EDITOR’S NOTE

THE SaaS TAX

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 24x7 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, Editor CHIEF EXECUTIVE OF THE YEAR 2020 SELECTION COMMITTEE

ADAM ARON President and Chief Executive, AMC

DAN GLASER President and Chief Executive, Marsh & McLennan

FRED HASSAN Former Chairman, Bausch & Lomb; Partner, Warburg Pincus

NEAL KEATING President and Chief Executive, Kaman

TAMARA LUNDGREN President and Chief Executive, Schnitzer Steel Industries

MAX H. MITCHELL President and Chief Executive, Crane Co.

ROBERT NARDELLI Chief Executive, XLR-8

THOMAS J. QUINLAN III Chairman, President and Chief Executive, LSC Communications

JEFFREY SONNENFELD President and Chief Executive, The Chief Executive Leadership Institute, Yale School of Management

ARNE SORENSON President and Chief Executive, Marriott International 2019 CEO of the Year

CARMINE DI SIBIO Global Chairman & CEO, EY

Exclusive Adviser to the Selection Committee TED BILILIES, PH.D. Chief Talent Officer, Managing Director, AlixPartners

CONTACT US CORPORATE OFFICE Chief Executive Group LLC 9 West Broad Street, Suite 430 Stamford, CT 06902 Phone: 203.930.2700 Fax: 203.930.2701

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