This article is the first of 2 in our SaaS Series, which will cover what the SaaS explosion means for your organization. In this episode, we will cover how SaaS is licensed and sold, the challenges that SaaS spread, spend, and shadow IT poses to organizations, and what your company can do to get in control and master your SaaS license management.
SaaS is Taking the Software Landscape by Storm
According to Gartner, global software spend will reach approximately $1 trillion in 2024, up from $916 billion in 2023. In 2024, Software as a Service (SaaS) will account for more than $200 billion of global software spend. Here are some mind-blowing statistics on SaaS spread and spend:
- An average company uses up to 250+ SaaS applications.
- In 2024, the average company will use approximately 25 new SaaS applications.
- SaaS spend makes up 14.1% of a typical company’s expense line.
- On average companies are renewing 4.7 contracts per month, spending 385 hours on SaaS purchase and renewal meetings per year.
- Spending on SaaS per employee is now greater than healthcare spend sitting at $7,900 per employee (up from $6,220 in 2022).
- It is estimated that 85% of business apps will be SaaS-based by 2025.
What is SaaS?
SaaS stands for Software as a Service. It’s a modern method of providing software to users that offers more flexibility as you can access it any time via a web browser or inside an app. Some examples of popular SaaS applications include Gmail, Slack, Salesforce, and Trello.
SaaS differs from the traditional on-premise installation method of providing software. The application logic for on-premise software runs on the installation device only, while the application logic for a SaaS product runs in a cloud server that may be far away from the user.
How is SaaS Sold?
Traditionally, software was sold like a physical product. That meant companies could sign a contract and pay an upfront fee. Once you pay, the software is yours to own, maintain, and upgrade forever.
SaaS is different. With SaaS, companies are paying for access to the software rather than ownership of the software. SaaS products are sold according to a subscription model, meaning that a company will pay a monthly or annual subscription fee based on their license metrics (more on that below). As long as you keep paying, you can access the software.
While SaaS is generally cloud-based, on-premise software is sometimes sold according to a SaaS license model, utilizing an annual or monthly user-based subscription. For example, applications like Microsoft 365 and Adobe can be installed on-premise, but companies are charged according to a SaaS licensing model.
How is SaaS Licensed?
SaaS licenses include the terms and conditions of how the company can use the software . That includes the services that the customer can access, how long the customer can use the product, how many users have authorized access, permitted locations for use, specific usage restrictions, SaaS pricing, and SaaS protection options.
SaaS pricing is determined according to six common license categories:
Flat-Rate Licensing:
Users pay a flat rate for the SaaS product for a set time, regardless of usage.
Per-Feature Licensing:
Users pay based on the features they have access to inside the SaaS product, allowing them to tailor spending to their needs.
Usage-Based Licensing:
Users pay based on how much the SaaS product is utilized, providing flexibility and a ‘pay-as-you-go’ approach linked to consumption.
Per-User Licensing:
Users pay based on the number of users, with various tiers accommodating different user categorizations.
Freemium:
According to this model, users have free access to limited functionality, with the intention of enticing them to pay for a premium subscription to access more features.
Tiered Licensing:
Users pay based on the package or tier they have selected. Each tier has unique features and pricing, and users select the tier that best meets their needs with the option to upgrade for more advanced features.
The Key Challenges of SaaS Management
Organizations are scrambling to get control of their SaaS, and it’s no easy task. 59% of IT professionals find SaaS sprawl hard to manage. 8 in 10 enterprises report that software compliance issues have either increased or remained the same after moving to the cloud . These are the key challenges hindering you from mastering your SaaS management.
Challenge #1: SaaS Sprawl and Shadow IT
The first and most difficult challenge of managing your SaaS is managing sprawl. Today’s average company has over 250 SaaS license contracts with different vendors to manage and oversee. According to a 2024 report from Vertice, businesses spend 385 hours per year in SaaS and cloud contract purchase meetings. In the report, they discuss how time is consumed by both contract purchasing and renewals: “It’s a long process to buy or renew parts of your tech stack. Our research shows that, alongside a buying process taking about 100 days, renewing a SaaS license takes an average of 60 days end-to-end.”
