Getting an ROI from SAAS

I’ve been around a lot of small businesses in my life. Sometimes, the only thing that stands between many small business owners and the overdraft limit is “the kindness of vendors” (otherwise known as “vendor financing”.)

Which is why software-as-a-service (SAAS) matters to small business. Because if SAAS is about anything, it’s about putting the “cash” back into “cash flow”.

Imagine a business that employs 50 people at $75,000 average salary per year. That business has to come up with a payroll of $144,231 every two weeks. As a rule of thumb, total annual software costs are likely to average half a payroll: 50 people usually adds up to around 50*1.5 computing devices (including servers), depending on the industry segment. Let’s assume that the annual software bill is in the range of 75*$500=$37,500, and web-based services are approximately as much again, or $75,000 in all.

Let’s assume the business is generating $175,000 per employee, or around $8,750,000 per year. Let’s further assume the small business uses a factoring company and the cost of capturing 50% of this money early (using factoring) is 4%. 4% of $4.375m is $175,000.

In the SAAS model, you don’t have to pay the $75,000 software license fees up front, like you would have to with a software manufacturer. You can opt to pay it monthly, in service fees, across twelve months, or the length of contract. Which means rather than being $75,000 down, you get to keep that $68,750 balance *in the bank* month one - and lower your financing costs/keep that superstar software team employed - all because of SAAS.

If you’re a Not-For-Profit stuck between budget years, SAAS can work for you too - by enabling payments to be structured to span budget periods, or structured to free up vital funds for services that you need, but are not in your budget.

Wikipedia has listed a bunch of very good reasons for adopting SAAS, but my bet is that the improved availability of cash and the ability to make dollars stretch further are going to become major reasons why small businesses and government adopt SAAS in 2007.