Budgeting best practices from a CFO's SaaS spend review.
Michael Tannenbaum
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4 min read
4 min read
Budgeting best practices from a CFO's SaaS spend review.
A zero-based approach to B2B SaaS.
Like many Finance and Operations leaders, I spent a lot of last year’s annual planning cycle (given the current macroeconomic environment) focused on optimizing headcount costs, which is in most organizations by far the largest line item. However, as 2024 planning approached, I wanted to check in more closely on Brex SaaS spend.
At Brex we’ve historically budgeted SaaS as something that grows with headcount, but should gain leverage over time. Specifically we’ve budgeted SaaS as a percentage increase year-over-year and allowed teams to spend within those guardrails.
This year, I decided to take a zero-based approach, popularized by the Brazilian buyout company 3G, a company that was influential to the founding of Brex (itself started by two Brazilian founders who received school scholarships funded by the founders of 3G).
While my colleagues Henrique and Pedro are the Brazilians, I am more the zero-based budgeter… :)
So, on a recent Sunday morning I began looking through Brex’s monthly SaaS spend at a vendor level. I came away with some budgeting best practices I wish I had implemented earlier, and some insights into the B2B SaaS economy.
The most interesting budget insights and best practices.
You need a budget and budget owner by team: Similar to headcount, software spend needs to be owned at the team level where the leader is held accountable to a budget and that budget drives results. If the budgets and accountability are too federated, SaaS creep ensues.
Budgeting per employee is ideal, but not perfect: Lots of SaaS should grow with employee count, based on the way contracts are negotiated, but not all. It’s the 80/20 of SaaS budgeting. However, usage-based SaaS (e.g. Datadog, Snowflake, Twilio each in their own way) grows with the product. If usage-based SaaS costs are not scaling slower than revenue, unit economics and pricing need to be revisited.
SaaS budgets can assume 0% growth (per employee) once you’ve hit scale (at least for 1-2 years): Once a company hits a certain stage and scale, companies should assume that SaaS costs stop growing (outside of growth from new users). Therefore, if additional SaaS spending is desired, this should come in exchange for retiring existing vendors and associated spend. Teams must be given a constraint that forces them to sacrifice existing software in favor of new capabilities. Just as new needs arise, old needs go away or change.
Many vendors offer functionality you are paying for elsewhere: With the SaaS proliferation at larger companies, there are likely 5-10 vendors that offer functionality your company is separately paying for with a point solution. Remember that most companies in the B2B software space have huge R&D budgets — so existing vendors are innovating and adding functionality.
A good example here is Zoom — which added a feature that provides automated recaps of video calls — a need for which Brex previously used a point solution. That said, much of the functionality of Zoom itself is provided by Google and Microsoft productivity suites (which Brex also uses), so there will be a spectrum for companies across the best-in-breed vs. bundled continuum.
Have a look at your list of existing vendors and make sure you are getting as much value out of them as possible. You will likely find that you’ll be able to retire some other point solutions completely as a result. Learn more on managing runaway SaaS spend from Tech CFO CJ Gustafson.
Better pricing comes with consolidation: While this is a rudimentary point, it’s worth noting specifically that in areas like productivity software (e.g. Asana, Monday, Coda, Atlassian) where you see a lot of teams adopting their own preferred tools, there is a bigger opportunity to consolidate and extract overall user savings by buying in bulk.
Observations on the B2B SaaS landscape.
Enterprise is an upsell story: There are a number of vendors for which we’ve 5x-ed our spend over the past few years. From a B2B SaaS perspective, this net revenue expansion is a dream! Companies that get a wedge with a customer can use that wedge to land and expand, and it’s very impressive to see how some do this.
Most spend / revenue is captured by usage-based pricing vendors: Almost all of Brex’s largest SaaS vendors employ a usage-based pricing model (vs. a per-seat or -user model). The reality is that as companies grow, their goal is to grow revenue faster than costs, and so their product (and SaaS tied to its usage) should over time grow faster than headcount.
Usage-based pricing has fueled the revenue growth of huge players like Snowflake, Datadog, and Twilio and is behind game developer tool Unity’s recent controversial decision to charge per game installation.
Vowing to be better SaaS spenders.
SaaS is a huge area of investment for most companies. Finance leaders should take control of it in their budgeting process and also look to best-in-class SaaS companies on how to approach their own product pricing and go-to-market motions.
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