Cut license churn by unlocking value for CIOs, software, and services firms

Ask any CEO of a SaaS firm what keeps them up at night, and they will likely say, “I need to reduce license churn.” However, if you ask CIOs what they are trying to accomplish, it’s often, “I need to optimize my SaaS license costs.” These diametrically opposed seller and buyer goals represent an opportunity for a preferred managed services firm to help broker better outcomes for technology, the business, and the SaaS vendor.

After all, both parties should focus on creating value for the business rather than defaulting to cost metrics to justify the commercial relationship. Enterprise buyers will have no qualms about investing in SaaS that creates value. If you are a vendor and license churn is of concern, perhaps you need to focus on why your customer is questioning your value rather than the costs of your solution.

Why are CIOs so locked into buying software as a subscription?

Software-as-a-Service (SaaS) took off around 2003 when Salesforce solved the need for companies to adopt customer relationship management software as a business rather than an IT solution. By being born as SaaS, Salesforce CRM allows companies to adopt a complex technical solution without their IT organizations needing significant time testing, implementing, deploying, and supporting it. Thus, the SaaS revolution began.

Beyond making it easier for the business to get value from the software, SaaS changed how companies account for their software licensing costs. By adopting SaaS, firms switched from a CAPEX (capital expenditure) model of perpetual license and maintenance fees to an OPEX (operating expenditure) model based on the subscription that values adoption, not potential. Over a decade, this model quickly became the default mode for established ISVs and software upstarts using the internet as their means of software access and distribution.

SaaS began as an internet-based “service”—now the internet part is a given, and the model is more aptly “software-as-a-subscription”

Fast forward two decades and nearly 100% of software sold requires a CIO to adopt a subscriber model as part of their operating budget. The CIO has become a buyer in a complex financial model where investors seek software vendors selling via a subscription model, as it allows them to predict long-term revenues based on MRR (monthly recurring revenues). The more SaaS subscriptions a vendor has, regardless of delivery, monthly, or annualized fees, and the more general its total available market (TAM), the higher the MRR, valuation, and potential for greater return on shareholder equity.

The SaaS model isn’t all bad for the CIO. By embracing a subscription-based licensing model, applications have evolved from their initial value proposition of “easy for IT to deploy” and “easier for business to adopt” into one that predicates the need of the SaaS ISV (independent software vendors) to constantly “grow monthly license sales.” To accomplish this, ISVs, such as Oracle, Salesforce, and ServiceNow, focus on increasing their subscriber number by adding features that cross over and attract new users to core and new products.

However, this constant pursuit of growth in users has led to significant company spending increases. Increasing software budgets are a growing issue, as many of the systems of record (such as finance and accounting or human capital management) have adopted the SaaS licensing model. These costs are escalating to the degree that the CIO is under constant pressure to find ways to reduce SaaS licenses wherever possible.

The current dilemma is how the CIO sees SaaS as either a value creator for the business or a cost for IT operations.

CIOs have three levers for reducing license churn

License churn, a measure of the number of subscribers (licenses) not renewing at the end of the contract period, impacts the ISV from a revenues standpoint. However, it can also hurt the business user. When the CIO chooses to reduce licenses or downgrade to a less functional version to save money, it could limit business users’ capabilities.

Only 15% of firms are reducing their investment in SaaS business applications.

Source: KPMG and HFS Cloud Adoption Survey, 2023

In the KPMG and HFS Cloud Adoption Survey, a study of 624 business and technology decision makers, 15% cited reducing their investments in SaaS-based business applications. Of these, only 2% of all respondents indicated SaaS licenses were being reduced due to a “lack of business adoption.”

This isn’t a CIO problem; the SaaS vendor must own and address this churn and prove how its software creates business value. Doing so can avoid the perception that it’s a cost and a likely target for investment reduction. Therefore, it is up to the SaaS vendor to reduce license churn, and we recommend three ways to do so:

• Ensure customers adopt feature releases to improve how subscribers work with the software.
• Gamify software to raise awareness, train, and attract new users.
• Incorporate meaningful, contextual AI to augment, not replace, the user.

