What you need to know:

• Almost half of the software-as-a-service (SaaS) licences that companies pay for go unused. Companies should be shooting for a utilisation rate of 90 to 95 per cent for core applications. But some, such as ServiceNow and Asana, have utilisation of less than 25 per cent according to a new report.
• The costs of integrating SaaS into wider enterprise tech infrastructure could be 8-10x higher than the cost of SaaS software (vendors forget to mention that bit during the sales pitch).
• Some SaaS contracts allow vendors to incorporate the software customers create to integrate into wider enterprise ecosystems back into their SaaS solutions – which they can sell on to competitors, effectively leaking IP. This happens in about 10 to 15 per cent of the contracts examined by a specialist M&A tech auditor.
• Although media spending is often touted as one of the biggest expenditure lines on a P&L, SaaS is a growing operational cost, and for some large companies is second only to staff costs, according to Zylo. Many people we spoke with disputed this, but they confirmed that companies might be paying a dollar on martech for every dollar of media spend.
• Failing to equip staff with the skills they need to use the tools is also driving under-utilisation, marketers say.
• Brands are missing out on significant potential discounts as vendors target individual business units to grow their share of wallet.
• Often the answer to the difficult and expensive martech integration challenge is "more martech." And so the cycle repeats.
• SaaS is breeding like rabbits, says former Commonwealth Bank CMO Andy Lark.

No wonder software-as-a-service vendors made out like bandits for so long – there are fat margins to be had selling customers stuff they don't use. And it turns out organisations around the world are utilising barely half of the SaaS (Software-as-a-Service) licences they have bought, with 44 per cent going unused, according to a study by Zylo, a platform that helps companies manage the licences for their applications portfolio. 

But that's just the start of it.

CMOs, auditors, consultants, and analysts who spoke to Mi3 suggested the bigger problem is the expense of integrating each individual SaaS platform into the enterprise stack, or even wider into the company tech ecosystem – and it's driven by the cost and complexity required to derive the benefit and return on investment from the software.

Perhaps most alarming, some SaaS contracts confer the right to software vendors to integrate the work done by their customers back into the vendors' offering, which can then be sold to the customer's competitors.

According to Zylo's data, which it claims is based on six years and $30bn worth of SaaS spending across more than 30 million licenses, SaaS is typically a company’s second-largest operating expense after staffing, although that seems to be more a function of scale in the US and Europe. "The average organisation spends roughly $50m on SaaS. That equates to about $4,600 per employee, " according to the Zylo report.

In a discipline like marketing, those low levels of utilisation reflect how little CMOs understand the complexities of software integration, according to industry leaders Mi3 spoke with.

Ex-Commbank, Dell, Foxtel, and Xero CMO Andy Lark, founder of Group Lark, a consultancy that audits marketing functions, said wastage levels tend to be closer to 20-30 percent rather than the 44 percent identified by Zylo. He broadly agreed with the direction of the report – although in his experience Lark says SaaS costs as a proportion of marketing costs in Australia do not reflect the report's findings, which are based on the costs of much larger international businesses. 

"The typical marketing function today is running upwards of 28 different stack licenses, some are as high as 40 or 50, depending on what kind of business they're in," says Lark. "Needless to say, all marketers right now are under pressure around that cost."

He said the research highlighted a common problem: "Organisations need to be far more aggressive in auditing their use of SaaS software and actually using third parties to audit SaaS software usage, and to help them negotiate really effective licensing."

SaaS utilisation needed to be considered across three categories, Lark told Mi3: "There's the SaaS products that you use intensely as part of everyday workflows. So if you're a marketer and you've got an MRM (marketing resource management) platform, like Simple, or you could be using Asana for workflow — that sort of foundational marketing workload and workflow software. If a marketer is not using those platforms, the chances are they are not doing their job every day. That's first layer."

