Russell Lester (00:00)
I think a really funny thing is happening where procurement leaders are being told we need to whittle down our software spend by their board and investors and CFOs. At the same time, they're saying we need to accelerate our use of AI and make sure we're not missing out and we're keeping pace with our competitors out there and we need to invest more in AI. And then the procurement person's like, okay, wait, so.
Am I robbing from SaaS and putting money in AI? But what is this tool? Is this tool AI or SaaS? Isn't it just a delivery vehicle versus like
Michael Shields (00:33)
Okay.
Russell Lester (00:34)
if I'm procurement, I'm like, what are you guys talking that we're using these words in ways that people haven't really self-actualized or kind of sloppy guidance to a procurement person. But the procurement team and finance, we're to have to make heads or tails of it.
Michael Shields (00:56)
So, you know, state in the obvious, we're in the SaaS business and there's been a pretty big sell off over the, you know, start of this year. Some people are using the word SaaSpocalypse. Others maybe are a little bit concerned given the layoffs and things of that nature. I would love to start by just kind of breaking down what you think is happening and maybe the why behind it. I personally don't subscribe to this notion that like SaaS is dead or SaaS is dying.
But certainly the markets are reacting. Would love you two to jump in there.
Justin Etkin (01:26)
Well, for good reason, because when you think about what public markets are evaluating, there's a few things. One is obviously business fundamentals. We're talking revenue, profitability, growth, forecasts, and what these companies are indicating are their kind of general trajectory and positioning. And the second is
Beyond the near-term growth forecast is also the long-term opportunity that companies have to continue growing. And for the longest time, SaaS businesses, the model was so valuable because it generated a ton of cash, and the subscription model lended itself to continued organic growth that seemed like it was never-ending. And so SaaS companies would get these massive multiples because of these business dynamics.
And with AI coming along, we're seeing a lot of wavering on the ladder, which is the future looking kind of viewpoint on how extensible this model becomes, but nothing really to do with the short term kind of business implications and financial metrics of these business, because all of them are still performing exceptionally well. So it's a really interesting kind of psychological experiment with investors as opposed to the fundamental dynamics of what's driving growth within these companies today.
Michael Shields (02:40)
Yeah, I was that first point you were talking about that resonates because even companies like ServiceNow, where they produce better than projected results and monday.com where they improve their guidance, they still have seen their stocks shift downwards quite dramatically. Russell, know, as a CFO, does that make you nervous regarding like the stability or, you know, maybe does it change how you think about your next renewal conversation?
Russell Lester (03:05)
I mean, it makes us all nervous about our 401k, right? But as a CFO, know markets are fickle. They move based on emotion often. The underlying fundamentals of a lot of the companies that are taking a real beating haven't actually changed. In fact, many of them are reporting record profits and revenue growth.
And yet the stock will crater and what's happening is, it's the forward guidance, which is a little more uncertain and that forward guidance is tied to geopolitical environment uncertainty. And then the big topic AI and to what extent is AI disruptive versus additive? And I think there's lots of opinions on that. So I think it's it is the uncertainty. It's the lowered forward guidance.
And it's the fact that the dust hasn't settled yet on how you value these companies and how you really understand what you're investing in. Am I investing in a software company that's becoming agentic? Does it have any play in AI? What is this investment now? And I think investors are reacting with that volatility, but I think it won't be long lived, in my opinion.
Michael Shields (04:16)
I'm a little bit concerned, I'll be honest with you. I have been through not as many cycles as you Russell, but a few cycles. And it feels like sometimes, especially for public companies, but even those kind of adjacent, when that stock price starts to dip, you know, the immediate reaction is to increase prices to improve the margins that way. Like, do you think me as a procurement person, you as a, you know, CFO, Justin as a budget owners should be worried about big cost increases coming through to offset some of those share price drops.
Justin Etkin (04:49)
Well, I think there's going to be some very clear near-term implications that these businesses are navigating. They're basically trying to accomplish massive transformation around their commercial model at the same time as satisfying the near-term expectations that the street has levied upon them. So how do you do that at the same time?
