Article
Efficient Growth for Software Companies: AI as a Catalyst for Deeper Efficiencies
February 06, 2025
Article
February 06, 2025
Software companies have long worked to balance growth with profitability. While top-line expansion remains a priority, competitive pressures and a shifting macroeconomic environment have made it harder to hit growth targets. That’s why margin expansion is taking center stage.
Done right, AI can drive efficiency, lowering the cost per release while improving quality, speed to market, and competitiveness. West Monroe’s own Product Engineering team has seen over a 20% productivity boost from AI-assisted code generation alone.
However, AI doesn’t interact with infrastructure the same way traditional software does. AI workloads have unique computing, storage, and model-serving requirements that alter costs—sometimes significantly. Many software companies don’t yet have a firm handle on the true cost of providing AI services or how AI changes their development and support models.
Software COGS includes cloud and DevOps costs, customer support, licensing, and other essential services. Benchmarking helps companies gauge efficiency across these areas. Today, COGS accounts for 15% to 25% of revenue for most software firms, yet our analysis found that 46% of companies operate below the median gross margin of 74%—suggesting untapped opportunities to optimize.
A $700 million ERP software provider, for example, restructured its cloud usage, re-architected key products, and streamlined service delivery. The result? A 14-percentage-point increase in gross margin.
1. Cloud Cost Optimization
Cloud spend continues to rise, making it a major target for efficiency. Leading cloud-based SaaS companies keep their cloud spend between 5% and 8% of revenue—a level many companies can move toward with focused effort. Strategies include:
2. Product Architecture
A modernized product architecture reduces hosting, implementation, and support costs. To assess efficiency, software leaders should ask:
3. Service Delivery Efficiency
Many software companies can reduce service-related costs by:
1. Product Development Labor Optimization
2. Software Development Lifecycle Optimization
3. Platform Consolidation
Private equity-backed software companies often inherit multiple platforms through acquisitions. AI-driven product innovation offers an opportunity to rationalize platforms, cutting costs while aligning resources with the highest-value offerings. Companies should prioritize:
The shift to efficient growth won’t occur at a single point in time. The next round of optimizations will require a scalpel, not a hammer—precise, data-driven adjustments rather than broad cost-cutting measures.
Making cost optimization a continuous effort is the best way to stay ahead. Software companies that benchmark regularly and apply structured cost analyses will be better positioned to capture AI-driven efficiencies, enhance portfolio value, and maintain long-term profitability.
Authored by: Hubert Selvanathan and Dhaval Moogimane
To scale AI-powered products profitably, companies must reevaluate their cost structures. That means taking a hard look at cost of goods sold (COGS) and R&D investments, using AI as a catalyst to unlock greater efficiencies.