The second tier is the platforms — Figma is a good example of a use case where a marketer might not use it every day but still some frequency said Lark. "They might dive in and be working on a project, then they drop out of it for a week or two and then they drop back in. And that's a big problem with SaaS software, [because] SaaS software is not based on utilisation, it assumes 100 per cent consumption equally by all users. And more and more organisations are becoming more and more adept at using general passwords to try and skirt that issue."

Then there is a third category of software that operates in the background, which is licensed through a variety of other means, not necessarily attached to the user, he says. "A good example of this in the marketing space is a piece of software like Segment and some of the back-end systems that you use to manage and massage data and move data around. They may be attached to a user as a way of charging you for the software, but they have no relationship actually to individual user usage."

The current licence wastage is significant, he says, for businesses that would spend 500k to $1m a year on SaaS licences.

Over promising. Under delivering

While software licences may be a significant driver of cost, the real issue is the failure of many marketers to understand how SaaS works, and the additional investments in integration required to derive real value - a somewhat salient point that is often missing from the vendor sales pitch, according to Andy Lark.

"The real problem with SaaS software today is that we look at the [multiplier effect] of the SaaS software. Vendors are very good at selling you their instance — but getting their instance to work is a completely different thing. And that incremental cost for some CRM platforms, who I won't name but you can guess who they are, are between eight and ten times the license fee. So you've signed up your users but then you go, 'Oh, I need to integrate it with this, I need to generate dashboards, I need to get these plugins or add-ins working.' And then suddenly you've got professional consulting fees wrapped around it."

That's the tiger in the grass with most SaaS software implementations today says Lark. "Marketers walk into this. They're like, 'Well, I thought I was paying this much for my CRM software, but I'm now paying eight times more than that in aggregate annually just to run and operate it."

The software licences are not the biggest drivers of cost in SaaS implementations, he said. "It's the customisation, implementation, and management of the SaaS software in the context of a broader enterprise suite of software that's being used in the business. And then the second cost is managing the integrations, [and the] tailoring of that for reporting, dashboarding [and] analytics. It's really significant and it's a major pain point for most businesses."

Lark says the cornerstone principle of SaaS software is "you're buying vanilla" but very quickly realise you need sprinkles, cream, and sauce to make it any good. That's why it's important to understand those three layers of software."

He says for something like workflows, "Asana is Asana - yes, I'm going to include training costs, education costs, some implementation costs perhaps, but it's relatively nominal and it's manageable over time."

The real problem is implementing heavyweight stack software like Salesforce, HubSpot, or Figma. "If I want to integrate that and get that working with my dashboards, the business intelligence platform I'm using at the business level, I might want to integrate it with other tools, my website, all the other things.

"To make SaaS software work, there's always one simple answer, which is 'Oh, you need another piece of SaaS software. It breeds like rabbits. So you start with one and before you know it you've got a large family of SaaS rabbits hopping around your business and it's quite staggering."

Counter argument

Still, with some tight focus and intent on quantifying the overall contribution to an organisation from martech investments, good returns are possible. For example, the likes of the 60,000-member Norths Collective, which amalgamates clubs, gyms, and entertainment venues across NSW, is extracting a clearer picture of the broader business impact from marketing automation.

Norths has started "Project ROI" to understand the overall return to the business from its martech investment - not just what individual campaigns delivered. Norths is almost entirely in the Salesforce stack. "Project ROI is giving us the opportunity to really prove the worth of this digital transformation journey to the Norths Collective bottom line,” the GM of CX, Brand and Innovation, Robert Lopez told Mi3 last month.

"If I go back to 2021, it took us about ten weeks to build out the back end systems. Last year we opened two venues within six weeks of each other and we did the back end build in three weeks. So we have reduced the time to market by 70 per cent. It's about really building out a strong system that's going to allow us to understand how we've improved our member experience and our customer lifetime value on a monthly basis. 

