscriber organization. Detailed discussion of this problem, which is perhaps the most insidious of all, is beyond the scope of this article.
Platform lock-in. This is another legacy problem that we were hoping would become part of IT history as we transitioned to SaaS subscriptions. Nowadays, we are far less concerned about conventional platform centricity. Are we a Microsoft shop? Or is our business powered by Oracle applications? SaaS subscriptions have made these conversations largely irrelevant. We simply require a service that satisfies our business requirements and exposes appropriate APIs to support our integration requirements. So, in theory, we should have escaped the platform lock-in problem. But new cloud platforms have emerged. These are having an even more insidious effect than the legacy non-cloud platforms. Extensive ecosystems are evolving around cloud platforms, and once again we find ourselves making decisions based on platform centricity. On the one hand, current trends in devops (for example) can turn platform choice into a strategic advantage, but on the other hand, we find ourselves favoring specific applications and add-on services simply because they are part of a platform ecosystem that we have committed to, even though these may be more costly and less suitable than non-platform alternatives.
Are service subscriptions insidious? Probably not — in fact they provide us with unprecedented business leverage. But their effect on our businesses is certainly insidious. Management and governance of service subscriptions promises to present a daunting challenge to CTOs, COOs and CFOs everywhere.