Don’t Automatically Say “Yes” to a SaaS System for Accounting and ERP Software
Understand the alternatives to SaaS and the Cloud before you buy—and consider a hybrid system
First, what is SaaS?
Software as a Subscription (SaaS) is software that you license. Instead of buying and owning it, you “rent” it, paying a monthly fee to keep using it.
And what is the Cloud?
SaaS is usually done in the Cloud. At AIS, we regularly talk to company executives and non-technical people who refer to “the Cloud” in a tone of awe, as if angelic music is playing in the background. But the Cloud is just a fancy name for “computers.”
If you were to visit a Cloud, you’d see warehouses (data centers), with aisles of tall racks of computers connected to the internet. That’s it. Since most people never visit a data warehouse, the vision of remote computers and how that works can be vague, like a “cloud” up in the sky, off in the distance somewhere.
When you log in to Cloud accounting software from your browser, your device gets the software screens and the accounting functionality, and your organization’s own accounting data, from those warehoused computers across the internet—rather than from the hard drive on your own local desktop or mobile device, or from the network server in your office.
Why did the software industry move to a SaaS-in-the-Cloud business model?
The biggest benefits of SaaS are monetary benefits for the software company. There are other benefits to you, the user.
- SaaS makes more profit for the software company—a lot more
This is the big one. Because the customer perpetually “rents” or licenses the software with SaaS, the software company gets automatic payments every month. Their customers cannot buy software, nor do customers own the software forever.
This means that the software company receives more money long term from each customer.
It’s like renting a house. If the renter lives in the house long enough, they will pay more to the landlord in total than if they’d taken out a mortgage on the house and then paid it off—even after factoring in the costs of home maintenance and the appreciation of the home’s value over time.
The software company’s SaaS customer will eventually pay more than if they’d paid once up front. For mid-tier accounting and ERP software, this breakeven point is reached after perhaps 4-5 years. Most companies don’t replace their systems for 10 years or more due to the size and cost of the project. So, even considering the additional price of regularly purchased software updates over those years, and the value of the new features and technology added to the software during the subscription period—the total software price paid with SaaS is more.
The best way to assess this is to calculate what you’ll pay over the entire life of the software. Many SaaS companies don’t want you to calculate this number before you buy, so you’ll need to ask a lot of questions to get all the info you need about the pricing plan that you’re evaluating.
Not all software subscriptions are created to benefit consumers
“If you look at headlines about Stellantis’ [formerly Fiat-Chrysler] new money-making scheme, things seem pretty innocuous. “Stellantis Bets on Software,” says the Wall Street Journal. “Stellantis launches $23 billion software push,” says Automotive News. Software sounds good, right? Well, something else is at play here: subscription services that keep you paying long after you’ve bought your car.
This is not going to be a “we’ll update it when necessary” kind of thing. This is going to be an offensive, judging by this line from Stellantis:
“We really see software as a growth opportunity, something that can make a huge difference,” [Chief Software Officer Yves] Bonnefont said, adding that updates that could be done every quarter would bolster profit margins.
On the one hand, it will be good for you to be able to upgrade your old car with more modern advances. Hell, even I upgraded my 1974 Volkswagen to have disc brakes not drums. Upgrades aren’t a bad idea. It’s just that expecting to pull in billions of dollars per year on software updates sounds more like a kind of revenue extraction than something done in the interest of the consumer.”
(A Carmaker’s $23 Billion Plan To Keep You Paying Long After You’ve Bought Your Car, Jalopnik, December 7, 2021)
- SaaS delivers recurring revenue to the software company
For the software company, this predictable, steady subscription-based revenue model is immensely valuable. If the customer instead just pays once up front, and then again up front for each new upgrade or version as those become available, the software company’s total revenue stream is smaller, plus it’s more cyclical and less predictable.
Then, each time there’s a new upgrade, the software company must again sell the product to their existing customers to get them to purchase the new upgrade. This adds a lot of time and expense compared to a SaaS model where the upgrades are included automatically and don’t need to be sold to existing users.
Without SaaS, not all customers will upgrade. Some will skip versions. Others won’t upgrade at all because not all customers require or want all the upgrades.
