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How to Manage the Ballooning Costs of Software

July 7, 2022
Robin Li and David Campbell

Investors and board members are often tapped to be advisors on decisions that build transformative companies. Lately, I’ve been fielding questions from founders and operators, who are understandably all asking the same thing: “When it comes to finances, expenses, and tech stacks, what should we do in a recession?” After all, software tends to be the No. 2 line item at technology companies in terms of overall cost (after people).

As the CEO and co-founder of Tropic* (a tech-enabled procurement service for startups), David Campbell has some ideas on what startups can do right now to optimize their spend. 

Below is a lightly edited and condensed version of our virtual roundtable for finance leaders at GGV’s portfolio companies.

How are leaders thinking about tech-stack budgets right now?

David Campbell: “I went on a listening tour, and I talked to lots of other CEOs in my network beyond just our customer base… [W]hat we've seen is that: 

  • [Some] companies are in full budget freeze for the foreseeable future. Nothing gets through.
  • [Others are] eliminating all growth with the renewal. No contract should be higher than last year.
  • We’ve also seen that there's been a really meaningful reduction in the willingness to sign a multi-year contract.
  • Companies are focused on more favorable payment terms and are focused on rationalization… Let's make a grid—an audit—and figure out if there's anything that we're buying that has duplicative functionality… [W]hat we've seen is that empowerment now rests with the finance team to say, ‘No, we're not going to buy that.’” 

What are some ways for optimizing a startup’s expenditure?

David: Consider starting with a five-step playbook:

Step 1: Do I know everything I've bought?’
Step 2: Am I using my tools wisely? 
Step 3: Do I have an adopted purchasing process? (This, by the way, can be a Google form.)
Step 4: Are my prices fair?
Step 5: Am I paying for duplicate tools? 

Pro tip: “Audit the stack as soon as possible if you haven't already, and make sure you have literally everything on the table—including those tiny credit card purchases that don't usually make the cut because those are the ones that can be the highest risk over time. And once you have that picture, identify your duplicates and start to make some hard decisions.” 

The bottom line: “It’s much better to cut software if you can. And if it means you don't have to cut people, it's much easier to recoup the losses you accrue… it's easier to bring the tool back later than it is to go hire a new team, train them up, and get them to a full level of optimization.” —Tropic CEO & Co-founder David Campbell 

How far in advance of the renewal date should you negotiate?

David: “It's understood for most vendors that you're going to be renewing and at a minimum [of] the cost that you were paying last year. So if you're trying to take out costs, you need to jump 30 to 90 days before that.”

What’s an ideal discount for multi-year renewals?

David: “The standards that we've seen—which, by the way, are starting points in general for most providers—are 10% for two years and 15% for three years. And then you can kind of work from there… So what’s a good way to find out benchmarks on pricing? The only way to really get there is with a network of peers that are buying the same thing.”

What are some ways to better track utilization? 

David: “I wouldn't boil the ocean too much for the purposes of cost cutting. I think it's better to get a pulse from the user. What are the tools that you're using every day that you need? Because what we find is when you start the audit there, you almost always are getting like 70%, 80% of the tools that you're actually buying. And then you could be like, ‘Oh, so nobody said that they need these 20% of things that are just sitting on a credit card renewing every year. Let's get rid of that stuff immediately.’ 

… And then let's remember that we have to stay frugal potentially for the next two to three years and build a process—even if it's just a Google form, something that our end users will follow so that we can ensure that we don't wind up in a situation where we're overpaying for sales again.”

*Four companies in GGV’s portfolio are existing Tropic customers, but GGV is not an investor in Tropic at this time.