SaaS vendors must leverage their partners to ensure customers adopt feature releases to improve how subscribers work with the software

Beyond initial cost optimizations from SaaS solution implementation or legacy system migration, SaaS value comes from ongoing access to SaaS software improvements. In each major cycle, ISVs typically release two or three “feature” upgrades, such as security, user interface, analytics, or collaboration features. However, KPMG and HFS found that less than 50% of new features are adopted because technology teams lack time to test, train, and support them.

Any decline in long-term adoption undercuts what should be an increase in value from a SaaS solution to their customer’s business. The number-one culprit is training the business on new features. While many SaaS vendors offer enterprise “readiness packages,” they lack insights into the enterprise’s managed services partner about how the software is applied, integrated, and aligned with processes.

Therefore, SaaS vendors and their managed services partners need to fill this critical gap for the CIO. By doing so, they can create new sources of business value through usage, co-creation, and service excellence.

Gamify software to raise awareness and train and attract new users

When asked, “What is the biggest barrier to adopting new functionality into your organization from the SaaS vendor?” 51% of companies indicated insufficient training and documentation were the biggest impediments to adopting new features. Teaching users how to use software is laborious, and it’s not what many IT organizations are built to do.

51% of companies indicated insufficient training and documentation are the biggest impediments to adopting new features.

Source: KPMG and HFS Cloud Adoption Survey, 2023

CIOs constantly seek innovative ways to get users to train themselves. Gamification scenarios could be the answer. Humans are hardwired to enjoy learning games, positively react to reward-based engagement, and gain status by promoting achievements.

But a game needs to fit in the context of the firm’s goals, processes, and governance, so who better to help design gamification than the services firm that likely helped you design and implement them? Further, your services provider likely has a strong partnership with the SaaS vendor and can enlist its support in modifying the software to better engage your users, making training engaging and status-building rather than tedious.

Incorporate meaningful, contextual AI into core and edge SaaS solutions

The need for AI (artificial intelligence) and generative AI (GenAI) solutions has spawned from the growth of automation and AI in many feature releases. In KPMG and HFS’ Cloud Adoption Survey, 38% of business executives indicated their company is missing out on “new features that allow more automation when using the software” by not adopting the latest SaaS releases from companies like Salesforce, Oracle, Workday, or Microsoft.

This GenAI wave is currently front and center for CIOs across all their products. They want to understand its impact on productivity, talent, and operations. They are also incorporating GenAI in their SaaS solutions. Yet, these three factors manifest themselves differently, potentially causing more confusion than help.

Incorporating artificial intelligence (AI) into SaaS solutions can reduce license churn as it helps users automate how they search, collect, and analyze growing amounts of data. The latest updates bring solutions that aid collection, collaboration, and contextualization tailored to a user’s functional needs in sales, marketing, or business operations.

38% of C-suite executives say they miss out on new automation features by not adopting the latest SaaS releases.

Source: KPMG and HFS Cloud Adoption Survey, 2023

As many ISVs are adopting AI—increasingly GenAI—in the context of their solutions, firms need to work closely with their partners to evaluate how these enhance their capabilities and at what potential cost. By doing so, they can collaborate with the CIOs and their team to identify the impacts of generative AI.

The Bottom Line: To reduce license churn, CIOs should lean on their managed services and SaaS providers to develop innovative ways to educate, train, and evolve the software they use to run their businesses and empower their employees.

SaaS ISVs are not equipped to ready customers at scale to use their software to solve new problems. Without a strong managed services program to train customers, ensure new features are adopted, and engage customers to implement AI-based capabilities to extract and contextualize insights, perceived costs can outweigh the value of their solutions.

License churn is inevitable if the CIO sees software as “the cost of doing business.” Our research shows implementing new features increases adoption and adds value for the business. Increasing new feature training through methods like gamification also drives adoption. And while incorporating GenAI may be in its early stage, the rate at which SaaS solutions evolve as platforms will likely make this a must-have feature.

Therefore, to succeed, HFS prescribes SaaS and managed services firms to work together on educating their customers on the following to improve their use of SaaS and, as a byproduct, reduce license churn:

• The ISV, services partners, and enterprises can co-develop a more cohesive feature release plan for their customers over years of value creation.
• Leveraging a managed services firm’s capabilities to gamify adoption can motivate users to learn how to use the software’s newest features.
• Educating IT leaders on how SaaS incorporates AI and GenAI to solve employee and customer experience problems and contextualizing this for the customer’s outcomes can be a game changer.