With so many SaaS apps in use and more added each year, keeping track of all the software in the IT environment is a major challenge to businesses. Legacy Software Asset Management tools were built to capture on-premise installations and have not kept pace with the explosion of SaaS software provisioning. Clunky browser extensions are required that often gather more web browser data than companies desire, creating security issues. This results in SaaS detection that is mediocre at best because of outdated raw data inventory methods, saddling organizations with the tedious work of manually inputting software information to track their SaaS apps. And that only covers the applications they know about.
Shadow IT is a major culprit in SaaS sprawl. In the context of SaaS, shadow IT is the use of SaaS applications with no approval or oversight from the IT department. While the intention is often harmless, the consequences of shadow IT are not. Gartner estimates that shadow IT spending accounts for 30-40% of total IT spend in large organizations, while Everest Group puts estimates as high as 50%. Shadow IT usage has increased by 59% with remote work , raising the risk of security breaches and unmanaged cost. In addition, 78% of organizations store sensitive data in SaaS applications, and in 2023, 82% of security breaches involved data stored in the cloud . The lack of management inherent in shadow IT poses a significant security risk to organizations that must be addressed.
The reason why most companies struggle so much with SaaS recognition is because most SAM tools struggle with it too. Legacy providers were built in the era of on-premise installations and perpetual licensing, and their technology remains stuck there.
Their solution to web app detection usually entails the inefficient and retrograde route of adding plug-ins for various web browsers, or the use of a separate agent that solely monitors https traffic. This outdated technology is clunky and unreliable, meaning that many web applications slip through the cracks and leave organizations with only a partial view of their hybrid IT environments. This method of detection also presents privacy and security challenges when the logic that the plugin or agent operates by does not filter for relevant https addresses, mistakenly collecting sensitive data from end users’ search habits.
For companies seeking broader visibility, the only option left by these tools is outdated manual data input of SaaS application information, an inefficient solution that leaves room for significant human error.
Challenge #2: Runaway SaaS Spend
The flexibility of SaaS licensing comes with an upside and a downside. The upside: access to the software is flexible. With the option to cancel their subscription, companies are not locked in forever. The downside: instead, the subscription comes with a recurring fee which SaaS vendors can increase at will. And they do.
SaaS prices are raised annually, giving vendors the opportunity to achieve significant yearly leaps in revenue. According to Vertice’s SaaS Inflation Index 73% of SaaS vendors raised their prices in 2023. The average price increase per SaaS application was 12%, placing SaaS inflation at more than double consumer inflation. This means that the same unchanged set of SaaS products will cost you significantly more year on year.
So, not only will companies continue to use more SaaS, the SaaS they have will also continue to cost them more. Most importantly, up to 53% of SaaS licenses are unused , meaning that organizations are wasting a significant portion of this mounting SaaS spend. More than ever, companies need more granular data on their application usage, not just the number of users, to manage utilization and optimize costs.
The Path to Mastering Your SaaS Management
The first step to mastering your SaaS management is to understand the pros and cons of SaaS, and how it may pose both unique risks and rewards for the organization.
Next, SAM and ITAM managers must excel in two core functionalities to optimize their SaaS environments. Firstly, they need to focus on SaaS-specific software recognition, which helps them to identify and manage any unseen licenses, eliminate overlapping subscriptions, and upgrade licenses to match utilized functionalities. Secondly, they need to have insight into usage data, which will help them optimize under or over-utilized licenses and reduce costs.
Solution #1: Comprehensive SaaS Visibility
Comprehensive SaaS visibility will enable effective SaaS management more than any other factor. Many SAM and ITAM managers know this, so they purchase a Software Asset Management solution in the hope that it will resolve their SaaS woes. But it’s not as easy as it sounds.
