A capital expenditure (CAPEX) is an investment in assets such as servers, software licensing and the implementation of the software.  If you buy the software, the implementation costs are includable in your asset as a necessary cost of preparing the asset for use.  Later enhancements, training, etc. are often expensed in the period as an operating expense (OPEX the cost of normal business operations).

For certain companies, mostly large companies, it is about budgets and balance sheets.

• If there is a freeze or a limit on capital expenditures (CAPEX) then a SaaS application is allowed where an investment is not.
• A company may have loan covenants and acquisition of a new system is often financed.  Although the new system adds an asset it also increases liabilities and can change the debt to equity ratio or affect loan covenants from lines of credit and other finance sources.

For most businesses these arguments are moot and miss the true economic questions:

1. Will the cloud/SaaS application provide a lower total operating cost?
2. Is there a long term commitment inherent in my cloud contract that may require balance sheet treatment?
3. Is there transfer of ownership which will require capitalization?

1. One clear benefit of the cloud is that you pay for the capacity you need instead of acquiring a fixed capacity in  a traditional model.  In addition, because of economies of scale, enhanced technology and other factors, a cloud provider should be able to provide the infrastructure at a lower cost of ownership (for comparable capability) than a small business can on its own.

Often the cloud provides new capabilities for remote access, integration and functionality that just isn’t available in entry level systems used by most small businesses.   In this manner the cloud can increase the top line further increasing the ROI or in effect offsetting the total cost of operation for the new systems.

Another factor that can lower the total cost of operations is the time to value.  Many cloud providers have developed rapid implementation programs and “pre-configured” elements to reduce implementation time and costs when compared to a traditional on-premise deployment.  I-BN’s “Start & Grow” program for Sage MAS 90/200 and SAP Business One have cut the deployment cost by as much as 75%  and has resulted in rapid deployments measured in days rather than weeks or months.  This again improves the ROI by reducing the upfront implementation costs and is much more salient than the CAPEX vs. OPEX argument.

2. Many SaaS applications require multi-year commitments and payment up front.  These multi-year commitments can also be financed.  In either case, you have created a balance sheet prepaid asset that needs to be amortized over the life of the commitment.  If financed, the associated liability must also be added to the balance sheet of the company.  This may not be a capital expenditure for company and may affect loan covenants differently than a traditional capital expenditure, but for most small businesses, who cares?

3. Companies like I-BN offer cloud services combined with software in a hybrid model.  Combining terms with cloud services our customers gain the benefits of an elastic cloud supported by leading technology and a team of experts with ownership of the business management software after the initial term.  In this type of arrangement ownership of the asset transfers to the company at the end of the term, and accordingly the asset should be recorded on the books of the company at the beginning of the contract term.

The concept of transfer of ownership is akin to purchasing versus leasing a car.  If you plan on a short lifespan for an asset, or  flipping a car so you are always driving new cars with the latest features, a subscription model makes sense.  If you plan to keep an ERP system for 10 years or longer, you must look at the total payments over the anticipated life and discount that cost using some expected cost of capital.  Often a subscription versus purchase analysis results in a 2-3 year break even on the licenses for purchase versus subscription.  For example, if a license costs $150 per month per user compared to $3,000 to purchase, without cost of capital in about 20-24 months the license would have been paid for.  Even if you factor in a 20-22% license maintenance fee, $600 per year compared to $1,800 per year adds up quickly in your ROI calculation.

So the bottom line is that CAPEX vs. OPEX should rarely be the deciding factor if a factor at all in systems selection.  A companies choice of business management platform should be based upon meeting your  business requirements, ease of use, and total cost of operations over the anticipated life of the software.

• Customers gain predictability in cost and eliminates the large upfront costs for licenses
• VARs would lose their upfront commissions in favor or a long term revenue stream
• Software Developers gain increased contact with their customers  and can reduce the margins they pay their VARs

Nicole’s conclusions, even without a crystal ball, are that “the answer for customers, VARs, and software vendors would be to have some type of hybrid of both outright purchase and subscription options. In that way, businesses will have a choice of buying in the way they want.”  This is what I-BN has been advocating for years because the subscription pricing model tends not to be all inclusive.  Even if 100% of license, maintenance and upgrades are included, the subscription almost never includes training, configuration or business process redesign.