“We want to start to understand that by centralising our data and communicating more effectively with our members and our community, what has that done? Have we shifted member visits by one per month? Have we got an extra visit out of every three members every month? And really tying that back directly to our marketing activities.”

IP risks

More broadly though, there is potentially a more significant risk than just the cost to enterprise of SaaS licensing, according to Josh Hinton, partner and co-founder at CTO Labs, a specialist Mergers & Acquisition technology advisor.

"Some customer's contracts have clauses within their intellectual property rights where anything that is written on top of the software is inherited into the software developers license, and they have a right to redistribute that software out to their other customers. That intellectual property right would basically mean that your investment in any development on top of their software would be then legally publishable to your competitors," he said.

"We see that in about 10 to 15 per cent of the transactions we do."

Driven by data

The increasing bloat in tech stacks and the associated issues with SaaS costs reflect the growing primacy of data-driven decision making in marketing, according to Melissa Wong, a long time B2B CMO, who has worked for companies such Kmart, Apple and most recently Elmo Software, says martech continues to eat more of the marketing organisation's budget.

She told Mi3 the growth in martech is a function of investments companies have made around data-driven decision-making. "The more data you deal with the more you're going to need technology to help you streamline those processes. It depends on the complexity of the programs you're putting in and whether you operate in the B2B or B2C world. Putting on my B2C hat, take personalisation — martech plays a massive, massive role, therefore you need different tools to help you measure, quantify, accelerate, and of course personalise. I think it's probably going to start shaping that way for B2B as well."

Like Lark, Wong says poor utilisation is the biggest challenge and primarily because brands fail to invest in the skills and capabilities needed to make the most of the platforms.

The other issue is that brands need to better understand just what they are signing up for. "People need to be much more intentional about the features of the products," Wong says.  "A lot of the time they have been sold this vision — around attribution or data analysis for instance — whereas the reality is it comes back to how deep is that going and can it really deliver what you need it to do?

"A lot of the time it's where that shortfall comes in. They might say it does this, but by the time it arrives and lands and is implemented, it doesn't necessarily deliver what is needed."

"I do feel that there's probably an opportunity for education around features. What does it do? How does it help me now and in the future?"

Gagan Batra, a director at Insighten, a Sydney-based adtech, martech, and data analytics consultancy concurs. "Our enterprise clients use tools like Adobe and Tealium. One of the key things that we find when we do an evaluation or an assessment is that most of these platforms are onboarded or procured – but then they don't have the resources, or the skills, or the will to use them.

"If I look at the split I would say as much as 70 per cent of the platforms are wasted. I think the reason why is that the client doesn't necessarily understand the value or the proposition."

He calls out the the groundswell of interest in Customer Data Platforms (CDP), a category in martech that is running red hot, as a prime example.

NAB, Big Red Group and retailers like Alquemie, which owns General Pants, Surf Stitch, National Geographic and Pumpkin Patch – are piling in. 

"Most of the use cases we get from a client on first party data are the most simple – 'we want to build an audience, we want to push it out to an advertising platform' and that's the extent of it. To do this you don't need a CDP. But the CDP vendors have done a fantastic job selling their products," per Gagan. "You could use a marketing automation system that already exists in the business to work on that use case."

Shadow IT

The Zylo report reveals that inefficient purchasing behaviour is a common problem at organisations of all sizes, as departments and individual employees purchase new SaaS tools in silos without knowledge of a company application strategy.  Multichannel spending – when an organisation has an enterprise agreement or contract in place but employees keep on buying the the same application on their own, is a particular cost-hog. "The average organisation has 23 applications with multichannel spend," per the report.

It's an issue that Josh Hinton at CTO Labs also flags as a business risk.

"SaaS has made the consumption of software significantly easier," he says. "If you think about the modernisation of technology and the ease of consumption, say via credit card purchase, what it's done is move software purchasing from a CIO or the technology department into the hands of business unit managers. Heads of marketing, heads of digital, heads of content can now buy a significant amount of software and implement it."

