For many years, telecom operators have primarily relied on a capital expenditure (capex) model for procuring software, network gear, and other IT infrastructure. This traditional approach of purchasing perpetual licenses and depreciating assets over time has been deeply entrenched across the industry.

However, the software-as-a-service (SaaS) model, already widely adopted by enterprises in most other industries, offers compelling financial benefits that telcos can no longer afford to ignore.

A changed economic landscape increases SaaS appeal

After enjoying an extended period of low-interest rates, today’s elevated interest rates have translated into significantly higher capital costs, making telecom CFOs confront a very different economic reality.

At the same time, the accelerated pace of innovation and the potential impact of disruptive technologies like generative AI have heightened market uncertainty.

This environment demands new financial strategies to drive profitability while maintaining a sound financial position.

With SaaS, telcos can preserve capital through a subscription-based payment structure rather than major upfront expenditures. The capital savings achieved by avoiding large initial outlays can instead be reinvested to generate returns that offset SaaS subscription costs over time.

Overcoming common SaaS objections

Despite its well-established adoption in the enterprise space, SaaS can be a source of concern because of how costs are accounted for and that has thwarted its adoption in the telecom sector.

Telcos frequently cite perceived higher long-term costs and the operational expenditure (opex) treatment of SaaS subscriptions as key deterrents to adoption.

However, many of these objections can be overcome through a more comprehensive total cost of ownership (TCO) analysis and a better understanding of accounting guidance nuances.

A fuller TCO picture must consider factors beyond upfront costs, such as avoiding ongoing expenses for labor-intensive support, customizations, and system upgrades typically required with traditional on-premises deployments.

With SaaS, these lifecycle costs are embedded in the subscription fees, often resulting in lower overall TCO – especially when factoring in the capital redeployment benefits enabled by the SaaS model’s smaller initial cash outlay.

When an initial hardware or infrastructure investment is needed to host the SaaS software, the costs can potentially be treated as capex for a time before transitioning to opex recognition for the ongoing subscription fees. SaaS customization work can also often be capitalized in certain instances.

Telcos can and should explore these opportunities with their vendors and auditors.

Innovation, agility, and financial de-risking

Beyond the cost factors, SaaS offers telcos compelling operational and strategic advantages relative to traditional procurement models. The inherently flexible, scalable nature of SaaS provides much less institutional inertia, enabling telcos to respond faster to market shifts and technology disruptions like generative AI.

If an application or platform is not meeting objectives, SaaS contracts can generally be exited with lower switching costs compared to the painful process of replacing embedded on-premises infrastructure.

Additionally, the SaaS delivery model ensures telcos continuously benefit from the innovation velocity of their software vendors and always have the latest version. New capabilities like AI, machine learning, and advanced analytics are seamlessly provided rather than requiring internal development teams or major upgrade projects. This agility ultimately drives greater competitive differentiation for providers of connectivity and digital services.

SaaS adoption is not an ‘all in’ approach

While valid SaaS cost objections have been addressed across industries, most enterprises have adopted SaaS incrementally rather than via large-scale, disruptive migrations. Telcos can emulate this proven path by starting with lower-risk SaaS implementations, such as analytics, while establishing internal processes and governance and then bring SaaS into other areas as comfort levels increase.

Those objections are often surmounted through comprehensive TCO analysis, taking full advantage of available accounting guidance and gradually building internal competencies.

Most importantly, the core SaaS benefits of capital preservation, investment income opportunities, staffing efficiencies, accelerated innovation, and financial risk mitigation have been realized across sectors.

The telecom industry faces a unique inflection point, with economic pressures and technological change requiring new strategies for financial success. Telcos are striving for profitable growth and competitive agility in today’s challenging environment, and SaaS offers a compelling solution to achieve those ends.

The time is ideal for telco financial leaders to move forward in embracing this future-focused commercial model.

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