With the recent tech downturn, it seems like every day there is a new company announcing layoffs and removing perks like free lunches. But these are not the only places where companies can trim some expenses. Believe it or not, sometimes it makes sense to trim your software expenses.
Back when I was investing in growth companies and reviewing P&Ls, software was always one of the places that was glossed over. More often than not, when we dug in, the company was wasting money on software spend for months or years, especially because software expenses are recurring and can end up overlooked. In some cases, the monthly cost actually grows over time, and a company ends up paying way more for a product than when they first signed up (e.g., a headcount-based software expense).
We’ve always been incredibly frugal with our spending at Subset, but we fell into the same pattern; our software spend was always a bit bloated. It made sense. Everyone at Subset loves software and we are very keen to try out new software products. We all believe in the power of software and how much leverage it can bring.
But given how prudent we are in other expense categories, every month when we ran our P&L, it was clear how big of a line item “software spend” was in comparison. So we finally ran some quick analysis and dug into it. At the time we were still in product development mode and there were four of us on the team. We found that we were already using 30 different paid software services and had racked up over $12K of software expenses since we started Subset about a year ago.
Here is the link to the automated spreadsheet template to calculate your own software spend and below is how I ran the data.
First, we downloaded all of our expenses from Quickbooks (for you it may be Xero, Ramp, Brex, etc.). Then, we summarized our expenses for “all time spend” and “monthly spend.” From there, we sorted the spend from high to low and went through each and every expense to determine whether or not the cost was justified.
Then, we broke each software into the following categories:
1. Need to have - this is something the business cannot live without
2. Nice to have (no alternative) - this is something that is nice to have but not crucial to the business, so in the worst times, these expenses can be cut
3. Nice to have (cheaper alternative) - this is something that is nice, but has a cheaper or free alternative that accomplishes the same task, so this expense can potentially be decreased
4. Duplicated or unused - these are expenses that have slipped through the cracks and should be cut immediately
After looking at the list, we first started cancelling expenses in the fourth category and heavily considered cancelling expenses in the third category. But keep in mind that for the third category, sometimes the switching cost or time it would take to switch is not ultimately worth it.
This is definitely more of an art than a science, and you have to determine what works for your specific business and team. For some teams you may not need an Gmail address for everyone if you already have Slack. For others you may not need Slack, when the free version of Discord could work. Every team is different.
I truly think every company should do some form of this analysis once every quarter to check where your software spend is actually going and if each vendor is actually necessary. I’ve spoken with a few early-stage founders and have often been amazed by how much they spend on software. That was the purpose of this exercise.
If you don’t already have a spreadsheet like this, consider using this automated template built on Subset, where you just need to import your Quickbooks information.
