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The inventory advisor

Feb 24, 2020


Is the outright purchase of software a thing of the past?

Most senior managers born in the ’60s or ’70s were taught by their parents that it was way better to buy items like software, buildings, and other assets to reduce the expenses incurred in interest and grow the capital value of the business. This way of thinking has been passed down over the years but does it still hold true?. Does it still apply to all the things you can buy?. Is software something that can be seen as an asset that we want to own?

We will look at the benefits of SaaS (software as a service) vs. outright software ownership, but before we do, let’s define their meaning. SaaS is a software licensing and delivery model in which software is licensed on a subscription basis and centrally hosted. Applications that use the SaaS models are also known as Web-based software, on-demand software, and hosted software. The SaaS model has been incorporated into the strategy of nearly all of the leading enterprise software vendors, including Sage. 

Outright purchase is an upfront payment, and the software is yours. But is it?. There are often annual license fees on top of the once-off purchase price, so effectively, the software isn’t yours – you are still paying a fee to use it. Worse yet, some companies only provide support if you keep the license plan current. Is this not just another way to charge you ongoing for the software? The platforms used in an outright purchase model could be on-premise or hosted/cloud systems. In contrast, in the SaaS model, the software tends to be hosted by the provider. 

INFRASTRUCTURE 

A significant benefit of the Saas model is the savings on infrastructure costs. All the basic IT costs for servers, storage, and maintenance are spread over multiple customers by the SaaS vendor. Besides being attractive for customers, it also provides the Vendor a means to perform upgrades and updates seamlessly and at scale. Whereas if you decide to buy and host internally, you not only need the server to run on, you probably need a Sandbox environment as well. Next, you need to add access rights and staff to manage the servers. Then you need to ensure that all the latest patches and upgrades are kept up to date – how many resources will you need to manage all of that? Do you have these resources inhouse or will you need to upskill or hire in? Then you need managers to manage these people, and so the costs keep escalating. In a SaaS business, the infrastructure and server management is part of the business model, and the SaaS vendor needs to manage this well, or they will not survive! Since this infrastructure is done at scale, SaaS vendors become efficient at managing this for you and at a much lower rate. Most SaaS contracts run from month to month, so it is in their best interest to keep their service levels high, or they are at risk of losing customers. 

SALES AND ONBOARDING

In the traditional software sales model, hefty fees are paid upfront, and this provides an attractive commission to the Salesperson. The products are usually installed onsite, and the lengthy implementation and staff training commence. Training is generally conducted onsite in a classroom environment. After the training, the vendor to customer engagement is reduced. Given the nature of these products, the training material is developed or customized to this specific environment, so later, new employees have to learn about the software from someone else who was there at the time. In this instance, the information passed on is often misunderstood or misinterpreted when communicating, and it is no wonder why a lot of big implementations often fail.

The SaaS model may reduce commissions for salespeople and lessen initial returns for the Vendor; however, it can create opportunities for incremental and add-on product revenue throughout the lifecycle of the client relationship. The implementation time in a SaaS model is usually shorter as it is backed up with regular online training, tools, and help. Generally speaking, a faster return on investment is seen. New employees have access to a host of online materials, chats, and online workshops, all of which are usually prepared and conducted by the Vendor and are generally far more effective and retentive. In the SaaS model, there is an ongoing relationship with the customer and the SaaS provider needs to make sure they deliver reliable solutions to their customers every day and to continue to develop a good customer relationship. The main benefit to the customer is fast onboarding with low upfront costs with a Vendor that has a vested interest to keep them happy all the time.

COMPLIANCY

Keeping up with compliance, data security and data privacy issues within your business is a full-time job. Even if you have employees to manage these for you, as a senior manager you could be personally liable if you are not dealing with all of these correctly. Because a SaaS vendor lives in this space, they have to allocate time and resources to manage these compliance issues and to ensure that they are always up to date with things like SSAE 16 (protection of personal information) and ISO27001 (information security standard). It makes more sense to let the SaaS vendor obtain the required compliances, and they can spread the costs among their customers.  

The overall benefits found in the SaaS model outweigh those of the outright software purchase. Traditional models of software purchase and the in-house management thereof, are outdated and end up wasting resources with the level of compliance that is needed. Its time to ask yourself whether the outright purchase of software still makes sense or are the new models like SaaS a better option?.