Capital Expenditures — use it or lose it

I recently had the my first experience consulting on the purchase of a SaaS platform along with constructing the game plan of phasing out our former proprietary system. What I learned is worth sharing…

  1. Business expenses are controlled through (amongst other things) two factors. Employees and Capital expenditures.
  2. Hundreds of thousands of dollars are determined by meetings that take place over the course of a few days or less.
  3. Are you better off buying or building your own? Depends on your size and time.

People and Capital Expenditures.

A capital expenditure is an amount spent to acquire or improve a long-term asset such as equipment or buildings. Usually the cost is recorded in an account classified as Property, Plant and Equipment. The cost (except for the cost of land) will then be charged to depreciation expense over the useful life of the asset.

Capital expenditures, contrarian to operational expenditures, allow companies to acquire depreciating assets which, in turn generate tax deductions and defer tax payments. These expenses are usually budgeted annually which creates frenzy around the later months of the year. Companies throw money at assets (in this case, software) that may or may not be needed. Uneasy questions then begin murmuring in the halls… “Doesn’t the current system work well enough? Why spend money on replacing something that is currently operational, won’t that cost money and slow down production?”.

Meetings, where the dollars are spent.

Small committees of employees often time determine ten plus years of a companies backbone within a series of hour long meetings. One might ask: “why he hell aren’t we spending more time on these decisions?”. A valid question! In the case of operational software, a company needs reliable, tested platforms in order to produce it’s goods or services. Often, due to looming, expiring budgets, time is short in the decision making process which limits input from potential end users. Requirements are ambiguous, and the platform is judged based off of limited knowledge of the product. With this haste, decisions are made under the merit of a shimmering bell or whistle caught by the decision makers eye.

Depends on your size and time.

Is a company, large or small, better off building their own software? Or is purchasing from a vendor who specializes in software as a service (SaaS) a better option? The question should be broken down into two parts: do you have the time and resources? Time is often determined by whether you’re currently operational and with the understanding that this expenditure isn’t mandatory in order to produce content. If you already have a system in place that allows you to continue to produce, then often times you can eat the cost of time and slowly begin exploring and implementing third party software. Resources are similar. If your company is operational and has steady cash flow, then most likely the company can eat the cost of purchasing, maintenance and training.

Amongst other factors

Outlined above are just some of the obstacles a company faces when asked the question: do we build our own or hire outside vendors? A myriad of other elements come into play when making large company purchases. Money, politics, budgets, deadlines, egos and even prior relationships all factor into deciding to build within or hire outside.