Before you sign that contract you may want to make a trip down to the accounting department to fully understand the financial implications of a SaaS DAM solution. And you should be prepared to make a strong argument for adding budget to your operating budget.
A SaaS solution is generally NOT considered capital expenditure (CAPEX), which means the cost of the SaaS project will be primarily considered an Operating Expense (OPEX).
A capital expenditure is a purchase that a company records as an asset that will have a useful life beyond the tax year, e.g., expenditure on assets like computer equipment. Instead of recognizing the expense for an asset the company can either amortize or depreciate the expense over the life of the asset, typically 3 to 5 years for computer hardware. CAPEX projects must have an expected useful life of more than one year.
An operating expense is an expenditure that is an ongoing cost incurred as a result of performing normal business operations, e.g., maintenance and repairs, and salary and wages.
OPEX costs can be used to reduce income tax by deducting expenses that are levied on net income, whereas CAPEX investments can be leveraged to defer costs over the life of the project. Both OPEX and CAPEX have advantage best left to the financial department to sort out.
CAPEX vs. OPEX Expenses
Think of a SaaS solution as a “pay-as you-go” subscription-licensing model that allows your company to use the vendor’s software. Your company is paying for a service from the vendor. Since the customer does not own the software nor is allowed to download the software, the SaaS solution is treated as a service -- which is considered an operating expense by the generally accepted accounting principles (GAAP).
When implementing a SaaS solution there are a few exceptions to this rule that may allow your company to capitalize some of the cost of developing a new solution, such as:
- Application development (owned by your company)
- Customization (owned by your company)
- Development of software for migration or conversion of data (owned by your company)
All other expenses incurred are considered operating expenses, such as:
- License subscription
- Project planning
- Data cleanup
- Data conversion
Financial Advantages of a SaaS Solution
SaaS solutions have a lower barrier for entry. This allows a company to implement a lower cost, smaller DAM solution and increase as the demand increases. If planned correctly, this will correlate directly with the ROI generated by the DAM solution, allowing the organization to demonstrate success without a large investment.
A SaaS DAM solution can be implemented very quickly, reducing the initial cost of implementation and providing the company with faster time-to-market. This could provide a strong competitive advantage.
Consult with your accounting department to fully understand what expenses can be capitalized and what your company considers as operating expenses.
Plan for an increased operating expense budget to cover the non-capitalized costs of the SaaS solution. Most vendors provide cost estimating calculators or spreadsheets to estimate the ongoing cost of their solution or that allow you to make comparisons to an on-premises solution. Don’t forget to budget for the additional cost of data conversion, metadata enhancement and customization.
License the SaaS DAM solution sized according to your needs, but make sure you carefully cover the scalability costs when negotiating the licensing agreement with the vendor. Include provisions to reduce costs as you scale. Make growth projections considering high, medium and low estimates. This will provide valuable information when negotiating your contract.
The vendor tools will give you a good starting point, but do your homework and understand all the costs for your project.
Title image by Mikael Damkier (Shutterstock)