Adopting new enterprise software is a huge deal. It’s not like adopting a new desk, or new office chair; it has to be learned how to be used by everyone, has a high budget, and involves interacting with a vendor for a few months that will hopefully meet your needs. It also takes months to completely implement, and….you probably get my point: it’s nothing like a new desk.
Operating Costs vs. Capital Costs
First thing to know is that in all organizations, big and small, there are two types of costs:operating costs and capital costs. If you deal with accounting, you already know this.
- Operating costs have to do with employees’ salaries, bills, expenses, and software subscription fees. Most often, operating expenses are regular monthly or annual fees.
- Capital costs include buying things, such as a new desk, lamp, printers, etc. It may also include the fees associated with acquiring new software.
This is important because depending on how you pay for the software, it will be put in either the operating costs budget or the capital costs budget.
Up-front Costs vs. Subscription Fees
There are various types of ways enterprise software can be paid for. Today we will be focusing on two common ones: up-front and subscription costs.
Some enterprise software will charge up-front costs, this would count as a capital cost,because it’s like purchasing a full item, that item being software. An up-front cost is defined as it sounds , it’s an expense you pay at the conclusion of receiving te contracted deliverable. This cost is usually a set price, and once it is paid, it’s paid. Often these types of expenses have to be approved by the College or association’s board, so it’s generally more hassle. Software that uses an up-front cost (aka perpetual license) may also require maintenance and support fees that get you the next version of the software or frequent updates.
Other enterprise software instead just use subscription fees. This is usually referred to as “subscription-based software.” Subscription fees are usually collected each month, like rent, and are continuous until the organization decides to stop using the software at anytime. Subscription fees cost a fraction of the average up-front cost, however, subscription fees are sometimes based on the number of employees that will use the software. This cost would count as an operating cost, because it’s monthly.
Software companies offer this choice because you’re more “using” their product than “buying” it. So when you end the subscription, you no longer have access to the product. With subscription based software, your up front costs are typically much lower. Often subscription based software gets more frequent updates and new features.
Which is better?
Of course we wouldn’t just tell you about the cost barrier of adopting new enterprise software without suggesting a solution.
Plan A Budget
We’ve written a post about budgeting for software procurement before, but we’ll mention it again here. Before even looking at software to adopt, set your boundaries. Know how much your College can spend and discuss it with the College board, so that they know what to expect if it happens to be an up-front cost.
Need New Features?
If your College or association only needs a standard set of tools, without needing access to new versions or features, going the up-front cost direction might be your solution. If your looking to get new updates and features every now and then, the subscription is better for you.
In the end, both up-front and subscription costs could be better for your organization. It only depends on what you want to pay each year and what your College’s software needs are.
Thanks for checking out the Alinity blog! If you are looking to adopt new software, please check out our Software Procurement Checklist. This checklist will let you easily check if a license management software or association management software reaches all your needs, as well as makes it easier to compare different software to each other. Click on the link in the image below to download it today.