Change your mindset: why savvy companies are choosing SaaS
Date: September 2022
Software as a service (SaaS) is now mainstream.
Research from International Data Corp predicts that cloud computing annual subscriptions in South Africa will grow 29% annually, from US$370-million in 2018 to $1.7-billion in 2024.
The research shows that cloud computing is growing exponentially in South Africa and generating incremental value for companies by enabling lower investments in IT maintenance and improvements, which comprise 70% of IT spend.
“SaaS and cloud applications have grown at a nearly unimaginable rate over the past decade, and it is no longer about the technology but rather about a business mindset.” — Kerryn Lee, head of financial operations at Tarsus On Demand, a four-time consecutive award winner of Microsoft’s Cloud Solution Provider (CSP) of the Year.
Why SaaS is becoming the dominant IT trend
The transition from in-house software to the SaaS model was rapidly accelerated by the onset of the pandemic.
The financial benefits of SaaS for SMEs include:
- No capital expenditure: With on-premises IT solutions, data, applications and software are powered entirely by expensive in-house servers that require a sizeable capital outlay. With SaaS there is no need to buy, install and maintain hardware. The need for physical installation of vital security software is also negated as it is now offered virtually. SaaS is billed as a recurring monthly expense, a steady and predictable cost with no big upfront payments, and no need for sudden unexpected expenses when it’s time to upgrade or something breaks down. It’s a capex to opex mindset change.
- Data centres are expensive to build and to run: The monthly subscription fee for SaaS offerings is based on consumption, allowing companies to pay for what they use. From a budgeting perspective, this is an advantage because the business can build this cost into its budget as a recurring monthly expense. Because there are no sunk costs with SaaS, there is no need to sweat IT assets and hold onto old technology that may limit an organisation’s ability to innovate. In addition, there are no IT support employee costs incurred with SaaS because there is no need to hire and manage IT infrastructure. It’s an own to rent mindset change.
- Predictable revenue for vendors and partners: SaaS is an attractive business model because of predictability and flexibility of the recurring revenue stream. The SaaS model enables a hybrid billing model that allows for a combination of subscription and consumption-based payments. This pay-in-advance (subscription) and pay-in-arrears (consumption model) model can be tweaked according to the ever-changing needs of the customer. As an example, a customer pays a set monthly subscription fee for a certain offering, with additional usage billed on consumption. This predictable recurring revenue, combined with flexibility in consumption management, allows Tarsus On Demand partners to efficiently control input costs, as well as allowing for flexibility with consumption costs. The mindset changes to hybrid – a word that makes many accountants feel uncomfortable.
New ways of evaluating a business
If you’re looking for an investor or want to exit your business in the not-too-distant future, a SaaS revenue-based business model makes you attractive to a potential investor. From their perspective, the predicable revenue stream, based on subscriptions, makes the business attractive and allows for an above average valuation.
SaaS adds to the valuation numbers because an investor can calculate a customer’s lifetime value resulting in greater predictability of future value. The recurring revenue model also makes it easier to predict cash flow and generate sustainable profit margins for the business. Which investor would not like this picture?
“Through our SaaS-first offerings, Tarus On Demand not only enables digital transformation for SMEs, but we also provide the best technology, regardless of brand, to solve ever-changing, real-world business challenges in the most efficient way. It’s about building relationships with SMEs that turn technology access into new competitive advantages,” says Lee.
It’s for these reasons that the “as-a-service” market is becoming a mindset as much as it is a business strategy, concludes Lee.