The real issue from a customer perspective is the method in which subscriptions are being sold, especially in the ERP market space.  Subscription based pricing is great for commodity services, short term projects, and businesses with cyclical businesses if subscriptions are variable.

• Credit card processing, tax calculation service, currency conversion, etc. are great examples of connected services which are commodities which fit a subscription model to the tee because you pay for consumption.
• Project based subscription software for construction, professional services, etc. are also perfect for subscriptions. Costs can be associated with and attributed to a project and turned off at its completion.
• Companies that have peak and valleys in usage can take advantage of subscriptions that are on a short time frame. Take for example a catalog company that has 100′s of call center people in the holiday season and a dozen during off peak times. A call center software paid per seat per month would be a perfect subscription application.

Regardless of whether the subscription is for a web native product like NetSuite or a web-enabled product like Sage ERP MAS 90 Online, there tends to be an annual or multi-year subscription.  There is no ability to scale down in off peak periods and ERP is not a commodity.  Changing ERP systems is hard work and disruptive to operations before all of the benefits are gained, so companies plan to keep ERP systems 10 years or longer.  Even if we can’t plan what technology or business will be like in 10 years, selecting an ERP package often hinges on the confidence that the software developer will be in business for the long haul and can keep up with new technology and business practices.

Companies like Sage, Microsoft and SAP have all done the math and calculated how much extra money they will make with subscription pricing (as part of their price calculations) based upon current and anticipated usage patterns. Customers will as well. Therefore, either subscription pricing will not capture a large ERP  market share or software vendors will adjust the policies to balance increases in revenue to the value provided by the lower up-front costs (similar to leasing).

That is unless you think, a sucker is born every day!

In just its second year attendance seemed to grow to over 500 attendees and the expanded session offering included a wider variety of topics and speakers.  Some highlights of the event included:

• Keynote session by Conrad Mandela VP for SAP SME in North America
• Keynote session by Andreas Wolfinger Head of Business One Development Worldwide
• Business One Mobility Shootout – demonstrations of the Mobile device capabilities for B1
• Technical sessions on Crystal Dashboard Design, Business One Integration Framework and B1 Mobility setup by Eddie Neveux and Dan Love from SAP
• What’s new and What’s coming in SAP B1 sessions by Leah Divir, Idit Fydman-Saguey and Andreas Wolfinger from SAP
• Customer Experience Sessions such as the one led by Shawna DeBoer of Durks Farm Service

In addition to these great educational sessions, there were a number of Solution Provider sessions on industry specific topics or general business topics such as I-BN’s session “What Is the Cloud and When Should I Use It?  Solution providers also hosted several evening receptions and the Solution Fair where over 50 companies were able to demonstrate their products and services.  Several solution partners also sponsored a golf outing and nature hike.  Thanks to the generous sponsorship the entire event was FREE and a good time and tremendous learning was had by all!

I-Business Network is a member of ASUG and a sponsor of the Business One Summit.  I-BN also provided the technical infrastructure for the hands on training.

• A community of programmers can develop quickly and cost effectively
• Multi-platform and LAMP platform support can lower license costs and provide flexibility
• Eliminating the up front and ongoing license costs can save money

The operative word in the last bullet point is CAN.   The cost of an ERP system is made up of many factors; however, one of the least significant is the upfront license costs.  Don’t stop reading because a license may range from $1,000-$3,000 or more per user in a traditional implementation or $100-$250 per user per month or more in SaaS,  but think of the costs of an ERP implementation and the ongoing costs and benefits.

Typically, in traditional software implementations, the license cost is less than 1/2 or of the initial costs.  Don’t just think of the cost of an implementation partner and your internal staff costs, but consider the disruption of your business processes due to change, and the time it takes of leadership to effect the desired behavior from the staff.  Even in a SaaS world, if you compare the first year or two subscription to the cost of change it will pale if you consider all the soft costs.  In many cases, open source software needs to be supported by a programmer who customizes the solution to your needs and is often required to make changes to code when system capabilities are not available in the “free” version.  In either case, the efficiency and effectiveness of the implementation will determine the total cost of your initial outlay for the system.

