SaaStr - Unlocking New Product Categories: The Future of Vendor Budgeting
Enterprises consider vendor integration as a long-term commitment, often spanning several years. They anticipate initial learning phases followed by expansion and additional purchases. This mindset leads to doubling budgets for vendors due to expected growth in add-ons and seats. Companies like Adobe experience limitations in adding new vendors annually due to these budget constraints. AI and new product categories may alter these dynamics, as they often don't replace existing budgets but create new ones. However, some budgets are reallocated from service-based expenses like production agencies or translation services to software. A study by Morgan Stanley found that 50% of AI budgets cannibalize existing software budgets, while the other 50% are new allocations. This shift indicates a trend towards converting service budgets into software investments.
Key Points:
- Enterprises plan vendor integration as a multi-year investment, anticipating growth in costs.
- Budgets for vendors often double due to add-ons and increased usage.
- AI and new product categories create new budget categories rather than replacing existing ones.
- Budgets are often reallocated from service-based expenses to software investments.
- Morgan Stanley found that 50% of AI budgets come from existing software budgets, 50% are new.
Details:
1. 🔄 Strategic Approach to Vendor Integration
- Enterprises typically commit to vendors for extended periods, often up to eight years, rather than just one year. This long-term commitment reflects a strategic approach to building stable partnerships.
- The initial year focuses on learning and integration, where enterprises test and adapt the vendor's offerings to their needs. The second year involves a more widespread rollout across the organization, ensuring that the vendor's solutions are effectively utilized.
- By the third year, enterprises often expand their purchases, indicating satisfaction and confidence in the vendor's offerings. This expansion phase is crucial for scaling and optimizing the benefits of the partnership.
- Budget allocations for new vendors are often doubled in anticipation of future needs and usage expansion. This proactive financial planning ensures that enterprises can accommodate growth and adapt to potential changes in requirements.
- The strategic decision-making process involves careful consideration of long-term goals, potential challenges, and the evolving landscape of enterprise needs.
2. 🤔 Navigating AI's Impact on Vendor Economics
- Growth through add-ons and additional seats is limited, even for large firms like Adobe, emphasizing the need for new growth strategies.
- AI's impact on mergers and acquisitions is uncertain, raising questions about future growth opportunities.
- AI is expected to redefine business rules, but it remains unclear who will shoulder the financial burdens of these transitions.
- Vendors might need to invest significantly in AI to stay competitive, impacting their economic model.
3. 🆕 Innovation in Product Categories
- There are fundamentally new product categories emerging, which suggests an evolving market landscape.
- These new categories are not designed to replace existing vendors or take over their budgets immediately but could draw from training or LMS budgets over time as they prove their value.
- Additionally, there is potential for these new products to utilize video production budgets typically allocated to agencies, indicating a shift in how companies may view and allocate resources.
- The key insight is that the product is seen as a new addition with a unique value proposition rather than a replacement, highlighting its innovative role in the market.
4. 🔄 Budget Reallocation Strategies
- New product categories and features align better as add-ons within existing platforms, enhancing growth and customer engagement.
- Companies are strategically reallocating budgets by canceling underperforming or unnecessary services to invest in innovative, value-adding solutions.
- The shift often involves redirecting funds from outdated budgets towards cutting-edge tools and technologies that offer efficiency and growth.
5. 🔄 Transforming Service Budgets into Software Investments
- Morgan Stanley's study in Q3 found that 50% of the AI budget was cannibalizing existing software, while the other 50% was new investment. This indicates a balanced approach to AI budgeting, reflecting a strategic shift in financial planning.
- Budgets for software investments often come from reallocating funds originally designated for service-driven areas, such as production agencies, translation, consulting, and legal services. This reallocation aims to optimize resource allocation and improve operational efficiency.
- The transformation of human service budgets into software budgets reflects a broader trend of companies investing in technology to enhance capabilities and reduce reliance on traditional service providers.
- This shift is driven by the potential for software investments to offer higher returns, greater scalability, and enhanced flexibility compared to service expenditures.
- The implications of this budget transformation include a reevaluation of departmental roles, as technology increasingly takes over functions traditionally managed by service providers.