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CIOs, beware rising SaaS costs

As vendors rake in revenues from software-as-a-service subscriptions, CIOs could see their SaaS costs rise 10% to 15%.

A new tech spending forecast from Forrester research advises CIOs to negotiate caps on price increases in cloud software agreements — and to evaluate alternatives to current vendors when contracts expire.

The problem, Forrester analyst Andrew Bartels said, is SaaS agreements are often structured “in ways that in fact don’t provide downward flexibility of costs — [they] only provide upward flexibility.”

So a contract with a vendor may allow for prices to rise as IT adds more users to an application, said Bartels, who wrote the report. What they don’t do is decrease if the number of users goes down. And many of those contracts last for three years.

There are other aspects of SaaS that box CIOs in on cost. When an organization owns the servers that its business software runs on, it can stop paying maintenance on it, for example, to save cash, Bartels said. Or it can decide not to do an upgrade. Not so with SaaS.

“Any time you’re using SaaS, any time you’re using cloud, you don’t have the option of stop paying because as soon as you stop paying, you lose the technology,” Bartels said “You’re renting it.”

Rising SaaS sales, SaaS costs

The attention to contract details and exit clauses is particularly important going forward, Bartels said. SaaS sales are expected to rise in 2017 despite uncertainty surrounding President-elect Donald Trump’s policies on international trade deals and immigration. But this is not the case for all tech sales. Indeed, the Forrester report lowered its pre-election forecast of 5.1% growth in tech spending to 4.3%, as companies remain cautious about investments.

Swelling SaaS sales reflect Forrester’s projection that sales of “business technology” — that is, technology that aims to serve and keep customers and win new ones — will also grow by 7.7% in 2017. In contrast, IT spending is expected to increase by 2.8%.

“The type of uncertainty that we’re facing becomes an incentive for firms to adopt cloud perhaps more rapidly than they might otherwise adopt it,” Bartels said. A heightened adoption rate of cloud sharpens the challenge for CIOs.

“One of the downsides of cloud technology is the potential — unless you are careful, unless you negotiate carefully, unless you create exit paths — that you’ll be trapped into agreements where your cost rises over time and doesn’t in fact either flatten out or go down in tough times as you might like it to,” Bartels said.