Now think of why you are changing systems in the first place.  Your business processes need improvement, redesign or radical overhaul to deal with the new economy, competitive pressures, or to become a leader in your industry.  The benefits of the ERP system are driven by the capabilities of the system and its ability to adapt to your business and changing conditions.  Typically the “free” version of an Open Source ERP lack capabilities, support and require customization to meet and/or adapt your business requirements.   Custom development is always more expensive up front, and long term, if an out of the box or configurable solution is available.

You don’t buy a new system based upon what it can do for you in the first 3 or 6 months,  so don’t evaluate packages based upon initial costs.

SAP Business One has been a fast growing software platform in the US Market since 2003.  Last year Business One reached a milestone when the Americas SAP User Group (ASUG) held the first SAP Business One Summit in Portland Oregon.   This free event is organized by and is for users who want to meet with other users, learn from SAP and leading partners and see what is coming down the road from SAP.

Carl Lewis who has spearheaded the Business One group within ASUG recently posted The TOP Five Reasons To Attend The ASUG Business One Summit.  In bullet form Carl identified:

1. Education
2. Networking
3. Influence
4. Unfolding the Future
5. Cost Effectiveness

When virtualization took hold in the marketplace, Microsoft realized it needed to change its rules of engagement or it would be losing money.  Post Windows XP Microsoft put many new restrictions on virtualized desktops and created new VDA licensing.  The same is true with HyperV and the virtual computer operating systems being licensed by virtual CPU or cores rather than physical CPUs.  VM Ware is going even further with virtual RAM licensing costs.

Its not just operating systems that change their licensing methods.  Several years ago Microsoft came out with “Business Ready” licensing that offered role based licensing.  Theoretically this is to reduce license costs so people only pay for the functionality they need.  However, this change was a radical departure from concurrent user licensing to named user licensing.  Others including SAP and Sage also offer named user licensing models although Sage still has its complex user and module matrix for some of its products (although not as bad as the Navision module and granule used to be).

Most perpetual licensed software that is”beyond the shelf” often comes with the nagging “license maintenance” costs which typically range from 17-25% of original purchase price.  So every 4-5 years you end up repurchasing the license you thought you owned.  In most cases you do own the version you purchased, but every 2-3 years that version becomes obsolete and you can no longer get support from the vendor.  So the maintenance fees allow you to upgrade to newer versions with better technology and feature sets (which hopefully translates into business efficiency).

So what about open source and SaaS?

Open source products typically come in two flavors, the community edition or a paid supported edition.  The community edition is typically downloadable for free, but comes as is.  For packages like Sugar, Magento or Joomla, you can get a very stable version of software and then can pay a service provider for implementation assistance and support.  Seems free, but unless you want to spend the time and have the capability to support the products on your own, you are still paying “maintenance” in a different form.  Even if you support it yourself, isn’t your time worth something?

Almost all of these products have supported versions that offer a higher level of functionality and with that functionality comes a price.  You also can buy support contracts for commercial editions or subscriptions to the software (SaaS), so what you have done is shifted the timing of payments (sometimes, as some SaaS providers require upfront payment for the term of the subscription) and the names of the license fees.

One advantage of a SaaS model or using a Cloud Service provider like I-BN is the bundling of license costs.  When I-BN hosts SAage MAS 90 or SAP Business One, it bundles in all of the server, database, MS Office, Citrix and other license costs into a single predictable payment.  With a SaaS or subscription based hosting pricing model, the underlying ERP software and implementation costs can also be bundled into the monthly fee.

The key when evaluating the cost of software, whether on premise or in the cloud, is the total cost of operation over the minimum anticipated life of that software.  Software and computing resources used for a short period of time are ideal for cloud based subscription pricing.  Software with a longer “shelf-life” needs to be evaluated with annual maintenance, upgrade, and other costs factored in.   Subscription pricing eliminates much of the calculation effort if the service provider offers a comprehensive package.  It is critical for you to look at the contract terms and service level agreement to determine if all licensing and services are included.

The bottom line is that software companies produce software to make money.  That investment in research, development, support and maintenance is not trivial and software companies recover those costs over time via licensing, subscription or support agreements.  Cloud based software is no different, but adds the server maintenance and licensing costs to the bundle.  The names may be changing, but the need to support the investment in software development has not changed.

