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Navigating the Financial Complexities Associated with Enterprise Software Acquisitions

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Purchasing enterprise software today is a complex process that involves multiple stakeholders, from CTOs to CFOs. According to a recent Robert Half Management report, 41% of surveyed CFOs said staying current with changing technology is the greatest challenge facing their finance teams.1 The accounting rules employed for software acquisitions are almost as important as making the right software choice.

Traditional software ownership has been overtaken by new purchasing options, including SaaS and the cloud. According to a Gartner survey, by the year 2020, over 80% of software vendors will change their business model from the traditional license and maintenance model to a subscription solution.2

With new options come new choices. Although software availability and pricing have become much simpler for the end user, new challenges exist for the CFO. The financial implications and benefits of the different acquisition models are complex:

Perpetual Software Licenses

A perpetual software license has higher up-front costs, but the software belongs to the business indefinitely, The purchase is considered a capital expenditure (CapEx) and will appear on the balance sheet as an asset which can be depreciated over the life of the software, typically a period of three to five years.

The key disadvantage of perpetual licenses, in addition to the high initial capital outlay, is that the business is responsible for any upgrades which are often neglected due to cost, poor asset management or getting pushed down the priority list.

Software as a Service (SaaS)

SaaS, which is based upon a subscription model, eliminates the high up-front costs and ongoing technical support associated with perpetual software licenses. Once the software has been installed, upgrades are delivered seamlessly for the life of the contract.

Although SaaS may be the better option from a technical standpoint, it can pose significant problems for finance and senior management. Since SaaS is subscription-based, it will appear not on the balance sheet as CapEx, but on the profit and loss statement as an operating expense (OpEx). With ongoing pressure within organizations to reduce their OpEx, this purchasing model may introduce a significant cost accounting issue. As a business owner, IT or finance executive it may be worth exploring IFRS or FASB accounting rules which may allow OpEx to CapEx conversion in some instances.

The demand for SaaS has grown considerably in recent years, as the technology and usability have been dramatically improved. Demand for SaaS is expected to grow by more than 20% in 2017 to reach $46.3 billion, compared to $38.6 billion in 2016.3

Cloud-Based SaaS

Cloud-based SaaS has introduced the freedom to run business applications remotely and to quickly scale using multiple off-site locations.  As with all SaaS, the one-time license and implementation fees are reduced and updates are automatic.

Cloud-based strategies are critical to staying technologically relevant: 55% of larger companies will have implemented a cloud based SaaS strategy by 2025.4 Cloud-based SaaS minimizes the need for complex software integration services.. Gartner predicts that in the next five years, direct and indirect IT spending on cloud computing will exceed $1 trillion, making it, “one of the most disruptive forces of IT spending since the early days of the digital age,” and one that will be felt by both the CTO and CFO. 5

Central assists Fortune 1000 companies and their vendors manage the financial, operational and budgetary issues associated with acquiring enterprise software and related technology assets.  Contact us to learn how we can help you or read more in our article, Navigating the Financial Complexities Associated With Enterprise Software Acquisitions.  

Sources:

  1. Robert Half Management Resources survey, April 30, 2015.
  2. Smarter with Gartner, Moving to a Software Subscription Model, November 12, 2015.
  3. Gartner News Room, Press Release, SaaS, February 22, 2017.
  4. Gartner News Room, Press Release, CIOs Flip for Cloud SaaS, September 22, 2016.
  5. Gartner News Room, Press Release, Cloud, July 20, 2016.

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