Feb 13, 2020
Is software ownership a thing of the past?
Many senior managers that were born in the ’60s or ’70s were taught by their parents that it was better to buy software, buildings, and other assets to reduce the expenses incurred in interest and grow the capital value of the business. This mindset has been handed down over the years, but does this still hold? Does this apply to all the things you can buy? Is software something that can be seen as an asset that we want to own?
Before we begin to look at the implications between SaaS and outright Ownership, let’s define what they mean. SaaS (software as a service) 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.
Outright purchase is an upfront payment, and then the software belongs to you. But does it really?. There are often annual license fees on top of the once-off purchase price, so effectively, the software isn’t yours – you are paying a fee to use it. Worse still, some companies will 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, whereas the software tends to be hosted by the provider in the SaaS model.
A major attraction in the Saas model is the financial savings found in the infrastructure costs. Basic IT costs for servers, storage, and maintenance are spread over multiple customers by the SaaS vendor. This is not only attractive for customers, but it provides the Vendor a means to perform upgrades and updates seamlessly and at scale. If you decide to buy and host internally, you not only need the server to run on, you probably also need a Sandbox environment. Next, you need to add access rights and staff to manage the servers.
What about the latest patches of the operating system, virus protection, backups, and similar? How much work and/or resources do you need to manage all of that? It is not only the cost of one server you need to add, but several other factors to consider as part of that total cost. Taking this a step further, what skills are required to manage this? Do you have these skills inhouse, or will you need to upskill or hire in? Let’s not even talk about the increase in staff management costs. In a SaaS vendor business, the infrastructure and server management is part of the business model, and they need to be good at this, or they will not survive! The infrastructure is done at scale, so SaaS vendors become efficient at managing this for you at a hugely discounted rate. And, since the SaaS contract often runs on a month to month basis, it is in their best interest to keep their service levels high. If they don’t, they will lose customers.
Sales and Onboarding
In the traditional software sales model, hefty fees are paid upfront, providing an attractive commission to the Salesperson. The products are typically installed onsite, and the lengthy implementation and staff training commences, usually onsite, classroom-style training. After this process, the vendor/customer engagement is generally diminished. Given the nature of these products, the training is done using material 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. If you have ever played ‘broken telephone’ as a child, you can understand how the information becomes watered down, misunderstood, and often misinterpreted when communicating. It is no wonder that a lot of big implementations eventually fail.
In the SaaS model, an ongoing relationship with the customer is the central point of customer interactions. The focus is to develop a good customer relationship that develops over time. The SaaS model may reduce commissions for salespeople and lessen initial returns for the Vendor; however, it can also create more opportunities for incremental and add-on tool revenue throughout the lifecycle of the client relationship. The traditional, lengthy implementation in a conventional model is accelerated in a SaaS environment as it is backed up with regular online training, tools, and help. This usually results in a shorter implementation, and a faster return on investment is seen. New staff joining the team have access to a host of online training materials as well as chat and online workshops that are prepared and conducted by the Vendor. This training is usually far more effective and retentive than the staff being taught by an internal staff member at the customer’s site. SaaS providers need to make sure they deliver reliable solutions to their customers every day and have to keep on building the 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.
Have you ever been hit with a ransomware attack? Are you looking at personal data and privacy issues? Have you employed dedicated staff to deal with privacy issues and retention policies for all the systems in your company? As a senior manager, you could be personally liable if you are not dealing with this correctly. SaaS companies live in this space, so they have to allocate time and resources to these compliance issues. SSAE 16 (protection of personal information) and ISO27001 (information security standard) are some examples of standards that need to be compliant. Achieving compliance can involve a great deal of preparation, costs, and time and it makes more sense for the SaaS provider to accomplish these and spread the costs among their customers.
The benefits found in the SaaS model far outweigh those of the traditional outright software purchase – not only from a financial perspective. 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. So, if you are a baby boomer, it may be time to ask yourself whether the outright purchase of software still makes sense, or are the new models like SaaS a better option.