Who Should Control Software Spend: IT or Department Leaders?
A conversation with Andrej Safundzic, CEO at Lumos
Everyone is wondering about how companies are managing their software budgets in this macro-environment. SaaS CEOs are on both sides of this phenomenon: they want to manage their own software spend more closely, and they also want to prove to their customers that their product is worth continuing to spend money on.
There’s no better person to speak to both imperatives than Andrej Safundzic, Co-Founder and CEO at Lumos, which is an internal app store, helping companies manage the effectiveness of their software spend.
In this conversation, which spoke about:
As a CEO or executive, how should you approach your software budget in this macro-economic environment?
What should be the role of IT departments in decisions on software spend?
As an employee, how can you make the case for keeping software that is useful to you?
This conversation is in written-only form this time because we recorded the conversation over multiple sessions: you can check out the lightly edited transcript below. Hope you enjoy it as much as I did!
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Allison: Andrej, I am so excited to have you on the podcast today. You are the perfect person to talk about a topic that I think a lot of people are thinking about right now, which is how do I manage my software spend in the uncertain, volatile macroeconomic environment that we find ourselves in right now? I know you have some really interesting perspectives on that, so thanks so much for joining us today.
Andrej: Yes, excited. Let's do it.
Allison: In the past you've commented on the abundance of software products that the average company has bought. Do you mind providing some statistics around that, just so that we can give the audience some context?
Andrej: It's quite interesting. Marc Andreessen said when he started Andreessen Horowitz in late 2008, "Software is eating the world.” Fifteen years later…software ate the world.
There have been three different stages of the software industry. During the first stage in the late nineties, everything was on-prem. Then Salesforce came about and said, "Kill on-prem software, bring it to the cloud." Stage 2 saw more of a shift into the cloud from 2000 to 2010. Workday, Atlassian, Adobe, and many other companies were cloud-first. Stage 3 occurred around 2010 to 2020, with product-led growth becoming more prevalent. The power dynamic shifted away from the CIO, who used to make those big software purchases, to the team lead or the individual contributor buying software.
As a result, right now a typical 1000-person company uses on average 500 applications — 650 actually — but let's call it 500 for simplicity’s sake. Just 25% of them are actively managed by IT. So imagine you have 500 apps, 125 of those are managed by IT, and 375 of them are used by different types of teams. Especially with COVID, we saw a 20% increase in software usage at a typical company. But, did we overeat software? That's actually a great question to ask in these times.
Allison: Given the macroeconomic environment, some folks are starting to sound the alarm that companies are cutting their budgets for software. I'm wondering, to what extent is this happening right now? Do you believe it will happen more in the future as well?
Andrej: Let’s take a step back and compare the making of a car to the making of a product. A car on average has 30,000 pieces. A car is so great because it has all those pieces and because there’s a division of labor. Let's say BMW made all the pieces themselves — that wouldn't be productive. They would lose money because it's just inefficient. So they source the parts from different companies. With the Kaizen method at Toyota, the key learning wasn't that we should reduce the number of pieces. The key piece actually was, how do we manage those pieces in a better way? They created this method of iterative car development, involving small incremental pieces across their product life cycle.
Similarly, when we look at software, decreasing the number of pieces to build the software stack is the wrong approach. Decreasing the number of tools is not innately good. As the economy has changed, I've seen a shift in cost-response from CIOs. I speak with a number of CIOs on a daily basis and what I'm hearing is in addition to measuring ROI on every software purchase they are doubling down on finding efficiencies. Software purchases are still being made of course, as these tools are needed to achieve ambitious company goals, however, a cost breakdown per department is required, as well as a way to tie the purchases to team budgets. These purchases are looked at through a lens of, "which will drive revenue AND reduce cost?" Instead of buying a bunch of standalone products, CIOs are looking at consolidating tech stacks.
Going back to the car analogy, this basically means becoming more intelligent in the way you'd assemble your car. And so we see CIOs thinking about, with the products that I have, how to do more with those.
Allison: It sounds like your personal point of view is that in general we haven't really overeaten in software, in the sense that we've been spending way too much money on software. It's more that maybe we need to change the composition of our diet. Is that right?
Andrej: Exactly. It's not that we're eating too many calories. It's that our calories are not properly allocated across carbs and proteins. The question now is, let's say the $2,000 that I spend on food every month, I'm not going to lower that. I'm going to think about how to get more out of my body. As an athlete that has a budget of $2,000, how can I eat better food? Athletes may eat smaller portions more frequently throughout the day to perform at the highest level.
