7.12.24 – SSI
By opting for Security-as-a-Service, a business is not choosing a method of financing technology but, rather, adopting a hassle-free, use-based subscription model.
The financial rationale for choosing Security-as-a-Service over cash purchases is compelling. SECaaS offers businesses a way to navigate the challenges of technology depreciation and obsolescence, preserve capital for strategic reinvestment, and maintain flexibility in a rapidly evolving technological landscape.
Editor’s Note: This contributed article on Security-as-a-Service reflects the views of its author and not necessarily the views of the SSI editorial team.
How we use and consume all types of technology has evolved and dramatically changed over the last two decades. It’s continuing to transform at the most rapid pace in technology history. This includes security and surveillance solutions. Therefore, the traditional way an organization has procured to pay to own their needed technology hardware and related solutions has begun to evolve alongside it. Other technology sectors have proven more economical and financially sound ways to access, use, and pay for the solutions needed to operate.
Security-as-a-Service: Cash Can’t Contend
The age-old belief that paying upfront with cash for security technology hardware – a seemingly less complicated and more straightforward approach – is economically advantageous has been a guiding principle for many for a long time. However, this approach won’t stand up to scrutiny when we apply basic finance principles, the economics of ownership, and the time value of money.
Basic Arithmetic Only Makes You Basic
Security-as-a-Service (SECaaS) is often mistakenly perceived as the more expensive option due to the cumulative cost of monthly payments over time. This surface-level analysis of using basic arithmetic, multiplying the monthly payment by the term, would make a financial advisor cringe. This calculation overlooks critical financial principles that can dramatically alter the cost-benefit analysis. By delving deeper into the financial implications of SECaaS vs cash purchases or ownership payment models, we unveil a narrative that positions it not only as a cost-effective alternative but as a superior financial investment strategy for businesses aiming to thrive in today’s economy and digital business environment.
Strategic Financial Advantages of Preserving Capital
One of the most compelling arguments for SECaaS over cash purchases is the strategic financial advantage of preserving capital. Capital is the lifeblood of a business. Capital opens the doors for opportunity, fuels growth, allows for innovation, gives businesses a competitive advantage, and more. When a business locks a significant sum of its capital into technology, like its security systems, through a cash purchase, it simultaneously restricts its ability to invest in other areas that could generate higher returns or drive growth. Better preserving and utilizing large sums of capital is the ultimate flex for an organization.
Let’s consider a scenario where a business invests $100,000 into a new state-of-the-art security solution that will help protect people and assets. With an SECaaS solution, they’ll have access and the use of everything they need, including all of the maintenance and support services to help with monitoring and operations. More importantly, the business retains its capital. This provides flexibility to allocate funds strategically across operations that promise higher returns or require immediate attention. This approach maximizes investment returns and ensures a more balanced, predictable, and prudent allocation of financial resources.
Example: $100,000 SECaaS Capital Preservation
With a monthly SECaaS subscription payment versus using $100,000 of capital to pay to own a security solution, if a company has profit margins on its revenue at 10%, that $100,000 reinvested back in the company would have a value of $164,532.00 in five years, which is the average term of a SECaaS subscription. (This is a very basic calculation, using a present value calculator. Inputs used: $100K present value; period five years; compound frequency monthly; and interest rate 10%, calculate future value.) Often, there are other variables to decide when a company may realize a return, but any knowledgeable financial advisor or CFO is equipped to understand these principles.
When a business uses that $100,000 to buy and own the system, that capital is now gone. It’s spending the lifeblood of the business on an expense with substantial depreciation and unpredictable maintenance and support costs — and in a world where the manufacturers currently have new technology in R&D that will soon render the existing system obsolete, nonetheless.
Let’s unpack rapid depreciation and technology obsolescence and how SECaaS is a risk-mitigation strategy for these inescapable realities.
Navigating Depreciation and Technology Obsolescence
Look at major technology manufacturers today. Many allocate billions to their research & development (R&D) budgets. These resources guarantee that today’s cutting-edge technology will quickly become tomorrow’s obsolete equipment. The pace at which technology advances has never been faster and is only accelerating. Depreciation and obsolescence are not a controllable variable and are inescapable realities in the technology lifecycle. When choosing to own any technology outright, it means incurring significant financial risks for the business.
Nonrecoverable Costs Are Beyond Reasonable Control
Close to 50% of any installed technology solution, such as a comprehensive security system, will include different soft costs; i.e. design, labor, and software. This is standard on any bill of materials, across all technology sectors. These are considered nonrecoverable costs. So, even if a business returned its technology the day after installation, those associated costs and capital spent go up in smoke. Only a percentage of the capital expensed could be recovered. I don’t think it takes a finance degree to understand how that seems like an irresponsible way to spend precious capital (a.k.a., the lifeblood of any business).
While depreciation and obsolescence are inevitable, SECaaS presents a strategic solution to address these challenges. SECaaS shifts the risk of depreciation and obsolescence from the business to the service provider. This model ensures that businesses always have access to the technology they need, when they need it, and without the burdens of ownership. SECaaS is a forward-looking approach that aligns with today’s dynamic business environment and the necessary cycle of technology for businesses to remain adaptable and competitive.
Long-Term Financial Outcomes: Security-as-a-Service Versus Cash
When evaluating the long-term financial outcomes of SECaaS versus cash purchases, the benefits of SECaaS become increasingly apparent. The flexibility of a subscription consumption model allows businesses to manage their cash flow more effectively, with predictable monthly payments, typically including all maintenance, monitoring, repairs and additional support services, facilitating better budgeting and financial planning. This contrasts sharply with the substantial upfront costs and unexpected service fees associated with a cash purchase or capital expense model. These ownership payment models strain financial resources and limit a business’s ability to respond to unforeseen challenges or opportunities.
Additionally, the SECaaS model provides a hedge against the financial risks of technology depreciation and obsolescence. By entrusting their service provider with the responsibility for maintaining, monitoring, servicing and upgrading technology, businesses can focus on their core operations and know that their security technology infrastructure is at peak performance and aligned with their strategic objectives.
Maximizing Investment Returns through Strategic Reinvestment
The decision to opt for SECaaS over cash purchases is not merely a choice between different methods of acquiring technology; it is a strategic investment decision that can significantly impact a business’s financial health and growth trajectory. The preservation of capital afforded by SECaaS enables an organization to reinvest in areas with the highest potential for returns, such as marketing, research and development, or expansion into new markets.
This strategic reallocation of resources can amplify a business’s ability to generate revenue, innovate, and capture market share. It demonstrates that effective financial management involves not just managing costs but also optimizing the allocation of resources to maximize returns on investment.
Ensuring Flexibility and Financial Health with Security-as-a-Service
The financial rationale for choosing Security-as-a-Service over cash purchases is compelling. SECaaS offers businesses a way to navigate the challenges of technology depreciation and obsolescence, preserve capital for strategic reinvestment, and maintain flexibility in a rapidly evolving technological landscape. It represents a shift in mindset from the illusion of control offered by technology ownership to a focus on agility, strategic investment, and financial health.
When businesses face a decision on how to acquire comprehensive security solutions, they should consider the broader financial implications. By opting for Security-as-a-Service, a business is not choosing a method of financing technology but, rather, adopting a hassle-free, use-based subscription model that blazes a trail to make a strategic investment in the future of the business.
Paul Metzheiser is managing partner with TAMCO.