On the one hand, you're planning for long-term, which means your product, your pricing and packaging, all of these things that are being positioned towards a more AI forward world that we're living in. But that takes time to kind of flow through operationally and then also with customers as they come through their renewal cycles.
But in the short term, what they're gonna be trying to do is boost AI driven revenue as much as possible to quell the noise coming from the street around the lack of kind of AI uplift that these companies may be experiencing in their actual financials. And the way that's gonna show up is, know, products and packages, or products that are getting bundled with existing packages, features that are AI related that are going to be framed as AI revenue drivers, but in reality are just kind of figments of the bundling dynamic that has made these enterprise SaaS companies so successful for so long.
Michael Shields (06:07)
And this is the AI text that you've talked about in the past,
Justin Etkin (06:10)
Yeah, exactly. This is the short-term way that enterprise SaaS companies can best account for AI revenue on their books. It's forced AI revenue rather than chosen AI revenue. And that's the short-term kind of coverage that they're going to push for while they are long-term reorienting their entire business model to be more AI forward and structurally aligned with the consumption dynamics the outcome dynamics that customers are increasingly being drawn towards.
Michael Shields (06:38)
Yeah, Justin, you said something that I want to come and double click on something. You're very close to data. You're very close to, you know, obviously seen across tropics portfolio of companies. Are you seen, you know, with AI and all sorts of new companies being created, but then you have these legacy SaaS companies that we started off talking about, maybe struggling in the public market a little bit. Do you think tech stacks are going to dramatically change over the short horizon?
Justin Etkin (07:04)
Massively. It's totally like dramatic what's happening and it starts with the SMB. You know, when you look at the the historical tools that every SMB would use, it would be a HubSpot. It would be, you know, a Slack. It would be, you know, a Salesforce and in a lot of cases and the SMB stack of the present is like none of those companies.
It's all AI native solutions that are connected by kind of more agentic workflow functions like N8N or Zapier or Clay to help kind of orchestrate and connect all these different AI forward solutions.
Michael Shields (07:42)
So you're saying at the SMB level that shift has already occurred dramatically? Okay.
Justin Etkin (07:46)
100 % any business that started in the last year or two has a vastly different stack than the businesses that proceeded that five years ago. And in the mid market, as we move up further and further, that's where you start to see the kind of tricky decisions around legacy SaaS that might be so ingrained and have so much structural kind of capabilities built on top of it.
And the surge in the AI native providers that are promising better outcomes, kind of better kind of efficiency and productivity for an employee base and the opposition that's at play between those different paradigms. When we look at actual spending trends, AI native tools among mid-market enterprise, spend with them is up 94 % relative to last year, while the legacy SaaS providers is only up 8%. So there's clearly a lot of budget and dollars that are going to these.
AI forward solutions that used to be allocated towards the SaaS solutions that were so resilient and had such great business models. But that very stat alone should indicate why there's this kind of anxiety on Wall Street around what the future holds in store for legacy software.
Michael Shields (08:52)
But there's still, but you said there's growth for both traditional and the AI tools. Did I hear you correctly there?
Justin Etkin (08:58)
That's right. Yeah. 8 % enterprise SaaS. If you compare that with years previous, I think, you we had typically seen enterprise SaaS growing at like 10, 15, 20 ish percent year on year. That was like the clip that, you know, the gardeners of the world had been forecasting for, you know, year on year growth around enterprise software. So to see that dip into the single digits while the AI spend is, you know, near a hundred percent triple digits, like it's a, it's a pretty clear, um, mix shift around where that incremental spend is going.
Michael Shields (09:30)
Yeah. And so maybe if I'm just kind of thinking out loud and actually now that you mentioned that I definitely start seeing this play out in real life negotiations where, you a few years ago we were seeing bigger uplifts than normal, but, lately it's been, a little bit, I don't want to say the word nefarious, but a little bit trickier to kind of identify because what they're doing is they're, you know, repackaging features with AI.
They're, they're, you know,bundling things together. And so it's not comparing apples to apples, but we're still seeing significant price increases from especially those larger companies and the really sticky products that aren't just saying, hey, here's your new price is 5 % more. saying, hey, we're requiring you to change products to this enterprise plus or this, you know, whatever the case may be. it's not 5 % more, not 7 % more. It's 30 % more, it's 40 % more, it's 50 % more. Is that, Jive?
