The SaaS Tax

There’s plenty to like about cloud-based subscription solutions, including access to high-end tech. But there's also plenty to be wary of.

When Chief Executive Group moved into new offices in Stamford, Connecticut, a few years ago, we needed a way to lock the front door. Exploring our options, we found a security company that would install a keypad that would provide 24×7 digital access and a host of snazzy features to let top management—for a monthly fee—dig into data on who was using the door and when.

But something about paying monthly for a lock stuck in our CEO’s craw. He went online and found a keypad and digital logging system for $1,000. He installed it himself. We haven’t looked back—and remain burglar free—nearly five years on.

There’s a reason SaaS has become the go-to business model for our age. As Salesforce, Microsoft, Slack and 1,000 other tech firms demonstrate, SaaS is the ultimate cash machine, a steady drip-drip-drip that scales into a river with near-zero friction on customers’ wallets. Gartner forecasts global revenue from SaaS will hit $151 billion in 2022, up from $85.6 billion in 2018.

All that growth comes from somewhere. One CEO I recently spoke to has seen his once-tame IT budget nearly double over the past five years—as best as he can tell, at least—with little in the way of productivity gains. The reason? Subscriptions. Ofttimes, he finds these costs hidden away in little-noticed lines of expense accounts and other areas where you’d never expect it.

Growing Pains

To be sure, there’s plenty to like about SaaS and its cloud-based relatives. It’s allowed millions of businesses access to systems and software that would have been prohibitively expensive a decade ago. New features and improvements are immediately available without costly upgrades and product-cycle cul-de-sacs that render older code unusable on newer hardware.

But there’s plenty to be wary of as well—all easily glossed over—as you sign on the dotted line (or your senior VP of sales swipes that corporate card). Back when people actually bought software or developed it themselves, it could be depreciated as capital expense. Not SaaS, which remains an unending, EBITDA-eating operating expense. That becomes a bigger issue in slowdowns— tough to cut—or when you try to sell your business. Ever try to migrate from one SaaS solution to a rival? It’s excruciating—deliberately so—because you house none of the data. Expect to spend big on a consultant to make it happen. It also has a tendency to grow. What starts as a reasonable cost for a small company can be a big deal a decade down the line. Even “free” productivity software like Google’s suite of products can pull you on to an escalator of costs thanks to storage milestones that require you to spend more—or risk stalling your operations.

Still, for most companies, SaaS is simply a part of life now—for good and bad. The trick is to avoid complacency and inertia—the core of the SaaS business model. Make it someone’s job to keep an eye on SaaS spending company-wide. Ask them to watch long-term trends—not just spikes—in costs. Don’t budget for the present; model for growing usage over a long period of time. And remember, sometimes the best “door lock solution” for your company is just a lock on the door.

Dan Bigman
Dan Bigman is Editor and Chief Content Officer of Chief Executive Group, publishers of Chief Executive, Corporate Board Member, ChiefExecutive.net, Boardmember.com and StrategicCFO360. Previously he was Managing Editor at Forbes and the founding business editor of NYTimes.com.