Allison: We're really milking this analogy — I'm liking this. It sounds like your perspective is that people's software budgets are actually not particularly inflated, but at the same time many companies, especially tech companies are trying to cut budgets in general. Do you think that the mix of expenses at companies will be shifting more towards software over say the next year?
Andrej: Yes. Here's a big problem. Think about having 600 apps, three or five years ago. Let's ride that food analogy for one last time. Imagine you have just 50 ingredients in your fridge. You as one single cook can actually manage it. But let’s say now you have 600 different ingredients. This is a freaking cool restaurant, you can make delicious food out of it, but it's impossible for one person to really make sense of it. What a leader and a company should think about is, how to unlock my company's potential with the tools that we have in place.
You can unlock potential in three steps. Step number one is actually achieving compliance. Using things in a compliant way, e.g. so that you are SOC 2 compliant.
The second thing that people can think about is productivity. How to use the right pieces of software and how to create a frictionless experience for people using that software, with good onboarding and training to elevate how they do their job on a daily basis. Think about a designer 10 years ago: they didn't have Figma. It was way harder in Photoshop to create the marks that we are doing today. Great software really elevates a person.
The third thing is cost efficiency. Of course you want to decrease costs of managing your software. But the problem is the admin work is centralized. So usually operations or IT is told to figure it out. That doesn't scale. It's a bureaucracy. Think about the bureaucracies where you have a problem, and they guide you to different centralized resources, and nothing really works.
By contrast, leaders should be asking, how can I enable my teams? Enable them to spend effectively, to bring on software that is safe and secure, To train the employees to use software in the most efficient way. How can I make my sales people be the top 1% at Salesloft or Outreach? How can I make my engineers be the top 1% at Datadog? An internal operations department cannot help with that. You need to enable certain team leads to leverage the pieces that they have in their hands or the ingredients that they have in place to make a good meal out of it. People need to think more about how to distribute responsibilities when it comes to software management. And, IT can be the key department that manages that. We have DevOps that enables all developers to code in an effective way. We should make IT the TechOps department that enables the whole company to use technology to unlock their full potential.
Allison: I think what you're saying is a really provocative thing in a good way. In this environment, a lot of companies are probably thinking, we let our employees buy way too many apps on their credit cards and we need a central organization like IT or procurement to go through and evaluate each of these one by one and require folks to justify the ROI of each of these purchases, justify the cost, and then we're going to rank order them and cut the bottom ones.
I think this is an exercise that a lot of companies have done in the past when they've had to cut costs, and you could imagine potentially a lot of companies doing that now. But I think you're saying the solution isn't to revert back to centralization. We should recognize the benefits of some types of decentralization that we've had so far, just create more rules or boundaries around it so that we can be more efficient.
Andrej: Exactly. Think about this from a micromanagement perspective. Think about you telling all your teams, "Hey, I'm going to cut the people from your team. By the way, I'm going to decide this internally. I, as HR, or I, as leadership. I'm going to look at all the performance reviews, and here are the ten people I'm deciding that we're not going to keep."
What leaders should say is, "Hey Marketing, listen, you're using a hundred percent more of budget when it comes to SaaS than everyone else in the company," or, "hey Marketing, you're using 50% more of budget than a similar company our size." This is the data that Lumos is gathering. "Hey, listen, I don't want to control you. You know what to do best, but how can you actually decrease the spend to make it from a thousand dollars per user to $800 per user.”
It's about setting the policies in place and letting people, based on those policies, execute.
Allison: I love that. So let's say that I'm a mid-stage venture-backed company, perhaps around Series C. Let’s say I'm looking to make sure that every dollar I'm allocating to software is maximally productive. Do you have any specific tips for how I should organize the process of managing my spend or reallocating my spend?
Andrej: You need to have two benchmarks. The first thing is, you need to have one line. You need to create an understanding of how much spend you have across all your software. Then you need to know how the spend actually differs across departments on a per-employee basis. Let's say Marketing spends 400 bucks per employee. Let's say Sales spends just a hundred bucks per employee. You need to have benchmarks across different companies of what is seen as average.
Then you want to help employees help themselves. You want to teach them how to fish. You can go to every single team and say, hey, which of your pieces of software are not compliant with our policies? Or which of your pieces of software have very long onboarding times? You can measure this by using your internal IT tickets. You download all the tickets and you see which types of ticket for which types of software requests have the longest time to resolution. And with that, you help teams and departments realize where they have bottlenecks. And so across productivity, compliance, and costs, you should offer insight first to departments and then the proper infrastructure for them to acclimate.
