Two years ago we replaced our finance and HR systems, which ran on servers we owned, with software as a service. The business case was sound. Over five years the subscriptions cost less than buying new servers, renewing the licences and paying for the staff time to look after them, and the board approved it on that basis.
At the first half year review, our finance director asked to see me. The total cost was lower, as promised. But the company's earnings before interest, tax, depreciation and amortisation had fallen by about four hundred thousand pounds, and a good part of that fall came from my department.
The explanation is in how the two kinds of cost are accounted for. When we bought servers and perpetual licences, they were treated as assets and spread across their useful life as depreciation, which sits below that earnings figure. A subscription is an operating cost, charged in full every year above it. The company was spending less money, and the measure it reported to its lenders and used for management bonuses showed it spending more. Our bank's lending covenants were set on that figure, and we had moved closer to one of them without anyone noticing.
Nothing was wrong with the accounts and nothing was wrong with the decision. I had compared total costs, which is what an IT business case usually does, and never asked which line of the accounts each cost would land on. Finance had approved the project without asking either, because it came to them as a cost saving.
Every proposal from my department that changes the mix of bought and subscribed technology now includes a page prepared with finance, showing the effect on cash, on the earnings figure and on depreciation, year by year. Where a change would move a covenant figure, it goes to the finance director before the board. The covenant was discussed with the bank at the next review and adjusted to reflect the change, which was a simple conversation once it was had in advance rather than discovered.
A cheaper way of running the same systems can still make the company look worse by the measure it is judged on. The cost and its place in the accounts are two different questions, and I used to answer only one.
– Serguey Shinder