In contrast, when customers are using SaaS, the revenue to the software company remains steady month after month, because everyone is charged for new upgrades, whether they want them or not.
- SaaS promises product development you may not want
With subscriptions, the software company can continuously roll out new features and changes through the cloud. And they typically require that you continuously update to newer releases when they’re available.
If you are really enjoying the way your software works, you may not want the upgrades, but you may not have a choice.
For example, the software company may redesign the user interface, proudly announcing that it’s “even more intuitive and easy to use than ever.” But you cannot control the SaaS update schedule. If you’re in the middle of an important project or you’re right in the middle of your busiest season of the year, you get disrupted and must take time to find things in new places on the menus and figure out the new way your critical features now work.
As another example, if your system has been customized to fit your specific processes, some of those modifications may need to be updated in order to work with the newest software version. For that reason, you may prefer to upgrade your software less often, rather than have to get your custom programming updated for every software release. At AIS, we have clients who have solid business reasons to wait years between updates. With SaaS you usually don’t have that option available. Even though you originally selected the software in part for its flexibility and customizability, you lose some of that flexibility to the software company policies that come with SaaS.
Also consider that software companies typically introduce major new technology and policy changes every few years that you may not want. Perhaps a one-time overhaul of the underlying software technology, which may require data imports, reconfiguration or user training on your end. Perhaps an increasing number of new fees get added to your monthly subscription to access some features in the software.
With SaaS, it’s a lack of flexibility. You can’t move at your own pace, and you certainly can’t “freeze” your software when it’s exactly to your liking and keep running it that way. You must stay on board with any changes from the software company if you want your software to continue working.
What are the pros and cons of SaaS for your organization?
- Total cost of ownership
With a SaaS model, you don’t have to pay up front. You simply begin paying the monthly subscription cost. This makes it easier to get started sooner and is a big reason that users like SaaS. It’s like not having to put down a big down payment up front.
But as mentioned above, with SaaS you pay much more over the entire lifetime of your system than you would if you paid once up front. And if you ever stop paying the monthly subscription fee, your software will stop working and you’ll likely lose access to your company data.
At AIS, we help companies do the math to compare lifetime costs with and without SaaS. In most cases, our clients then choose to finance it. After paying off a bank loan in 3-5 years, they have no ongoing monthly subscription cost.
For example, instead of paying $100 for a word processing program, you pay $100/year. If you use the word processor for 30 years, the $100 program will end up costing you $3,000. Actually much more, because the $100/month fee will go up many times in a 30-year period.
Paying up front can become a competitive advantage as well. If you own your software for a longer lifetime, you’ll pay less in operational costs than your competitors are paying. This gives you more control and flexibility in your margins and pricing.
- SaaS requires using the Cloud
SaaS subscriptions are delivered in the Cloud. For example, when there’s a minor security update for your software, the software company can install it directly in the Cloud without you having to do anything. When there’s a larger update, like a new version, you don’t need to download the new version and manually install it. You click some buttons to have it installed, or in some cases it will be installed for you automatically or by your reseller.
But do you want to use the Cloud?
There are pros and cons to working in the Cloud. Just as there are pros and cons to having all your software run On Premise in your office instead.
At AIS, we discuss these pros and cons with our clients. Most of them choose a hybrid model that addresses security against hacking attempts, remote access to allow users to get at everything they need from wherever they are working, total IT cost management, and more. They don’t put all their eggs into the Cloud basket.
Some of our clients also must meet regulatory requirements that necessitate security steps that impact a Cloud / No Cloud decision.
The companies that are telling you to license their SaaS software in the Cloud typically don’t run their own critical business applications entirely in the Cloud
“In a survey of 384 global decision-makers for IT infrastructure environments, 85% agreed that on-premises infrastructure is a critical part of their firms’ hybrid cloud strategies. Respondents said the failure to meet security needs is the top reason for maintaining infrastructure outside of a public cloud platform.
Three-fifths of companies surveyed use a hybrid cloud infrastructure strategy that includes public cloud, internal private cloud, hosted private cloud and/or on-premises hardware—and these firms are continuing to expand their use of each strategy.”
