It is estimated that in 2021, the worldwide IT expenditure of businesses touched $3.92 trillion (Gilbert, 2022). And, 66% of the total IT expenses or $2.58 trillion was spent on software licensing, cloud based services as well as managed services. With the annual growth projections of 20%, the enterprise spending on software and cloud based services is bound to grow even further (Gilbert, 2022).
A 2019 survey by Computer Economics reveals that enterprise spending on IT as percentage of revenue amounted to 1.4% – 3.2% for manufacturing sector and 4.4% – 11.4% for Fintech sector. In terms of per user cost, the manufacturing sector spends $3,733 – $9,864 per user and the fintech sector spends between $13,772 – $26,667 per user (Computer Economics, 2022).
By rough estimates, companies in US are spending at least $550 per employee on a monthly basis towards software licensing and SaaS fees. While in the US context, this amounts to 4% of an employee’s monthly remuneration, the cost is significant for companies that operate in middle or low income countries. For instance, in India $550 is 97% of the average monthly remuneration of a typical corporate employee.
There is therefore a strong case for companies to evaluate the long-term operating cost of their digital transformation initiative. So, here we provide some pointers to help businesses determine an approach, by which they can cost-effectively sustain their digital transformation in the long run.
Understand the economics of digital transformation and make the right trade-off between acquisition cost and operating cost
Digital transformation requires adoption of software applications for all the processes that are crucial to a business organization. Businesses can either opt for SaaS based applications or develop a bespoke software solution.
The economics of the two approaches are pretty straightforward. When opting for SaaS, your acquisition costs are null, and you only have to incur operating costs on a per user per month basis. On the other hand, with bespoke solutions, your acquisition costs are significantly high, but operating costs tend to be minimal.
For businesses having a small team of employees, SaaS is convenient, as it allows them to use great tools without having to incur high acquisition costs. However, in the case of businesses which have several hundred employees or more, the monthly per user model of SaaS applications becomes significantly expensive. So, for medium and large businesses, reliance on bespoke solutions is economically more viable.
Consider ‘Do-ability’ along with costs
In theory, medium and large businesses can increase their profitability by deploying bespoke software applications across all of their departments. However, this is not viable in the real world situations because of ‘Do-ability’. Even if a business has the resources to engage the best development team, it is just not possible to replicate benchmark SaaS applications.
For instance, Google Workspace is used extensively by businesses across the board to facilitate communication as well as collaborative working. The comfort and convenience offered by the suite of applications included in Google Workspace, cannot be matched by any bespoke solution. So, it is futile to even attempt building something like it.
There are many other scenarios, where it is prudent to use readymade SaaS applications rather than build bespoke ones. Here, we have compiled a list of scenarios for which bespoke development should be avoided.
Digital Marketing Tools: Website analytics, Search Engine Marketing and Social Marketing Tools like: Hub Spot, Kiss Metrics, SEM Rush, Huite Suite and more.
Taxation / Compliance: Laws relevant to taxation / compliance change from time to time, therefore using a readymade SaaS application is the best way to stay updated and comply with laws of the land.
Design & Prototyping: Design applications and web prototyping tools such as: Adobe Suite, Figma, Webflow, Canva and others.
Specialty Software: Applications for R&D, CAD/CAM or any other industry / niche specific tools.
Communication Tools: Email, Chat bot, Meeting (Zoom, Microsoft Teams), Chat (Skype, Google Chat), file sharing (Dropbox, G-Drive) and more.
Now, let’s shine some light on what is ‘Do-able’, and which aspects of your business can benefit from bespoke development.
Ideally, bespoke solutions should be developed for your KAOs (Key Areas of Operation), these include:
Sales: Lead nurturing and funnel management such as: CRM that integrates all channels of communication (email / whatsapp), auto responders, email blast, reminder emails etc.
Core Operations: Project management system, order & inventory management, deliveries, billing, process / queue management, EHR (for healthcare), help desk system and more.
Human Resource Management: Attendance & leave, payroll, roster management, material resource allocation, facility & resource access management.
Bespoke development aimed at integrating and simplifying the core processes of an organization usually pay long term dividends. It provides great value, enriches the work culture and enables significant cost savings on SaaS fees.
Try to avoid the SaaS integration and customization trap
SaaS has been a hugely successful model for many reasons:
- It provides a reliable, stable and well tested solutions right from start
- It reduces the risk of sunk costs, ensuring that an organization doesn’t incur losses by attempting to build something from scratch and then having to shelve the project due to incongruent workflows or errors
- It eliminates the the need for back up, data security and server maintenance
Having identified the benefits of driving the digital transformation initiative through SaaS, it is also essential to understand that ‘SaaS only’ approach doesn’t mean you get complete waiver on acquisition costs.
Firstly, when businesses choose different SaaS applications for various organizational processes, they then have to hire development teams for integration. For instance, if an organization uses a SaaS application for project management and another one for invoicing, then the two must be integrated so that information from project time sheets can be used for creating invoices. When integrations need to be made between multiple SaaS applications, the acquisition costs tends be significantly high.
There are many enterprise level SaaS applications which cater to typical KAOs (key areas of operations). However, these applications may be cumbersome and have features that are not relevant to your industry. So, they need to be customized in order to tailor them to your specific organizational needs. Development support is needed to customize enterprise level SaaS applications, and this is typically achieved at a high price. So, even with an enterprise level SaaS solution there is a significant acquisition cost.
We hope the guidelines provided in this article will help you choose the right appreoach to cost-effective and sustainable digital transformation.
Gilbert, N. (2022, November 7). 50 crucial it statistics you must know: 2021/2022 Data Analysis & Market Share. Financesonline.com. Retrieved November 24, 2022.
It spending as a percentage of revenue by industry, company size, and region. IT Spending as a Percentage of Revenue by Industry, Company Size, and Region | Computer Economics — for IT metrics, ratios, benchmarks, and research advisories for IT management. (n.d.). Retrieved November 24, 2022, from https://www.computereconomics.com/article.cfm?id=2626