Justin Etkin (10:27)
Yeah, exactly. Like if you believe that historically, you know, let's say Salesforce, you know, as an example, Salesforce could count on some amount of its growth every year coming from increased seats and utilization across the organization. That growth has like come to a complete standstill. Cause I don't know if you guys have any examples of like enterprise companies that are thinking about a head count growth right now. And so the, you know, the historical seat-based model where these types of businesses were so reliant on their growth for so long, now that's been completely cut, they have to turn their attention to other growth levers, which is the packaging side of things.
If we can't rely on the utilization to drive growth, we have to look at packaging and renewal uplifts and some of the more like structural type things that these massive incumbents have at their disposal to continue driving growth. And that's what we're seeing a lot more evidence of, of these massive uplifts due to the AI tax.
And the rebundling and packaging of solutions, 15, 20 % type off lists. And that's to compensate for the growth that they historically have relied on and expected from seats.
Michael Shields (11:32)
So Russell, with you being a CFO, are you seeing people come to you with more requests, more dollars? Because I have to imagine most CFOs in this market aren't raising budgets right now.
Russell Lester (11:44)
If you think back to 2019 and 2020, we had this phenomenon happening called SaaS sprawl, where tech stacks were exploding because of capital that was flowing. Companies were changing their operating model. Software companies were enhancing their capabilities, and people started buying a lot of things.
And work that had previously been done manually or the old way was moving to the new way, or either it was moving from on prem to cloud. I think we're seeing and then things theoretically stabilized, although I would argue. People's perception of their tech stack being stable are greater than the actuality, but we had a period of time where people leaned in on the procurement side and like actually task.
people like you to tend to this and make sure, you know, are we buying the right things? Are we getting a good price? And then we saw this cycle over the past year or two where they're like, we think our tech stack is pretty stable. We're probably good, but now we have a new entrant of these AI tools. And so it's not only just price increases from within the current stack, it's net new tools are now coming on the scene. And I think it's
tech stack sprawl 2.0 happening right now. I think unless they're paying attention before their very eyes, they're going to quickly find that several months from now, several quarters from now, they're gonna have many more tools than they realized, because they're gonna buy little bites of these AI tools that are pretty cheap in the beginning. They're gonna proliferate within the company, one user, two user, three, four, they're gonna invite people to their project. I mean, we see it happening with our own use of AI here.
Next thing you know, what does it look like? It looks like those SaaS company investments from back in 2020 that you needed to get your arms around. So I just think we see a similar story playing out that we've already seen before. It's just people are kind of carving out it. It's either AI or it's SaaS, and I don't see it that way. I think we've seen this playbook before, but the only people that will thrive and survive most are those that figure out how to
Justin Etkin (13:45)
you
Russell Lester (13:46)
properly evolve their pricing and packaging in a transparent way where the people buying understand what do I get and as they're consuming they understand how much they're consuming and they don't have sticker shock at the end of the billing cycle. So that's my high level take.
Michael Shields (14:03)
Yeah.
Justin Etkin (14:03)
I think that's spot on. A lot of people think that AI is this like, it is. There's a massive paradigm shift around how AI is used in terms of the reasoning that can be accomplished and the outcomes that it can drive without human intervention. But at the end of the day, it's still software.
APIs that are being called to foundational models that are being used for reasoning to inform and deliver some sort of action and based on that very premise, like the sprawl of AI is no different from the sprawl of software as a service that happened back in the early 2020 timeframe. So I think that's exactly right. And all the work that has gone into mitigating SaaS sprawl through intensive controls, all that stuff is going to have to be recalibrated for this age of AI because the buying dynamics and mechanisms and expansion dynamics and mechanisms are very different from what people have grown accustomed to on the SaaS side of things. I feel like that's good.