But that also drives shadow licence costs, he says. "Often you'll find that that's dual purchased in different parts. In a larger organisation, the same software vendor salesperson will be incentivised around growing the account. They'll go to one business unit and then another business unit, and another business unit – and often you'll find that there are contracts for similar bundles of software in different parts of the business which are often blind or hidden to the internal technology department.

"It has different implications, not just on licenses, but everything from the security posture, to the ability to standardise content across the organisation. And it basically makes it challenging to understand your total spend on software, but also to standardise. You can see a tension there between standardisation and speed to market."

Bloat velocity

The sheer speed at which organisations are adding new SaaS applications – on average between four to six new applications every 30 days (across the enterprise, not just marketing) – suggests there's plenty of scope for the problem to get worse.

According to the Zylo report, SaaS spending overtook direct spending (where companies load the software onto their own servers) in 2022 for the first time, but that doesn't mean buyers are more vigilant about getting their money's worth.

"The painful fact is that most organisations are spending money on licenses that aren’t being used," the report warns. "On average, organisations use a mere 56 per cent of their SaaS licenses. The remaining 44 per cent are wasted. License optimisation based on utilisation continues to be a huge opportunity for cost reduction – especially for large enterprises."

The report says companies should be shooting for a utilisation rate of 90 to 95 per cent for core applications.

SaaS customers say it's a case of being ever vigilant. Per Cal Brown, REA Group's IT Procurement Manager: “Looking at optimisation opportunities shouldn’t just be when you come up to your renewal. It should be an always-on approach."

In the end, there's good and bad news for marketing and sales leaders.

Email tracking has one of the highest utilisation scores at 94 per cent, according to the Zylo data, with CRM app Outreach, an email sales engagement tool, getting one of the best individual scores. But service desk software – where brands and their customers collide when things go wrong, only registers 25 per cent. Coincidentally, that is the utilisation figure for service poster child ServiceNow.

Somewhat ironically, collaboration tools are particularly badly utilised with tools like Asana, Atlassian's Jira and Aha!, a tool specifically designed to aid product and marketing collaboration, showing utilisation rates of between 19 and 23 per cent, according to Zylo's figures.

"Redundant SaaS applications cost your business big bucks," states the report. "Many organisations struggle with duplicative and redundant SaaS technologies in use across the company. For example, an organisation might have a dozen or more project management applications – each used by a different area of the business and costing your company hundreds of thousands of dollars."

There are signs however, that the technology sector has finally read the room. Some large technology vendors like global business apps giant SAP are changing how they incentivise their sales teams, moving them away from an obsessive focus on new licence sales.

According to John Dawson, Head of ANZ Customer Evolution Program at SAP ANZ: “We measure our success by the success of our customers. We know that acquiring SAP cloud services marks just the first step in an organisation’s progress towards achieving its goals." SAP's sales teams KPIs and compensation are now "aligned to customer utilisation of SAP cloud services.”

Qualtrics, an "experience management" company which SAP briefly owned and is now in the process of selling to private equity, has reached a similar conclusion and other large SaaS vendors are making similar rumblings.

The precedent is there though not wide spread. Microsoft for instance changed its reward and celebration system for its engineers from shipping to customer usage almost a decade ago.

Brad Anderson, Qualtrics president of products and engineering was at Microsoft when the change was made and said it had a profound impact on the culture. At the company's annual user conference in Salt Lake City earlier this year he told Mi-3, "We have committed to the company what our top level usage is going to be  for the year, quarter by quarter. Each of the teams go and plug into that and then we review that on a quarterly basis.  I've made it very, very clear, as we get to the conversations about promotions and equity, those kinds of pieces, that hitting your usage goals is going to have an impact."

But for now,  these companies remain more of an exception in an industry that rewards seat sales over customer success, and where contract renewals – once those three-five year enterprise subscription deals reach their denouement – are proving increasingly difficult to close.