SaaS, Cloud, and Renting ERP Software
Renting Software versus Buying Software
Software as a Service (SaaS) provides an option for businesses to “rent” software. For applications that are easy to install and learn, the rental term is often monthly, while more complex solutions such as accounting and ERP software offer annual rentals.
In this article we take a deeper look at equating SaaS with the term software rental.
Why rent when you can own?
People are taught that it’s good to own things. Most people believe that owning a car, a refrigerator, furniture, televisions, vacation properties, and other tangible assets is less expensive that renting. In some cases this is true, but there are situations where renting can be less expensive (home ownership example in San Francisco).
People and businesses with sufficient cash positions will almost always purchase goods instead of renting them. Long term savings, perceived benefits of ownership, control over rental price increases, and freedom to do what you want with the item are reasons people give for owning.
But renting also provides several advantages. From a short term cash-flow perspective, renting ties up less capital. As a renter, you do not always have the hassle of maintaining the item or the risk that the item becomes defective. Rental items are also less complicated to dispose of. In the case of ERP software, the costs of maintaining the operating environment can be substantial.
Ownership with rental cash flow
Traditional on-premise software is almost always purchased; however, companies looking to maximize access to short term cash can find financing options to convert a one-time purchase into a series of monthly payments. There are many leasing companies such as Navitas that make these arrangements. Leasing can provide similar cash-flows to SaaS, but there are many differences …
Comparing software as a services (SaaS) to rental models
SaaS is more than just a rental. SaaS is a service that includes hardware, software, updates, bandwidth, electricity, redundancy, support, and more. The software component of SaaS is delivered over a distance and updated with new functionality at regular intervals.
Key talking points:
- Location: SaaS involves delivering work over a distance while most rentals involve taking temporary possession of physical goods (furniture, cars, tents, other assets). With ERP software “work” can include creating a financial statement, approving an invoice, and managing inventory.
- Ownership: Like most rentals, SaaS does not allow you to own the infrastructure for doing your work. This is often seen as a negative – but lack of ownership means you don’t have to understand how to maintain and repair the service. SaaS includes software updates, redundancy, up-time, and other complexities wrapped into a service level agreement.
- Maintenance: Typical rental goods (e.g. furniture) are easy to use and maintain. Maintaining ERP software is much more complicated and requires in-house expertise. A rental model that includes software plus the experience to keep it running is appealing to companies without in-house expertise. Without in-house experts, you have to contract with an outsourced IT firm or hire an expensive resource to maintain the system. For these reasons, SaaS can be les expensive in the long term. (see cloud software pricing article in ERP Cloud News)
- Price Control: Ownership allows you to control prices (you pay for it once), but you may encounter unexpected repairs. Renting (and SaaS) eliminate the cost of unexpected repairs, but the price of your service can change during your renewal. Many ERP software vendors raise prices because the switching cost is high. This lock-in has deterred some people from purchasing SaaS.
- Customization: Imagine renting/leasing a car, painting it pink and green polka-dots, and then returning it. SaaS differs from rentals in the sense that some modifications are possible. Since the cost of creating a copy of the software is nearly free, SaaS does not have the strict limits of physical rental goods with regard to customization. However, SaaS solutions are not completely customizable. If you want to change core business logic, accounting logic, or build interfaces to on-premise systems, SaaS can limit your capabilities. If you own the software and have access to source code, then you will have more customization options. Just be careful … too much customization to a complex ERP system can lead to undesirable results.
- Protection from obsolescence: Short term rentals never become obsolete, because you can return the item and rent something new. With ERP software, it’s not so simple. In theory your SaaS vendor keeps making updates so that your software never becomes obsolete. But, if you want to ‘return’ ERP software, then you need to undergo costly training and data migration to a new system. Vendor lock-in that originates from high switching costs is an aspect of ERP SaaS that is not a problem with rentals or simple software.
SaaS has many similarities to a traditional rental arrangement, but comparing SaaS to a pure rental model is not comparing apples to apples. Payment arrangements, maintenance benefits, customization limits, and ownership rules are similar between SaaS and rentals. Differences include the degree of customization (none in rental versus limited in SaaS), protection against obsolescence, ease of disposal, and the services included with the software.
A better SaaS to license comparison would involve comparing a bundle of renting software and contracting with a consultant versus purchasing software and hiring a employee. The software and the person each represent a complete system that can do work. By layering on the idea consultant versus employee, we capture the fact that a consultant is easier to hire (SaaS is easier to install), less work to manage (SaaS doesn’t require maintenance), and more expensive in the long run (SaaS is usually more expensive over multiple years). The consultant/rental model also represents the idea of limited customization because you can modify the consultant’s tasks, but still are limited with what you can do with the software. Finally, the constant represent the idea that you get the services with the software versus the employee who develops the skill to run the software in-house.
Some software packages allow you to use the same software as a rental or license and give you the flexibility to include your own services. In these cases, you can craft a program that meets your financial needs as well as your level of experience.