Thanks for the comment! Sorry, but I’ll steal Abe’s thunder on this one since I bumped into your comment first;-)

Accounting treatment is different. On-premises software is a capitalized purchase, allowing a company to depreciate it as a capital expense. Technically speaking, this reduces the perceived (important distinction from actual here) cost advantage of SaaS after the first year or two because SaaS licenses are recorded as standard period op-ex and can’t leverage depreciation mechanics like capitalized software purchases do.

Now let’s get down into the weeds and see why this isn’t really the best way to discuss ownership costs. First, large on-premises software purchases, despite giving a depreciation advantage, affect the books negatively in other regards. If a customer buys a large on-premises deployment, it usually requires a large cash outlay, which isn’t so hot for the company’s cash position, or to take on a capital lease, negatively impacting the company’s debt position. Neither is particularly appealing, and from a sound fiscal perspective, might pose a larger negative impact on the books than not being able to depreciate SaaS licenses.

Second, large on-premises deployments are far more costly than “sticker price” They usually require server hardware, staff to manage it, risk-costs associated with the prospect of downtime (on-premises offerings experience way more down time than SaaS offerings). All of this adds up to balloon the real cost of the offering. Generally, these “supporting expenses” can’t be capitalized and fall in the same boat as SaaS licenses. This dilutes or even entirely negates and perceived positive impact of the depreciation of the on-premises software purchase.

That’s a great question, I’m going to let Sinclair give you an answer as he is way better qualified than me to address it!

Cheers,
Abe

Are there any significant differences in accounting treatment of SaaS expenses? A large software purchase is a capital expense. Even 3-year lease financing to get monthly payments is typically considered a capital lease. How is SaaS treated in a company that signs a 2 or 3 year SaaS agreement? Is this capitalized, or are the monthly costs treated as simple period operating expenses?

That will benifit SaaS for sure!

Unfortunately we don’t have any posts that deal with SaaS and Supply Chain Management (SCM) integration but I’ll make sure that we write one in the very near future.

Keep an eye for it,

Regards,
Abe

Sorry the bad english.

Thank you very much.

I think that SaaS will do exceptionally well in the Supply Chain Management vertical. Even today ERP/PLM/SCM applications represent the second largest segment of SaaS applications behind CRM.

There are many issues that plague SCM that SaaS is built to support out of the gate but like any other obstacle, one of the biggest things that will have to be solved before it succeeds to its fullest potential is a seamless integration with all the additional on-premise hardware devices that are part of the supply chain.

I think that SCM is one segment to keep a very close tap on and I’m very sure we will see a couple more poster child success SaaS stories coming out of this segment.

Cheers,
Abe

You are absolutely right. CRM is a definite candidate for supporting offline functionality, and like this, many others. We are still not in the days where internet connectivity is available everywhere anytime so for the time being some SaaS providers should consider offering a hybrid solution that allows you to use the application in a disconnected fashion.

This goes back to understanding your target market and choosing the right implementation for your needs.