Russell Lester (15:00)
Yeah, and I think CFOs are going to have to up level the questions they ask about investments to better understand because they're just going to see all these tools flying across their desk and be like, I don't or their or Shields their procurement partners going to have to help them to to put it all together like this new tool. it replace something else? Is it additive? Is it? It looks to me like we're just buying a bunch more stuff. This bill is not going down because they've made their tool agentic.
Michael Shields (15:08)
Hmm.
Russell Lester (15:28)
But this tool's net new, how did we go from having 200 tools to now 250? It feels like we're sprawling again. so, I mean, that's good when you're in the business of helping companies solve that. But if you're not focusing on solving it and you're one of the tech stack zombies out there that's like, no, our tech stack is stable, you're going to be caught off guard by surprise because everybody's buying little bites of these AI tools and they will proliferate. They are already proliferating.
Justin Etkin (15:56)
Yeah.
Michael Shields (15:57)
Yeah, I do see this as tremendous value add for procurement teams right now to be able to, you know, jump in and assist here, not only tie back, hey, you know, this what we need back to decision criteria and strong ROI, but also looking at, what else is this going to replace within our tech stack? And that takes a lot of visibility into your tech stack. That takes a lot of understanding into what the different tools do.
You know, I rely heavily on Tropic's supplier intelligence platform to be able to quickly see what a certain supplier does and who the competitors are in the space. I think to your point, this has become something that started off in 2021 when COVID hit and companies were trying to reduce costs. But that was before really AI took a big hit. And so the initiative started. But then I saw it uptick quite a bit in 2024 and 2025 of
Justin Etkin (16:32)
Thank
Michael Shields (16:48)
procurement teams, finance teams saying, we need to get our arms around our tech stack because they're getting new requests for new funds, but they're being tasked with funding that out of the existing tech stack. So how do they start to rework things? And so if you're a procurement person and you're sitting there thinking like, hey, my job is to enable purchases, I think you're gonna be very quickly, you know, become irrelevant or because they need you to step up. They need you to say, okay,
We need you now to help us transform our tech stack. That includes pulling some things out and replacing, but also pushing back where we started this conversation with these AI tax hikes and understand what is really needed, where there's true ROI. And of course, optionality is going to continue to be your friend.
Justin Etkin (17:35)
I think the I'm seeing it across a lot of our technology customers where the role of procurement has been elevated massively to help to your point drive the kind of technology strategy, which historically meant renewal motions, RFPs, et cetera. But now it's becoming much more integrated into build versus buy decisions.
support consolidation or best of breed versus platform. Like the elevation of what the conversations are happening at these organizations and the role that procurement is playing within them is completely different from my vantage point from what it was five, 10 years ago. Especially like we see a lot of customers today even asking as part of their procurement process, like why can't we use AI to build this when a certain purchase request is being made? And that's not to say like we're buying an
We're buying an AI tool. Why can't we, why can't we build this ourselves with the AI tools that we have available to us versus needing to buy an AI application or solution to do it for us? Like that's now making its way into the business case and the criteria for purchase, which is, is, is a, is again, like infiltrating the, you know, human cost side of things, in addition to the historically separate kind of
vendor cost side of things, those are becoming increasingly intermeshed and intermingled.
Russell Lester (18:58)
Yeah, I think a really funny thing is happening where procurement leaders are being told we need to whittle down our software spend by their board and investors and CFOs. At the same time, they're saying we need to accelerate our use of AI and make sure we're not missing out and we're keeping pace with our competitors out there and we need to invest more in AI. And so then the procurement person's like, okay, wait, so.
Am I robbing from SaaS and putting money in AI? But what is this tool? Is this tool AI or SaaS? Isn't it just a delivery vehicle versus like
Michael Shields (19:32)
Okay.
Russell Lester (19:33)
if I'm procurement, I'm like, what are you guys talking that we're using these words in ways that people haven't really self-actualized or kind of sloppy guidance to a procurement person. But the procurement team and finance, we're to have to make heads or tails of it. And I think, Justin, to your point.
where the money is going to come from is the people side of the PNL.
Justin Etkin (19:55)
Totally, I mean, you can't.
Russell Lester (19:57)
There's not like this new pot of money called AI. mean, maybe in some cases, but most of the time it's like whittle down software and add more in AI.
