How CFOs are thinking about software purchases today
How CFOs are thinking about software purchases today
The good old days of growth-at-all-costs have been dead for a while, and a lot of CFOs became a lot more powerful at the same time. Even the most tenured CFOs got beat up a bit trying to control costs in 2021 when it seemed like SaaS companies could do no wrong in investors’ eyes. If you weren’t spending tons of money to grow a little more quickly then you weren’t playing the game on the field.
Some finance leaders got kicked too far by their teams, and spend really got out of control.
But 2023 is nothing like 2021. CFOs are doing a lot more to control spend and increase efficiency. Sales deals are facing constant budget constraints and pressure from CFOs.
CFOs are asking more questions
Below are some questions I might ask for software purchase requests. The level of detail I dive into depends on the size of the contract and the importance of the tool.
Why do we need [X] tool now? We were fine before.
What bucket does the tool fall into and can you quantify it?
Mission-critical (e.g., cybersecurity)
“Candy” — a nice-to-have tool that doesn’t fit into the above groups
Is the spend in the budget? If not, how will you make up the difference?
How does this tool help us meet our company objectives for this year?
What tools do we currently have that do something similar? I will also check with the IT team and other relevant people.
If similar tools exist, why can’t we use those?
Does an existing vendor have a tool that does a similar thing? Can we consolidate on one vendor and save money?
How “big” is the vendor?
This was much less of a concern before when every SaaS tool received funding just for breathing, but now I care a bit more — especially for tools that are mission-critical or can become deeply intertwined in the business.
What are the people time requirements?
Does it require hiring more people?
What are the implementation costs?
Will we need to upgrade plans soon to enterprise or some other made-up tier?
If it’s usage-based pricing:
I want a detailed analysis of how pricing works and modeling for what our planned usage will look like.
I start with distrust on the total estimated tool cost for usage-based pricing, so you better earn my trust with a thoughtful analysis.
What does cost look like this year, and how does it scale next year?
If it’s seat-based pricing:
I don’t want to buy a bunch of extra seats for planned growth. That got a lot of people in trouble recently as headcount growth halted and layoffs happened.
Does everyone actually need a license?
I hate nothing more than seeing half the licenses of a tool being used once every few months.
If we significantly underutilized licenses or usage under the first contract, then I am pushing hard come renewal. Teams need to make sure the company is getting maximum value out of the tool at least a few months before renewal. Otherwise I am going to try to slash.
The CFO’s perspective
Finance leaders are feeling immense pressure to improve efficiencies while maintaining strong growth. The data/tools available now are empowering CFOs to better control, monitor, and measure the ROI of spend. We are more aggressively fighting SaaS sprawl with SaaS spend management tools (Brex), SaaS optimization tools (Vendr), engineering productivity tools (Jellyfish), etc.
Given the dramatic shift in the relative importance of profitability vs. growth from 2021 to today, a lot of private companies are currently unfundable (at least anywhere near recent valuations) and public company stock prices have been hammered.
As seen in the image below from Bessemer, at the height of software valuation craziness (November 2021) a 1% increase in growth had the same valuation impact as a 6% increase in profitability. Today, the ratio is 2:1 (relative valuation importance between growth and profitability) — that is a significant decline in the relative importance of growth to valuations!
These bad behaviors and inefficiencies take time to unwind. It is the CFO’s responsibility to redirect the ship.
The balance is tricky and many companies won’t get it right. Some CFOs are going to overcorrect on maximizing efficiency and cost-cut their companies into oblivion.
As Janelle Teng explains in her recent post, the Bessemer data set from the chart above is from BVP Nasdaq Emerging Cloud Index companies that are “emerging public companies” — these are not hyper-growth, early-stage companies.
Companies need to make sure they don’t misinterpret benchmarks and set unrealistic targets for their specific circumstances. Bessemer adds the below context for private companies, but again, it depends on what stage the company is at. A $10M ARR company is very different than a $100M ARR company. Context is critical.
What are CFOs doing?
Better tools and reporting
The availability of finance and spend management tools has exploded, which has made controlling and capturing software sprawl much easier. Tools like this have existed for a while, but now:
1. CFOs feel empowered to strictly enforce them
2. Finance teams are performing a lot more analysis and adding stricter spend controls
3. Even very early-stage companies have access to these types of tools
I know some folks would sneak SaaS tools on a company corporate card to bypass official purchase approvals, but now that is easier to control.
For example, something like 90% of Y Combinator graduates and a growing number of enterprise companies, including DoorDash, use Brex’s platform. Solutions like Brex provide companies with spend controls and policies so finance teams can better control spend before it happens. Having a dashboard and analytics with all your global spend in one place makes it really easy to analyze and find software waste.
Other popular tools for understanding and controlling software spend: Vendr, Zluri, Spendflo, Tropic, Tipalti, Bill.com
We all know SaaS companies have wiggle room to discount more. Nobody is being fooled by the *very* special end-of-month discount. I get the tactic and I know everyone does it, but don’t push it too far.
CFOs are checking with their network and other resources to make sure they get the best deal possible. And we know that every sales team is doing everything they can right now to win deals given the current environment, so expect us to push on pricing hard.
While multi-year commits have a larger discount, the risk is too great to justify in a lot of circumstances.
For earlier-stage, high-growth companies, be extremely cautious with multi-year commits. Things change so fast that it often isn’t worth the risk. The exception might be things like AWS and Salesforce. Also, wait at least until the second year of using any software before committing more than 12 months. A lot can go wrong or not work as expected.
Sales folks: Don’t overly incentive and push sales reps to close multi-year deals. It’s OK to get pulled into these conversations, but when reps push hard on this a lot of customers will eventually be upset, which will cause a lot of second-order revenue to vanish.
I always try to negotiate these out, and if the vendor refuses then I will just send an opt-out notice immediately after the contract is signed. Auto-renewals can be 30 to 60 days before the end of the contract so make sure you are tracking it properly if you keep them in the contract.
There are spend management tools that help track this (Excel also works though!).
Annual upfront is typical for enterprise SaaS, and I have historically been just fine with that (makes my accounts payable team’s life easier). But with the significant rise in interest rates (the importance of the time value of money), I may ask for shorter payment terms for larger contracts.
How to get your SaaS tool approved
The #1 thing that makes a purchase approval easy is my trust in the internal buyer.
If I have worked with the budget owner on purchases, know that they do their due diligence (have gone through the questions above), and that they carefully consider the financial implications for the business, I am much less likely to push back too hard on requests.
CFOs immediately know who is lazy (or lacks experience) and hasn’t done much analysis/diligence. We push back hard, make them look at alternatives, ask other people, etc.
Budget owners need to carefully think about the questions I listed earlier and provide a thoughtful analysis of why the company needs to purchase a tool.
Sales folks: Your job is to help equip your champions to do that. Spend extra time with those who are less experienced, new to a company, or may not have the trust of their CFO. Because they are the ones who need to earn trust to get the purchase approved. CFOs don’t want to talk to the salespeople. They want to hear a thoughtful analysis straight from the internal buyer.
Yes, CFOs are blocking a ton more deals. Rightfully so. A lot of companies are stuck with a bunch of software tools that add little or no value.
Budget owners need to be more thoughtful about the tools they purchase and the value they add to the organization because belts continue to tighten. And those who don’t get the message will fail.
Sales folks need to work closely with their champions and enable them to gain the trust of their CFO to get their purchases approved.