What SaaS really means for your software asset management strategy

Software asset management? Cost optimization? With the growing use of SaaS (software as a service), that’s no longer an issue, because you know exactly what you pay for, right? I would like to undeceive cloud promotors. Of course subscription cloud solutions deliver huge benefits to organizations, but at the same time it is more important than ever to manage your costs and to get insight in spend.

Capex and opex

Any CIO or SAM manager distinguishes between capex and opex. These are standard terms of the financial world which stand for capital expenditure (investments) and operating expenditure (recurrent costs). A simple example: the purchase of a printer falls under capex, the purchase of toner and paper falls under opex. It is the same for software licenses: the purchase price of software is capex, while spending on support is seen as opex. If you want to gain insight into your software costs and usage and limit risks or optimize costs based on that, it is crucial to distinguish between capex and opex.

Highest profit on the opex side

Traditionally –  meaning in the ‘old’ licensing model of software giants such as Oracle and Microsoft – cost optimization and savings can be achieved mainly on the opex side. An investment is done once, even if it is spread over five accounting years. Support costs and other recurring expenses, however, come back periodically, so there are more opportunities for savings.

The lifespan of enterprise software is on average ten to fifteen years. In practice, support is mainly used in the first five years. If equal support costs are paid until the end of the lifespan, the cost per support request eventually will skyrocket. You could then decide to buy support with a cheaper third party or even to discontinue support. It also often happens that support costs for a certain product are still paid while the software is no longer used in your organization.

SaaS = more opex

Meet SaaS. The licensing landscape is undergoing major changes. More and more organizations move to cloud solutions with a subscription model and software giants such as Oracle, IBM and Microsoft actively offer SaaS packages. For your total software spend, this means that the opex part is becoming bigger and the capex part is becoming smaller. There are hardly any investments after all, you only pay for the number of people that will use the software that runs somewhere in the cloud. However, it is naive to think that buying a SaaS solution means there is no longer a compliance problem and that cost savings may not be possible.

In fact, with the growth of SaaS, your understanding of software expenditure is even more important than ever. The reason is simple. Your opex becomes higher, so the CIO or SAM Manager – or whoever has the responsibility in your organization – will manage a greater amount of recurring costs, even if your total software expenditure (capex + opex) is lower. Moreover, the impact of any cost-saving measure is also greater because the value per unit or user in the SaaS model is greater than in the traditional licensing model. The following example will make this more concrete.

Imagine that in the ‘old’ licensing situation your overall software budget was a million euro. 33 percent of which was for hardware, 33 software and 34 staff. Now, with a SaaS subscription, eight hundred thousand euros is sufficient. Hardware costs are gone, even though you should book another two hundred thousand euros for staff, the software share is thus much larger, about six hundred thousand euros. Suppose you can save 10 percent because it appears that fewer people are using the software product than initially thought, the effect thereof is so much larger. A simple calculation: 10 percent of six hundred thousand is more than 10 percent of 330,000.

Compliance issues are also possible with SaaS

In addition, it is a popular belief that you can never pay too little if you switch to SaaS. And although this applies to some SaaS solutions, there is also software where this is certainly not the case. This mainly involves SaaS solutions that deliver more technology components (such as databases) than applications. In that case it is certainly possible to start using software components without having to immediately pay or make changes for which an invoice will follow later.

This is also clearly stated in the SaaS agreements whereby a supplier can determine himself when he will act (at a time when you least expect it). Blindly assuming that compliance issues are history is not wise.

Moreover, SaaS does not replace all

Especially in large organizations, it is unlikely that all software will be replaced by SaaS solutions. Much more likely is a situation where new SaaS solutions are deployed alongside existing on-premises systems. Or maybe you choose a new financial tool in the cloud, but you would still want to maintain access to the old system. There are many variations and combinations, but in each situation, you should keep asking yourself: do I have insight in my costs and software use?

This article is also published in Dutch on Computable.nl

This article was published on 31-01-2017