Software Buy? Lease? Rent?
Most business executives understand the key differences between owning, leasing or renting office space, vehicles or capital equipment, but rarely consider software in the same light.
Yet software is something we regularly invest in and use every day. Efficient business are dependent on efficient IT systems. IT regularly provides us with fresh opportunities to differentiate our businesses from our competitors and underpin corporate strategy with the right technology.
Although software leasing has been around for many years, many business leaders are still unaware of the opportunities that exist with software providers. Whilst fundamentally software is a license agreement between vendor and end user, it can still be considered an asset,
like any other.
Yearly costs for maintaining software (upgrades) should be considered as part of any continual business improvement policy. Instead the annual invoices are often scrutinised and seen as an opportunity to reduce costs, by remaining on old software versions. The short term gains usually lead to long term pain.
Yet if upgrades are included in a lease companies often benefit from discounted prices and a fixed monthly operational cost which is rarely brought into question during the life of the lease.
To understand the differences and various benefits of buy / lease / rent delivery models, we can consider both the technical and financial benefits.
Buy (On-Pemise)
This is the method we are all familiar with whereby the user purchases on-premise software licenses as you would any other asset. Owning a license to use a particular version of software ensures you have right to use that version throughout its entire lifecycle. Responsibility for maintaining on premise licenses remains with the user, who may employ the necessary IT skills, or choose to contract this to a 3rd party, or even the vendor.
Software license agreements are usually between the vendor and the end user business (or legal entity) and cannot normally be resold, or shared with other businesses, even if two companies are part of the same group. If you are uncertain about your software, refer to your license agreement or speak with your supplier.
Ownership provides the user with the greatest level of control, having the right to use that software as required and within the constraints of any licenses agreement.
Owned software is usually installed directly onto a PC, or is sometimes shared across a LAN via a network license manager application. Data created using the software is also stored locally or to a local server.
As with any asset, users pay once for software and then maintain it, meaning that initial costs are relatively high. As with any Capital Expenditure (Capex) investment, any owned assets can be depreciated, or amortized, over the lifecycle of the software which is typically 3-5 years for most software products.
Lease (or lease/purchase)
In a lease model, a finance company will purchase the software license and any upgrades
on your behalf and then lease it back to you at a fixed monthly rate and over a fixed time period. For the user there is little difference technically from ownership. The final lease payment often sees the asset transferred to an owned state however there are lease models where the software is effectively returned to the vendor unless a further agreement is made.
Leasing provides a number of financial benefits in that the initial capital investment and associated risk are absorbed by the leasing organisation. Route to ownership is via regular fixed monthly costs and so leasing is considered an Operational Expense (not Capex). Whilst the initial VAT payment on the investment is absorbed by the lease company, the end user is responsible for the VAT on each lease payment.
In committing to 5 years of upgrades with a 5 year lease (for example) the software vendor will often provide additional discounting, which can help offset any interest paid on the lease. End users avoid the annual scrutiny of software upgrade invoices.
Whilst under a lease agreement, software is 100% tax deductable, during the period in which the expense occurred. This is a significant benefit which protects vital cash flow when compared with longer term depreciation/amortisation models.
Rent (On-Premise or Cloud)
Renting is another form of leasing, but without any final transfer of ownership. Software may still be provided as on-premise however cloud based applications delivered via the web and a simple browser are more common.
Saas (software as a service) delivered via cloud technology is increasingly popular as users are being attracted by a consistent reliability, added data security and lower operating costs.
Rental models remove any concept of ownership nd users simply use what they need, when they need it for as long as they need it offering flexibility and it complimentary features which are aligned to lean, agile business models.
With SaaS, some level of control is lost to the vendor who is responsible for service delivery and maintenance of the software, doing all this in background without user input, other than to agree to the update. Hardware is also maintained primarily by the vendor, eliminating many IT challenges for SMBs struggling to stay ahead of IT issues.
One obvious benefit of SaaS is instant mobility, providing access to applications anytime anywhere and without the complexities of global licensing. Commercially there is some added risk in that the vendor has control and could block your account should you fail to pay
for what you are using (for example)
There are still data and security challenges surrounding cloud technology, but ost businesses are only ever exposed to non-critical data and must understand and assess cloud security in parallel to any on-premise security. It is certainly true that most SMBs cannot afford to invest in the levels of IT security and skills, required to maintain an ongoing and effective security firewall.
My Thoughts?
There are no right and wrongs here. Different delivery methods, payment plans and tax incentives provide more choice for the end user. Software vendors shifting towards What you need, when you need it, for as long as you need it are aligning themselves with market
demand. For them there is expected to be a short term revenue loss, followed by longer term stability, found in more predictable and reliable revenue streams.
Symetri part of Airbus Defence and Space and a leading supplier of Autodesk Digital Design Solutions offers all of the above schemes and payment options.
In recent years our clients have been able to add capacity and capability, whenever required, using short term software rentals. Applications which have traditionally required a high level
of computing power (e.g. simulation, rendering, PLM) have been accessible via low cost cloud technology and therefore more affordable for SMBs.
My experience has been that these options help me to win more business, which may have previously been delayed, or lost. My customers get the right tools for the job helping them to reduce design lifecycles and bring innovative new products to market, faster.
A complete list of Autodesk software rentals is available here
http://www.autodesk.co.uk/buy/rental-plans
Autodesks 360 products available via cloud are outlined here
https://www.youtube.com/watch?v=Z71aYKW-LaM&feature=youtu.be
Andy Hadley
Symetri
07702 242583