Software as a Service (SaaS) is a rental model that allows you to purchase enterprise software without paying giant upfront license fees. In theory, this means software becomes an operational expense (OPEX) rather than a capital expense (CAPEX). As software markets shifted from CAPEX to OPEX, we were supposed to see dramatic changes to software markets.
We have… And we have not.
What we have seen is many enterprise software markets make a big transition to SaaS from the software license model. Customers really do prefer SaaS. And not just because of lower upfront software costs. In the supply chain markets that I cover, I have seen SaaS drive down implementation costs. SaaS solution providers either can’t customize the software (Public Cloud solutions) or are reluctant to engage in customization (many providers of Private Cloud solutions). Consequently, project implementations are faster and the software industry’s implementation revenues are falling.
In the transportation management system (TMS) market, where I’m wrapping up a global market study, we have also seen the SaaS model lead to smaller shippers and shippers from Latin America and Asia become increasingly willing to purchase TMS.
Sales Cycles are no Faster with SaaS
But as I have talked to software executives, there is one thing I am not hearing. I am not hearing that projects have a faster sales cycle because of SaaS. If SaaS was leading to a wholesale shift from CAPEX to OPEX, I would be hearing this.
A CAPEX project goes through a detailed budgetary process, where costs and cost savings are projected out for several years, a cost of capital is attached, and only relatively few projects end up being green lighted after being able to prove a high enough return on investment (ROI) to justify the risks.
In contrast, in OPEX, a manager with his or her own budget can choose to take on an expense if they believe it will help them hit their end of year goals. This should be much easier.
So, what is the problem? In short, the costs associated with implementations. In several supply chain software markets, the cost of implementations for tier one solutions run from several hundred thousand dollars to over a million dollars. Even a manager who owns a budget can take on the annual SaaS fees, they cannot swallow the upfront costs of an implementation; in short, they are still required to go through a CAPEX budgetary process to get approval.
If software providers were willing to spread the cost of an implementation over several years, like they do with the software license, we could truly say enterprise software markets have shifted from CAPEX to OPEX. They are not willing to take this risk on. And for good reasons. The success of a software implementation requires customer to actively participate, have a strong project team, and make good decisions.
Forecasting Software Markets in the SaaS Era
For several years, the company I work for, the ARC Advisory Group, has employed an economist. This economist produces proprietary five-year global CAPEX forecasts for spending for many different industries. These forecasts are designed to make it easier for analysts that work at ARC to forecast how the markets they cover will grow. Because of SaaS, which I had been told was an operational expense, I had been ignoring these forecasts. No more. In the TMS study, this is one of the data sets I am now using.
This is just not correct. You say “Sales Cycles are no Faster with SaaS”. YES THEY ARE. If there is NO implementation cost, we find customers start immediately, with no fear of wasting money…only a little time. There future of TMS is zero implementation costs, no contracts, and no long term commitments. We add 15 to 25 new customers a day, many from “brand name” TMS providers, who are more than willing to use a ZERO UPFRONT COST TMS right away.
Tim Higham
AscendTMS (www.TheFreeTMS.com)