(The Key To Enterprise Hybrid Cloud Strategy: The Importance Of On-Premises Infrastructure for A Future-Ready Hybrid Cloud Strategy, a Forrester study for IBM, January 2021)
- Level of customization available
Most SaaS Cloud applications are less modifiable to fit your needs than applications you purchase up front and own for life. It’s because it’s more efficient for the software company to have all users using the same system.
While it’s easier for you to commit to new accounting and ERP software when it’s just the cost of the subscription, this can lead to a tendency to spend less time up front asking questions and assessing your long-term needs before making that commitment.
You risk discovering a couple years out that your system isn’t flexible enough to handle your newest needs. Yet you’re now so invested in it that you can’t afford to change to a new system. You’ve lost the ability to strategically invest your money well for the most benefit to your organization. And you’re forced to settle for less, having to adapt your processes to fit what’s built into the software, rather than customizing the software to fit your changing processes and requirements.
This impacts your ability to be self-reliant
Customizability is more than the ability to change the software to do what you need it to do. As customizability goes up, so does your ability to be self-reliant and fully in control of your key business applications and data.
Yet as a whole, mainstream technology is moving customers away from self-reliance and toward dependency and planned obsolescence.
For example, John Deere is famous for stating in their terms and conditions that new customers don’t own their new John Deere tractors and all the embedded technology; they license them. This means if a tractor breaks down in the field, the farmer isn’t allowed to fix it, as that will void the warranty; they must wait with an idle tractor until a service technician arrives.
Another example is consumer electronics products that are purposefully built not to last. Because if your vacuum cleaner breaks down after a few years, the vacuum cleaner company gets to sell you a new one.
At AIS, flexibility and self-reliance are important values that we relate to ethics and proactively support. Especially when it comes to large, long-term investments like accounting and ERP software systems.
- Terms and conditions
SaaS companies have an easy ability to roll out changes to the terms and conditions that are included with your monthly subscription. If there’s something new that you strongly dislike, you cannot opt out of the new terms. Your only choice would be to stop subscribing and move to another software company.
For example, you may be required to pay new penalty fees for not upgrading and you might not be able to get technical support until you upgrade.
Because of this, before you sign up, it’s critical to consider the SaaS company’s management, its history of policy changes and customer-focus, it’s likelihood of being acquired and getting new management, and other factors that can help you assess its business practices, ethics, and future trajectory.
- Ownership of your data
Customers of some SaaS companies are often shocked to discover that they don’t own the data that they put into their SaaS software. Think about what data you have in your accounting and ERP software, from your customer and supplier lists, to your inventory data, payroll, sales tax records, order history, and much more.
With a SaaS system, it’s critical to find out, before you sign up, what access you’ll have to extracting your own data.
Can you export your data anytime? All of it? What format does it export to, and is that format useable? And can you backup and restore your own data as a redundant process, or must you exclusively trust the software company’s backups of your data?
You’ll be surprised what you learn about your options should you decide to change systems one day.
Consider speaking to other companies who’ve exported their data from that system, to find out what their experience was like, before you buy.
Big picture, a hybrid solution gives you the most flexibility
At AIS, we advocate hybrid solutions. It’s not SaaS or no SaaS. It’s not Cloud or no Cloud.
We assess the pros and cons for each of our client’s requirements and recommend a solution that’s optimized to reduce risk and cost, and maximize return on investment and user experience.
This hybrid approach extends into our implementation and customization recommendations. In some cases, it’s best to use built-in features just as they are. In other cases, substantial gains can be made by greatly customizing a key process, or partially customizing a frequently used process. The opportunities are different for each client.
Unlike most other software companies and technology partners, we’re willing to say that SaaS isn’t perfect and the Cloud isn’t perfect. And we’re willing to say that some of our clients don’t need any software customization.
As a consultancy, it’s our job to be truthful and knowledgeable about the choices that are available, and to recommend the best approach to fit your unique operations and goals.
We won’t advocate a solution for you unless it will give you a significant value in excess of the cost. We’re interested in your success and we’ll work with you to ensure that you succeed.