For many small businesses considering a move to cloud computing, the question is a paradox that has stymied the transition.  It’s also a myth begging debunking. As contradictory as it may seem, older computers are ready-made for 21^st Century computing solutions.

Cloud-based computing has taken its place as the hosted delivery model for many key business applications, from accounting and payroll software via such solutions as Sage MAS 90 and SAP Business One as well as the web native SaaS solutions.

The Software-as-a-Service (SAAS) model was created to deliver applications regardless of the processing speed or location of the computer. For a business owner, the cloud requires no new investments in the latest desktop systems or laptops. Moreover, solutions can be customized to meet any client’s specific needs, as well as the capabilities or perceived limitations of their computing systems.

All the business needs is a broadband Internet connection. Desktop computers become “dumb” terminals, like hardware deployed in many businesses. All software is served up on an as-needed basis via the Internet and Web browser. Businesses have been known to dust off even older computers to act as email servers; most Web-based mail consumes so little processing power and memory that even pre-XP OS installations generally can handle with relative ease.

Some business applications often perform better and more reliably when delivered as a web-based solution, as opposed to the software being installed on a local computer. No hard drive space is required, and far less RAM and processing power is needed to run an application accessed as needed over the Internet.

Given that older systems might be more susceptible to component or software failure, hosted applications also ensure data is backed up, protected and secure.

Contact I-BN for a free consultation or webinar to help you better understand how your current computing installation will work with the cloud. No paradox here. Just ready-made solutions.

• The cloud is a hot topic.
• SaaS is popular.
• NetSuite announces another quarterly loss.

“I’d like to try SaaS, but applications cannot be customized to meet my specific needs.”

“It’s one-size-fits all,” they worry. “Providers use a single code base for every customer. And if I went with a cloud-based host, any updates or upgrades may put my entire operation at risk.”

Let’s put this fallacy to rest once and for all: All SaaS applications from leading providers can be customized and securely updated to meet individual client’s specific needs. Period.

It’s an important distinction, especially as SaaS grows to become a critical delivery model for many business applications, like accounting, AP and invoicing, content management and collaboration, customer relationship management (CRM), enterprise resource planning (ERP), among others. Sales of SaaS rose 15.7% to $9 billion in 2010, and are projected to hit $10.7 billion this year – and could account for 16% of the total enterprise software market worldwide by 2014, notes research firm Gartner.

This is not to say that all SaaS applications are for all companies regardless of industry and requirements. Selecting a cloud-based application is the same as selecting an on-premise solution. Packages are designed and available for a general industry or classification of business or function which serve as the base for customization. A medical device company, for example, would not start with bakery software on-premise or in the cloud.

In many cases, packages like SAP Business One, Sage MAS 90, Sugar CRM, Sage CRM or other cloud enabled applications meet prospects’ specific needs “out of the box” with little to no customization at all. These packages come with numerous industry specific extensions for specific industry requirements, like engineer-to-order manufacturing or micro-brewery operations.

Most SaaS providers offer customization tools to enable custom fields, tables and screens in addition to custom reporting.  Scripting capabilities often are embedded in these tools, enabling mini-programs inside the framework of the core application.

Similarly, in private clouds like that found with I-BN, customers can have their own instance of the software, allowing for unlimited customization. What’s more, when we push out upgrades and updates, they’re automatically installed on the solution – without affecting individual client customization.

Moreover, concerns regarding single code base are misplaced. Some SaaS systems for multi-tenant solution use a single code base to provide economies of scale. However, some allow for a dedicated instance at a pre-specified cost.

Either solution works, regardless of whether the customer chooses a hosted, web-enabled solution, or one that’s taken in-house at the client location. Neither alternative jeopardizes performance, functionality or customizability.

So, as you ask whether SaaS can be customized to meet your specific needs, the real question should be: Just how much customization do I need?

• CEO Patrick Houillon announced that Sage will be dropping product names in the US and follow the Sage corporate standard for product numbering and corporate branding.
• Sage MAS 90 ERP will be offered in a cloud based subscription model
• Additional products like ERP X3 will be offered via the web next year