Allison: This is a much more sophisticated process than anything I've ever seen before, which shows that you may be breaking new ground here. I know you mentioned that Lumos is starting to gather some of this data, some benchmarks to try to give insights to companies that are looking to manage through this trimming or reallocation process. Are there any data points that you think might be worth sharing? For example, a statistic you mentioned is the number of dollars of software spent per employee for each department. Anything like that that you could share with the group?
Andrej: People are not proactive with renewals. We did a qualitative analysis and 95% of the time people think about renewals five days before they happen. That makes it hard to prepare and have all the negotiation power with vendors. We recommend that you start earlier and do a license review: look through all the accounts that you have and make decisions on what licenses you can remove, what licenses you can keep, how much do you spend per license and is that an expected amount. Usually you have year-long contracts and often you’ll be paying per seat, so the renewal presents an important opportunity to cut costs.
We also realized that 50% of all IT tickets are access requests or permission requests for software or cloud access. What that means is 50% of the time when a person has a problem with technology, it's usually because they don't have the right access to the tool that they need. And usually the time to resolve an access request is 19 hours, which is crazy. 19 hours it takes from me filing the problem to me resolving it. 19 hours to get that done. People are discovering that their organization is not running as efficiently as it could, they are not managing their spend proactively, and they are not enabling managers or app admins to manage it proactively themselves.
Allison: I'm thinking about the perspective of different people who might be involved in decisions about software spend, and how they might advocate for their point of view. For example, if I'm an employee and I've bought some software that's been critical to my productivity on my credit card, is there anything I can do to try to make sure that in this interesting moment in our macroeconomic history, my purchase is not taken away from me?
Andrej: It depends on the company, but usually how companies function is they have software budgets for different departments. So usually companies tell their Support teams, for example, "Hey listen, your software spend is $X." We’ve also seen that actually 30% of software doesn't get renewed on an annual basis. So there’s actually quite some churn.
Allison: That’s very high.
Andrej: It's very high. I was surprised how high it was. So the question is, how can you as a team lead or as a department lead have an overview of what your apps are, and enable your team to proactively put it into your calendar 30 days before renewal happens and have a proper discussion about it with your team. Where they can cut licenses, where they can cut use cases, or maybe even expand it and cut spend somewhere else. For example, I don't need to use software X anymore, but I want to double down on Datadog and add another use case. Proactively managing renewals is very important.
At Lumos we say that “we’re building the AppStore for companies.” The AppStore concept is all about delegated administration, where IT and security put the right guardrails in place to decide what software you will keep and what you won’t.
I always encourage leaders to think about, how can you enable a new manager to act within a framework and remind them to act proactively? For example, “30 days before renewal, put in a calendar reminder and have a 20 minute chat with me and give me a proposal on what you want to do with this piece of software.”
Allison: What tips would you have for founders who are trying to manage through these turbulent times with respect to their software purchases?
Andrej: Mission critical software — Workday, Okta, Datadog — that software spend is actually increasing. We can see that, it's quite interesting. I as a founder find this awesome. You really need to make your piece of software mission-critical to make it compelling enough for companies.
The question that I have as a founder is, how can I become part of the technology roadmap of a company? How can I become so important that a COO, a CEO, a CTO, thinks about my product as a core piece of infrastructure within the company? How can I secure such a strong position that they are dependent on my software being successful?
Salesforce's a good example. If Salesforce is removed from some companies, people will lose their jobs. Some people's jobs, they're Salesforce administrators, some are Workday administrators. That is success: when a person's position depends on a piece of software because it elevates them so much. What I ask myself as a founder is, how can I become part of the technology roadmap, and how can I increase the importance of a certain role within the company and make sure my software becomes table stakes for this person's success? Those are the two questions that I'm thinking about as I'm thinking about what new features to build.
Allison: Final question. If I'm a founder, how do I know if my company is a good fit for Lumos?
Andrej: I'm from Germany, and I love the Autobahn. At Lumos, we believe that IT and Security shouldn't be the drivers. They should become the Autobahn and enable other leaders and employees to be drivers — to enable different departments to help themselves in terms of managing compliance, costs, and productivity.
So Lumos is the right fit for companies if you have one of these three problems: One, I want to be more intelligent about my software spend. Two, I want to achieve SOC 2 compliance or SOX compliance and need to put proper access controls in place. Or three, my company is using so much software, we need to make sure that we productively onboard people to that software and make sure that everyone has access in the fastest way possible so they're not bottlenecked. If you have any of those three problems, you know Lumos is a good fit.
Allison: Andrej, thank you so much for joining us today and helping us understand how we can manage our software spend during these interesting times.
Andrej: Thank you, Allison.