Budgeting for SaaS Projects in 2016

It’s official—the Cloud has gone mainstream. According to CFO, “software-as-a-service (SaaS) arrangements now outselling licensed software.” This year, 73% of CIOs surveyed by Piper Jaffray have “allocated budget for cloud-related spend”. And as companies explore SaaS, their interest has only increased: Of IT executives who responded to Computerworld’s annual Forecast survey, more than 40% planned for their organizations to spend more on SaaS and a mix of public, private, hybrid and community clouds in 2015.

Businesses spend more on innovation

It’s difficult for businesses to stay competitive without participating in the information analytics revolution, which is greatly facilitated by social, mobile and cloud technology—sometimes referred to as the SMAC stack (social, mobile, analytics and cloud). In the years since the deep downturn of 2008, many companies had to reduce overall spending, and more of the IT budget was consumed with “keeping the lights on.” But as the economy has improved, business leaders have added emphasis to strategic IT—areas where innovation might rocket your company ahead of the competitive pack. Today, companies spend about one-third of the IT budget on “innovation” and “business opportunity”.

Rise of the “techie” CFO

In most businesses, technology’s share of the budget is increasing, but not all of those tech-related budget increases end up in the IT department. In fact, a recent survey by Corporate Executive Board (CEB) discovered that as much as 40% of technology spending occurs at the departmental or line of business (LOB) level, where the CIO/CTO doesn’t necessarily have full visibility. Many companies have multiple SaaS offerings coming out of line of business (LOB) operating budgets across the business. The largest “culprits” in these nontransparent, “shadow IT” expenditures are HR, marketing, operations and finance. For example, the CEB survey discovered that HR departments were spending between 6-9% of their own budgets on IT.

Whether your tech budget remains mostly in the IT department or is disbursed across your LOBs, one universal truth remains: Your CFO has to possess much more technology knowledge than he or she did a decade ago. Today, CFOs must:

• Have a solid understanding of technology concepts, including SaaS and the SMAC stack.
• Work in partnership with the top technology executive to influence more strategic tech investments across the organization.

A strong working relationship between the CFO and CTO/CIO is critical to success. According to a PwC survey, organizations reporting strong collaboration between the CIO and the C-suite “are four times as likely as those with less collaborative teams to be Top Performers— respondents who said they are in the top quartile of margin growth, revenue growth and innovation.”

Tips for better budgeting of 2016 SaaS projects

If your company is considering one or more SaaS projects in the coming year, here are some things to consider as you approach your annual strategic budgeting sessions:

1. Make a list and categorize potential projects. In the first step of your new tech budget, the CTO, in cooperation with LOB managers, should create a master list of all of the proposed technology projects. Categorize the list by department or by company goal (customer experience, cost cutting, etc.). Then prioritize the projects in each category.

2. Select strategic innovations in alignment with company-wide objectives. Here’s where the rubber really meets the road. The CTO and CFO should work together to prioritize initiatives at the corporate level. Which categories of projects offer the most competitive advantage? The fastest ROI? What can individual initiatives offer in terms of containing costs or improving overall productivity? The projects chosen should tie in closely with stated corporate objectives.

3. Determine interdependencies that may impact projects. When deciding which projects to advance first in 2016, consider how the projects impact other areas of your IT strategy. Will this project affect other systems? Is integration required? Are other resources needed?

4. What’s better for your financials—CapEx or OpEx? Once you decide what IT projects will move forward, consider whether cloud-based or in-house technology makes more sense for your business. According to Mark Peacock of the Hackett Group, “A company whose performance is measured by return on assets deployed is more apt to move assets off the balance sheet, which makes cloud arrangements more attractive. By contrast, regulated companies, such as utilities, are not interested in trimming fixed assets, which go into their base rate calculations. As a result, they may be more likely to hold on to their data centers and other IT infrastructure, but build out private clouds within those data centers to reduce operating expenses.”

This decision goes beyond software (SaaS) to also include network and storage infrastructure (IaaS) and development platforms (PaaS). Hardware can be difficult to maintain and expensive to secure. There are good deals to be had on IaaS and PaaS as large players including Amazon and Microsoft battle for market share.

5. Think about the best timing. If you have been considering moving legacy software to the Cloud, obsolescence or expiration of support might encourage your decisions. If you’re facing a large, costly upgrade because you’re losing support, or it’s time for to new a large license fee, it may be an ideal time to transition to the Cloud.

6. Ascertain the financial viability of your SaaS vendors. You’ve prioritized your wish list, chosen the project to move forward and decided that SaaS is your best option. How do you select between vendors? As with any software decision, make your needs list in terms of functionality and then evaluate multiple applications. Some will naturally rise above others and be a better match for your organization. Of those that merit final consideration, examine several additional factors about each SaaS vendor as part of your diligence—including the experience level of the leadership team, industry-specific features, and the financial viability of the SaaS firm.

IT budgeting might seem trickier than ever, especially with so many expenditures taking place at the departmental level. However, companies that make extra effort to get LOB managers, the CTO and the CFO on the same page can be rewarded by a clearer path to strategic innovation that may translate into stronger financial results.