Does it feel like your software subscription fees are out of control in your budget? If yes, there’s a good reason for that.
Traditionally, software companies have a CPI increase in their subscription prices each year.
With inflation just below 4% for both Australia and the US at the moment, Not for Profits could dependably increase their software budgets by a similar rate to accommodate any unknowns at the time.
So, why are subscription fees increasing by 10% or more instead?
Everything appeared to change a few years ago when Microsoft, in particular, started increasing software subscription fees beyond CPI.
Why are software subscription fees increasing so much lately?
There are a number of reasons why software subscription fees are increasing by so much each year and why this will be the future trend, too.
Some factors are driven by macroeconomics, but many reasons have to do with the vendors’ investment strategies.
Here are some of the reasons I’ve observed:
- The Australian dollar is weaker – Much of the software used by Not for Profits is developed by American companies. Since they usually do their pricing in native currency, the 12% drop in the value of the Australian dollar against the US dollar over the last three years has impacted us more than Not for Profits in other countries.
- Investments in general product development – It’s the nature of software companies to improve their products over time to keep their existing customers happy and as a general new business strategy. While these vendors can have a static development budget for these needs, they might also decide to increase this budget to beat competitive pressures.
- Investments in cybersecurity – There is no doubt that cybersecurity requirements for vendors have lifted in the last few years. With more Not for Profits using cloud-based subscriptions rather than self-hosting software on their servers, defence against hackers now relies more on the vendors than their customers. And this has come at a major cost.
- Investments in AI – The level of investment into AI by most software vendors has been in the headlines consistently for the last two years. Many of these companies have made heavy bets that AI will give them a competitive advantage, but not everyone has figured out how to monetise their extra investments. They have to recoup that cost somewhere, and that’s why existing clients are paying for it even if the corresponding benefits are not always clear.
- Customers are locked in – When vendor expenses are going up, it’s logical to make up the difference with existing customers. If you are already a Microsoft or Salesforce client as an example, you’re unlikely to change any time soon because of the transition cost and lack of alternatives. So, they can easily increase their software subscription fees with little impact to retention rates.
- Keeping the stock market happy – The largest software vendors in the world are public companies that report their earnings every quarter. To keep their investors happy, they must meet or exceed bottom-line growth rates each time. It forces a short-sighted view that, unfortunately, motivates subscription fee increases more often than not.
How to budget for future software costs?
Whenever I do IT budgets for my clients, I traditionally include a 10% contingency for unknown licensing costs in the future year. Unfortunately, this is proving to be too little at times, but I still think it’s a good benchmark for most software vendors.
So, when in doubt about future software subscription fees, increase your budget by at least 10%, not CPI.
How to reduce software subscription fees?
Unfortunately, there are not a lot of options for reducing software subscription fees. As mentioned earlier, once customers are locked into a vendor, the cost of changing can be quite high and sometimes there are not many great alternatives.
As a result, the few things that a Not for Profit may still consider are:
- Conduct a license review every year and question everything. Bigger organisations should prioritise this because I sometimes find them still paying for the licenses of employees who no longer work there. Also, there are often additional license options in bundles that you no longer need.
- Did you ask for a Not for Profit discount? Sometimes I find Not for Profits paying full commercial rates for software. While not all organisations may qualify for the discount, it’s always worth asking during the initial and renewing contract negotiations.
- Choose multi-year contracts. It’s a common belief that shorter contracts are better because they allow for more flexibility. However, if your license numbers are likely to stay the same or go up in the next few years, you are better off negotiating a longer-term contract to lock in current-day prices.
- Choose Australian vendors when there are good options to reduce the currency risk. For example, there are some great Australian vendors in the Association Management System (CRM) space.
Final thoughts
Not for Profits are very reliant on software to meet their mission’s goals and deliver their outcomes. Unfortunately, when vendors decide to increase their software subscription fees, there is little you can do.
So, consider the advice above where possible, and always include at least a 10% increase in your annual budget for software subscription fees.
I regularly help Not for Profits with IT investment decisions. Let me know if you need some help.
P.S. If you found this article helpful, you might want to read these too:
- The dangers of cutting your IT budget next year
- When you asked for a Rolls Royce CRM on a Kia budget
Tammy Ven Dange is a former charity CEO, Association President, Not for Profit Board Member and IT Executive. Today, she helps NFPs with strategic IT decisions, especially around investments.