Vijay Sundaram, Chief Strategy Officer, Zoho
How much does a company spend per employee on IT software?
The question itself is simple, but it can be surprisingly complicated to come up with a real answer. What do we consider “software” or “IT?” It’s easy to spot things like per-user subscriptions and industry-specific programs, and probably email clients or website hosting. But what about website maintenance? Do you count the salaries of anyone doing that work, and, if so, what proportion of their salary?
In addition to the challenges of calculating true software/IT cost, there are factors that can drive up per-employee spending. Some software is licensed on a per-employee basis. Some is licensed on an organizational basis, making the per-employee cost higher for a small company than for a large one. As a company keeps adding software for its different business needs, the number of licenses proliferates, along with employee logins, necessitating management and integration. With each new piece, the IT cost—the per-employee spending—increases algorithmically.
With all of those pieces factored in, businesses typically spend 6-10% of revenue on IT. Depending on the business and its profit margins, this may have a significant impact on the bottom line.
Given these challenges, how can businesses more easily bring that cost under control?
We might consider two examples of consumer-facing companies solving similar problems for customers. In each case, the companies have created value by offering integrated services that reduce direct and indirect costs while also creating efficiency.
The first example is what it was like to book travel before the arrival of websites like Expedia. Back in those days, a single business trip might have involved a half dozen or more different tickets, reservation numbers, and promo codes for each leg of the journey: plane tickets, cars, hotels, etc. You could either manage it all yourself, or you could hire a travel agent—essentially an implementation partner—to do it for you. Business travelers, or their administrative assistants, simply managed this because it was the norm. But the travel market was hungry for integration. Consumers appreciated a one-stop travel shop, to the extent that Expedia ranked third in Forbes magazine’s 2008 list of the most-admired companies in the United States.
Another example of consumer-service integration is Amazon Prime, which has embraced a flat-rate model both in its subscription plans and in its shipping costs. This April, Amazon announced that Prime had surpassed 100 million subscribers. This has been driven in part because Prime has continued to add services as it has grown - such as streaming video and expanded delivery options - so that the customer has seen an increase in value for their fixed fee. The company’s integrated services become the customer’s integrated experience, while maintaining a simple flat charge that the customer doesn’t have to worry about or calculate, beyond factoring it into their budget.
The question now is what business-facing software vendors can do to solve per-employee spending issues while offering value through integrated services.
We’re not yet at the point where a business can license all of its software in a single stroke, but we’re heading in that direction. Fixed-rate integrated services can allow businesses a sort of corollary to the experience of the Prime customer. This is a cultural shift as much as a technological shift: software vendors will need to move away from traditional pricing models to offer things like fixed per-head fees that include integration and single sign-on.
In addition to convenience, as we continue heading in this direction it will become easier to answer that seemingly-simple question: What is this business’s per-employee spending on IT software? In the meantime, it might be worth calculating.