A new survey by McKinsey & Co. finds that 61% of North American companies with sales of more than $1 billion plan to adopt one or more software-as-a-service applications over the next year. As these companies embrace the SaaS model, enterprise applications will show up on the books as operating costs rather than as capital expenditures (cap-ex). This isn't just because the software itself is no longer cap-ex, it's because SaaS erases the need for the capital-intensive IT infrastructure associated with the internal deployment of enterprise applications.

	Greg Gianforte, CEO, RightNow Technologies

This new model is part of a larger trend to jettison noncore competencies while leasing, rather than owning, depreciating assets. Motor vehicles are a good example. While all companies need them, they don't all want to be in the business of managing and maintaining them. So many turn that job over to a fleet-management provider. Because the provider serves multiple companies, it can achieve greater economies of scale and more flexibly allocate vehicles. Clients simply pay for the vehicles' use as an operating expense, saving both money and hassle.

Similar economic logic applies to enterprise applications. Why should companies invest millions of dollars in server infrastructure and IT staff when a SaaS vendor can relieve them of those burdens? All they need is access to the software functionality. As a SaaS provider, we believe a company is better off saving money and eliminating technology-ownership headaches by paying for use of the software as an operating expense.

The conversion from cap-ex-intensive internal deployment to the op-ex/SaaS model improves cost allocation as well. When you have a centralized IT organization baby-sitting a high-maintenance application infrastructure for all your lines of business (LOBs), it's hard to know where your budget is really going. How much of your IT labor and utility costs do you allocate to each application? How much time and effort would it take to assess such chargebacks in a way that would be both accurate and defensible? With SaaS, such allocation is simplified.

In most cases, LOB managers are buying SaaS applications directly from vendors anyway out of their operating budgets because their IT departments have become bottlenecks, rather than enablers, for technology acquisition and deployment.

For these reasons and more, we believe that software as a capital investment is on its way out.

By Greg Gianforte, CEO, RightNow Technologies