Most SAM solutions on the market were built in and for a time where on-premise software installation was the name of the game. Too often their technology hasn’t kept up with the advancements in software deployment, and a chronic failure to detect key SaaS applications through more advanced web browser detection leaves organizations with only a partial view of their IT environments. Considering the amount of SaaS modern companies use, this lack of visibility is a massive challenge to bottom lines, security standards, and accurate licensing.
A SaaS-Supportive Approach to Software Normalization
Xensam’s AI-powered Software Asset Management platform is cloud-based and built with the future in mind, delivering unprecedented visibility of SaaS applications , as well as the rest of the on-premise IT estate. Our unique algorithms for software detection put us at the forefront of our industry with the largest SaaS application library on the market. With a combination of AI-driven and human-approved normalization techniques , Xensam recognizes more than 73,000 SaaS applications and 25,000 SaaS vendors, with thousands added every year. What is more, no clunky browser extensions are needed: discovery of web apps is performed natively inside our agile Xearch agent, making Xensam the first SAM software on the market not to use web browser APIs to track Web App usage.
Xensam’s unmatched SaaS recognition is achieved by Xensam’s AI , which predicts the probability of raw software data being an actual application or not, based on highly advanced logic. This data is then processed and validated by the normalization team. Over time, the AI is continuously learning how to better predict software data’s application probability, based on various common software normalization patterns and other advanced rules.
Our proprietary AI sets a probability score on hundreds of millions of raw software each year. Processing all reported raw software rows in an environment nightly, the platform automatically reports missing new versions of applications each day, which leads to more than 100 new application suggestions daily, totalling more than 40,000 new app suggestions each year. On top of this, it classifies all raw software rows with missing recognition information where Active Usage is detected to better automate the prioritization of our data analysts’ daily work of approving normalized software. This empowers businesses with visibility of both their known and unknown software, ensuring that no SaaS or shadow IT slips through the cracks.
Solution #2: Insight into (Actual) Usage Data
Comprehensive SaaS visibility will enable effective SaaS management more than any other factor. Many SAM and ITAM managers know this, so they purchase a Software Asset Management solution in the hope that it will resolve their SaaS woes. But it’s not as easy as it sounds.
Most SAM solutions on the market were built in and for a time where on-premise software installation was the name of the game. Too often their technology hasn’t kept up with the advancements in software deployment, and a chronic failure to detect key SaaS applications through more advanced web browser detection leaves organizations with only a partial view of their IT environments. Considering the amount of SaaS modern companies use, this lack of visibility is a massive challenge to bottom lines, security standards, and accurate licensing.
A SaaS-Supportive Approach to Software Normalization
Effective SaaS management requires more than just visibility of the application. Because of the unique ways that SaaS products are licensed, organizations also need to know precisely how much their applications are being used. Without that information, it’s impossible to make informed decisions to effectively drive cost savings. This type of data will provide actionable insight on:
- Per-user SaaS licenses that aren’t being used enough and ought to be cancelled.
- Usage-based licenses that are being used too little and ought to be downgraded.
- Over-utilization of licenses that need to be upgraded or purchased in larger amounts.
Xensam is the only SAM provider on the market that delivers granular Active Usage data , in addition to showing total usage. Xensam differentiates between the time an application is open, even if it’s open and unused in the background (total usage), and the time an application is actually being used, down to the minute (Active Usage).
This unique functionality revolutionizes SaaS management by enabling precise, data-driven decisions on licensing and cost optimization
Conclusion
The widespread adoption of SaaS won’t slow down anytime soon, and it comes with both challenges and benefits. Companies can no longer ignore the need for a SAM platform that’s built for the SaaS era. Comprehensive SaaS recognition and Active Usage data are both critical capabilities that organizations must have if they want to master their SaaS management strategy, gain control of SaaS sprawl, shadow IT, and runaway spending, and enable data-informed decisions on cost optimization, security, licensing, and compliance.