What is zero-based budgeting & how can it help minimize SaaS spend?
Aimee Manning | APR 18, 2023
It’s an incredibly challenging time for organizations right now. Contending with a global financial downturn and escalating business costs – including, but certainly not limited to, SaaS – CFOs are fighting to stretch company budgets further than ever before.
As a result, techniques such as zero-based budgeting have grown in popularity, helping leaders address unnecessary outgoings and future-proof their businesses.
But what is zero-based budgeting? And how can you use it to keep your spend in check?
Let’s find out.
What is zero-based budgeting?
Zero-based budgeting is an accounting technique that requires all expenses to be justified and approved for each financial period, starting from zero rather than a pre-existing spend. This enables organizations to monitor and assess the necessity of each cost on a more granular level, lowering expenses and promoting fiscal responsibility.
Originally conceived in the 1970s, zero-based budgeting isn’t a new idea — but in the current economic climate, accounting for every dollar is helping businesses to regain control over their outgoings. The technique can be applied to a wide range of costs, from research and development to asset management.
If you’re looking to get your organization’s SaaS spending back under control, this might be the budgeting approach to consider.
Zero-based budgeting in software procurement
According to our data, $1 of every $8 that a company spends is attributable to SaaS — comprising a large proportion of total outgoings. So, if you’re not budgeting for your portfolio accurately, it could be hard to spot where, when, and how your organization’s budget is being drained.
We spoke to Vertice’s own CFO, Matt Barnard, for the lowdown on why finance teams might want to implement zero-based budgeting for SaaS. This is what he had to say:
“In 2023, everything should be subject to scrutiny. Companies can no longer afford to give certain tools a free pass just because they had them last year, or because the cost has only risen by a little. As SaaS portfolios continue to grow, those extra costs could translate to a significant amount of wasted spend. Zero-based budgeting helps finance teams to identify and trim the costs that can’t be justified before they eat into your IT budget.”
How does zero-based budgeting compare to traditional budgeting methods?
Traditional budgeting is usually based on a company’s previous year’s expenses. This involves assessing where the most spending took place and providing incremental increases where necessary.
While this can help you to predict your prospective expenses, it doesn’t usually inform you of which costs are rising. With each new term, finance teams analyze any new spending taking place, but fail to interrogate the recurring expenses carried over from the previous year — and this is where cost-saving opportunities could be hiding.
On the other hand, zero-based budgeting starts from scratch — meaning that each individual expense is evaluated for its cost and benefit, and the decision to spend must be approved.
So, what benefits could zero-based budgeting offer to your SaaS procurement?
How zero-based budgeting can reduce SaaS spending
Manage rising SaaS costs
SaaS prices are rising exponentially and rapidly outpacing market inflation rates. According to our data, vendors across the industry are raising their unit prices by an average of 9% each year — and in doing so, they are gradually pushing up your company’s operational costs.
Zero-based budgeting provides oversight on your entire software portfolio, so that you can spot unjustified expenses and take the appropriate cost-cutting measures.
For instance, you may subscribe to contracts that have risen in price beyond their original allocated budget. When you comb through your expenses as part of a zero-based budgeting approach, you can spot these cases of wasted spend and take back control over rising SaaS costs.
Rightsize your SaaS stack
SaaS is everywhere — powering functions from sales and outreach to marketing and HR. As a result, the software portfolio at the average organization grows by 18% each year.
However, as software continues to be rapidly implemented across all departments, the risk of overprovisioning rises. If your company has prematurely committed to higher contract tiers than required, you may be paying for seats or bandwidth that staff members aren’t using.
In fact, our data shows that 33% of the licenses in an organization’s portfolio go underutilized or not used at all by the intended employee.
Zero-based budgeting can identify these additional areas of needless SaaS spending and help you rightsize your software stack when it comes time to renew, reducing unnecessary expenditure.
Improve SaaS renewal management
With a large tech stack comes an extensive list of contract renewals to keep track of. Naturally, you’ll want to factor these into your budgets to stay on top of your cash flow management during each accounting period.
However, even if you subscribed to a tool at a set price, your contract could include an uplift clause that increases how much you’ll pay at renewal, sometimes without notification. Worryingly, our data shows that as many as 88% of vendors include price uplift clauses in their contracts.
Zero-based budgeting helps to identify which contracts have been renewed at a higher price than was originally agreed. This way, you can monitor the changes to your contract costs and factor these into your budget.
Reduces instances of maverick spending
As you get acquainted with your full list of company expenses, there may be the odd cost that you can’t explain — and this could be due to maverick spending. In the context of SaaS, maverick spending comprises any software purchases that have happened within the organization and not followed the established procurement process.
As part of the justification process, zero-based budgeting can uncover any spending that has gone unnoticed and provide a fuller picture of the software purchasing taking place within your organization.
Once you’ve illuminated maverick spending, you can assess whether the software that has been independently procured should be retained or terminated, and vet any unapproved tools that could represent a security risk to your organization.
The challenge of zero-based budgeting
For all its benefits, preparing a zero-based budget is not necessarily the ‘easy’ option.
In comparison to traditional budgeting, the technique can be difficult to implement as it is a significant drain on time and resources.
When budgets are built from scratch, finance teams tend to struggle to discover and evaluate every last company expense. This is especially true if the budget is reviewed on a regular basis or the technique is implemented across the entire organization, rather than just SaaS procurement.
How Vertice can help you to budget more effectively
Vertice provides total SaaS management from one convenient dashboard. Using our platform, CFOs are able to discover and manage each SaaS-related expense for budget consideration, whichever technique they prefer to use.
What’s more, we provide procurement solutions to streamline all software purchasing and renewals. Our expert team can handle your software negotiation process from start to finish, ensuring the best price for your business and saving you the time and resources lost to SaaS procurement.
To learn more about how you could start saving with Vertice, get a free audit of your SaaS stack. Alternatively, have a look through our extensive vendor database for access to exclusive pricing and discounting data for thousands of software providers.