Michael Shields (20:01)
Okay.
Justin Etkin (20:06)
Yeah, as you say, like, and I think there's a not insignificant amount of people time that is going to be dedicated towards a lot of the build ambitions that these companies have to, you know, resources that historically were may have been dedicated towards product engineering or, you know, bug fixes, you know, things like that, that are now going to be deployed much more towards internal.
You engineering ambitions, whether that's a good decision or not, I'm in the camp that like, there's a reason why, your tools exist to outsource a lot of the ongoing upheap and security and all that stuff. And there's a, there's a massive, you know,
people underestimate the amount of time and energy that goes into building and maintaining internal kind of systems and solutions. And so when you start thinking about the interplay of technology people, like this people budget is also going to be starting to deploy much more into the ongoing support of AI and technology used internally with these organizations, as well as externally within products that they're shipping.
So, Shields, now that we know that this is happening, we see all of these different dynamics, the build versus buy, the squeeze from the legacy and enterprise SaaS providers, or even the growing trend around consumption and outcome-based pricing among the AI native. You're the tropic procurement guy, but also the broader community procurement guy.
What are some of the tactics or things that you're seeing that are important for these folks to be keeping in mind?
Michael Shields (21:36)
Yeah, unfortunately, I think a lot of procurement people are still bogged down in very tactical tasks and more than ever, they need to be carving out time for the strategic initiative, right? Because you think about these existing vendors, whether they're the existing ones that are investing AI, whether the ones that they're being replaced by AI companies, SMB, MidMarket, as you talked about, Justin, they're still, I think, operating from
a position of, in some cases, strength, but in some cases, fear and how early you can be involved and how strategically you can work that sourcing muscle, how much data you have coming into you is going to make that difference of leverage at the end of the day. And I think that's going to be more critical than it's ever, it's always been critical. We've known that we've studied that, we've seen that data, but I think that is going to be exacerbated more than ever.
and, so it becomes like, how do you know where to focus, which Justin, you and I have talked about quite a bit, but also how do you arm yourself with the data, the insights too, so that you truly can do more with less because the opportunity is huge. The, opportunity to add value is huge, but right now we continue to focus on in many cases, tactical, maybe urgent, but, but ignoring this, this greater.
I don't know if I call it storm or opportunity that's coming down the line. And so if you find yourself behind the eight ball, it doesn't matter if the supplier is, you know, being replaced by AI or in a position of strong leverage, you've, you are not in a good position. Whereas if you can really work that sourcing muscle and, look at the opportunities, you can help your stakeholders find budget. can help your stakeholders identify new tools. You can help your stakeholders, you know,
manage that text stack strategically instead of letting it manage you.
Justin Etkin (23:33)
Yeah, love that.
Russell Lester (23:34)
Yeah, like when you said storm or opportunity, because I view it as I'm very bullish on technology, software, AI in general now, because I believe with the combination of what SaaS was seeking to solve for the past 10 years.
And what AI can add an acceleration for companies that are truly doing it in context with value with proper data guard rails. It is going to create that that many of the software tools have been needing. Like we've all bought tools where when we make the case to our procurement person and finance, it's going to deliver this ROI and these benefits and we implement the tool and it's OK. It's doing some maybe.
halfway, maybe most of what we hired it to do. But rarely does it really have that wow factor. Well, I think, I mean, I'm selfish, you know, as a user of Tropic, we got some wow factor stuff in there that is agentic and other tools are doing the same thing. And I'm experiencing it in real time where I'm like, this is some cool stuff. So I think that's no better time to be alive in the world of software and technology than right now.
The market will catch up, right? The market is about supply and demand and emotion and macro cycles. But at the root of it, at the core of it, we are seeing a market environment where tools are delivering more value than ever before. So if not procurement and finance, then who is going to lead the charge towards the future for their companies? I think we're the ones. We have to.
Justin Etkin (25:02)
Last thing I'll add is that, like, I feel that we have barely scratched the surface on the M and a role in all of this dynamic that we're seeing right now. You know, Salesforce, one of the greatest M and a companies in the history of existence has made one significant acquisition in the space thus far. And just like as Marc Benioff you have like starts to unpack and really start to figure where
Michael Shields (25:03)
Okay.
