Software as a Service – the best is yet to come
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BDO experts, Derek Neil, Johnnie Buchanan and Alex Wood discuss the evolving role of Software as a Service (SaaS) in delivering ever more specialised solutions to niche business sectors.
SaaS (Software as a Service) – the ability to access cloud hosted applications over the internet instead of installing and maintaining software internally – has soared in popularity over the last five years. Not only has the service proven itself a cost-saving and flexible resource, it’s also provided essential remote working solutions for businesses who went into the pandemic with data and other resources that could only be accessed while on-premise. SaaS has, in this sense, enabled digitization en masse across a range of sectors and businesses – even those that previously saw no need to house their data in the cloud.
However, SaaS has far from fulfilled its potential. What we’re seeing now is a new wave of SaaS that is more focused on providing specific solutions that can cater to niche markets.
In this feature, Derek Neil, BDO Transaction Services Partner, Alexander Wood, BDO M&A Director and Johnnie Buchanan, BDO Senior M&A Executive and, come together to offer their experience around the SaaS sector, providing expert insights into the trends they are seeing.
What has been the biggest development driving growth in the SaaS sector in the last five years?
The biggest driver of SaaS growth has been demand, driven in part by cash flow, and in part by the accessibly and scalability of the operating expenses (OPEX) model, as oppose to capital expenditures (CAPEX). The hyperscale cloud, and the ease with which businesses can now develop specific software solutions has been huge in facilitating this shift. There was a time, not even five years ago, when it was completely normal for a business to develop on-premise. They’d be using names we still recognise today, the likes of SAP & Microsoft, but the technology itself would be housed on-site. Today, the cloud makes deployment of SaaS, as well as the rollout of updates and new features quicker and easier, aided of course by the growing number of developers and quality development tools entering the space.
Now, all the big software companies work on completely cloud-based models, housing their systems and databases on remote, centralised infrastructures that are easily and instantly accessible. Businesses can leverage hyperscaler platform capabilities to IoT, AI or Data Analytics into their Software offering, making the true SaaS model cheaper than ever to run, deploy and even bill. It’s also given rise to the now widely recognised subscription model, which not only grants customers easier access to products and services, but also makes it easier for companies to grow quickly and expansively, without the huge scale up costs.
Another key driving force is an increased access to talent. Already in 2019, research by The Royal Society suggested¹ demand for workers with specialist data skills had more than tripled over a five year period. This is a trend that has only been further accelerated by COVID, with online recruitment company Adzuna² revealing there are 42% more job ads for technology-related positions in the UK, compared to before the pandemic. As businesses in all sectors race to upskill, reskill and add to the IT experience within their workforce, it seems apparent that the talent pool of SaaS experts is only set to grow, facilitating uptake and driving development into the future.
Is SaaS more high-risk than traditional in-house software solutions?
Subscribing to cloud-based solutions involves trusting a third-party with your most sensitive data, including everything from company financial details to employee data. It’s easy to see why business owners might believe this to be far less secure than storing their data in on-premise servers. However, this is one of the biggest myths around SaaS.
"The reality is that today, cyber offerings are arguably more secure than storing your data in-house, giving you the benefits of constant updates to systems and security, along with the knowledge that your data is being looked after by specialised experts whose job it is to keep the database secure around the clock."
Another factor to consider when it comes to risk is the cost of human error. Anything being created or managed by humans is inherently risky. So if you can automate and use software to minimise the amount of data inputs that have to be overseen by a human, you can reduce your risk, while also helping from an efficiency standpoint. This kind of automation is helping a lot of industries at the moment – from streamlining workflows, to minimising human error and cutting down the supply chain. SaaS is, after-all, exactly what it says on the tin. It’s a service there to help minimise costs and maximise profits – and that includes keeping risk low. In a show of confidence for the security of SaaS, UK spy agencies (MI5, MI6 & GCHQ) have just signed a contract with AWS to host their sensitive data.
What does the future of SaaS look like?
SaaS is becoming increasingly able to provide niche, targeted solutions, opening up a whole new realm of possibility for SaaS companies and their clients. Already, we’re starting to see companies specialising in specific sectors, building customised solutions that can be tailored to the needs of an industry, and in doing so, making themselves all the more integral to their clients’ business model. Moving into the future it’s likely that the advancing capabilities of this technology will enable SaaS service providers to build even more heavily targeted solutions from the ground up, working closely with their clients to provide solutions continually adapt to help increase their ARR percentages and stickiness, while reducing human error and cutting man-power on repetitive admin-based tasks. Being purpose-built, this would make businesses all the more reliant on their SaaS provider, and therefore less likely to switch supplier in the future, locking them into the subscription model for the long-term.
What funding is available for Research and Development (R&D) in the SaaS sector?
There’s a common misconception that R&D tax credit claims can only be made by companies dedicated to an almost scientific level of research – lab coats, test tubes and safes full of patented products. But this simply isn’t true.
And it was in recognition of this, that the HMRC’s generous R&D tax credits scheme became available to technology firms ranging from tech start-ups all the way up to long-established businesses looking to invest in SaaS development. However, many business don’t realise they are eligible for R&D funding.
Under HMRC guidance there are four criteria that companies must fulfil in order to secure R&D funding. These include:
- Having a specific, measurable project in mind
- That the proposed project intends to advance the field of technology
- The overall knowledge achieved will advance the whole sector and not only benefit the individual company
- That the project involves an uncertainty that can’t readily be resolved by current knowledge or solutions
R&D expenditure can be claimed against the costs of anything from consumables and licence costs to the cost of staff hired to work directly on the project. If you’re considering R&D funding for an SaaS project, it’s worth speaking to an advisor to figure out exactly what you could include in your claim and what the return might look like. Check out the BDO benchmarking toolkit to find out more about R&D expenditure claims.
Is SaaS a strong investment?
Interest in SaaS from a PE perspective comes from a combination of contractional revenue offering assurance of regular cash flow, the ability to streamline essential services, minimising risk and saving manpower, and of course, the huge potential in scalability off the back of these first two factors. According to Tech Nation , UK tech VC investment is third in the world, hitting a record high of $15bn in 2020 despite the difficult conditions brought about by the pandemic. And it’s not only domestic investors who are interested in SaaS technologies either – a huge 63% of investment into UK tech came from overseas in 2020, up from 50% in 2016.
However, only the best prepared and best advised companies will be in a position to take full advantage of SaaS investment. If you're not well advised, you might not be able to maximise the value of your investment in these solutions. There’s a lot to think from an investment point of view in terms of the KPIs, the long-term strategy this solution is helping you and your customers achieve and, of course, the protection you need in case things go wrong. Everything from churn and monthly/annual recurring revenues (MRR/ARR) to customer acquisition costs (CAC) and lifetime value (LTV) need to be taken into account as a means of measuring the value of your investment.