Justin Etkin (25:28)
the sources of value of extensible value are going to be as part of this value chain in the stack. I think that we're going to see a return to growth story from the incumbent SaaS providers because they have the distribution, they have the database, they have the infrastructure that companies still need to make this happen. And I bet on them way more than all the mega enterprises of the world trying to figure out how to build it for themselves. There's just no way. So that's my...
that and I think we're going see in 2026 a ton more M&A activity to fuel this growth.
Michael Shields (25:59)
Gosh, I feel like we've talked about so much on this, but yet, you know, it's one of those things where I honestly kind of came into this conversation. I wouldn't say fear based because that certainly doesn't fit the facts, but certainly apprehensive. And I'm walking away from it feeling more empowered and optimistic. know, kudos to you too, for helping kind of spark that change within me. If you're, know, a listener, what's one thing you're writing down from?
Let's just go around the horn real quick. Russell to you.
Russell Lester (26:28)
Yeah, I think pay attention. Open your eyes. Don't wait to react. You know if you're if you're a finance leader. Don't wait and react and respond. Lead the charge to better understand what tools are out there. Which one is your company investing in? How do they interact with one another? Make sure your team is testing out AI within your own tool set. You know. The finance tool set is.
maturing and there's some cool stuff out there that can save a lot of time. So I would say lean in on that front as well. But I think technology and capabilities normally lag to go to market, especially for fintech tools. I think we now see where the technology is leading and it's the pricing and packaging that's lagging. So it's going to be a frothy year. The next 12 months are going to be full of a lot of change.
So pay attention to your invoices and your renewals and like don't be asleep at the wheel. Now is not the time to be asleep at the wheel and what you're buying, how you're buying it and how you're negotiating all those stuff. Pay attention.
Justin Etkin (27:33)
My takeaway is really navigating the balance between supporting and accelerating the growth and experimentation with AI, while keeping in mind this SaaS sprawl 3.0 or as we'll know to call it AI sprawl 1.0. you CFOs if those are having a tricky dynamic where they're trying to find
productivity and efficiencies across the organization and they know AI is a huge unlock for that. But we don't want to stifle that growth and experimentation by like too rigid of a control system and locking down growth and access and all this other stuff that is critical to unlocking the acceleration. So there's gonna be a cleanup that has to happen and know, CFOs and procurement teams can set themselves up for success as part of that cleanup by keeping diligence
diligent tracking and systems in place to know what they're buying, what they've contracted for, how they're consuming against those commitments and make sure they're not, to Russell's point, asleep at the wheel as they're managing these costs and scale.
Michael Shields (28:32)
Yeah, and for me, I just feel like piggybacking on what you just said, Justin.
Procurement's always been asking for that seat at the table. They're always wanting to like be recognized for what they do. Well, here is a tremendous opportunity. This will be a need that basically universally every single company will encounter. And so, you know, this is a great opportunity for the procurement function to be elevated, but you can't do it alone and you can't do it by doing what we've historically done for decades, right? So.
A little bit of investment in supplier intelligence, in Tropic is going to go an enormously long way, but it's going to be a slingshot for the ones that do it well.
Okay, well, thank you both for joining me. You know, it's interesting, like January, it's been a little disheartening, right? Seeing those headlines come across and companies that perform well and still their, you know, their stock price struggles and reality is, is SaaS stocks, they're going to bounce around and AI is going to continue to reshape how these vendors, you know, build and price and sell. But, you know, many of these bigger companies like
they're not going anywhere right away. don't think Salesforce is going anywhere, ServiceNow is not going anywhere right away. we as a company, we are going to see new incumbents come in. We're gonna see these old incumbents try to protect their revenue. And we have to act judiciously and strategically in order to kind of protect our renewal and also give us those funds that we can invest in our company's growth to continue to fuel.
the growth and I think that become a competitive advantage. So thank you everyone for joining, subscribe, share, drop us a note if what your thoughts are on this. If you have a SaaS renewal horse story, we'd love to hear that as well and see you at the next spend
