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The final install: Say goodbye to buying software

The logo of German software giant SAP can be seen at the company's headquarters in Walldorf, southwestern Germany, on Jan. 18, 2016.

Uwe Anspach/DPA/AFP/Getty Images

A new generation of Canadian tech companies is proving you don't need to be in Silicon Valley to reach "unicorn" status. Ottawa-based e-commerce software-maker Shopify blew past the magical $1-billion mark when it went public last year. Hootsuite, the Vancouver-based maker of social-media management applications, raised $60 million in 2014, boosting its valuation to 10 figures. FreshBooks and Lightspeed, based in Toronto and Montreal respectively, are expected to join the club soon, too. All these companies have one thing in common: They sell software on the cloud, otherwise known as software-as-a-service, or SaaS.

Unlike the old system of buying and installing applications on site—Microsoft Office, say, or Oracle's CRM software—the SaaS model allows businesses to pay a comparatively small monthly fee to access those same apps over the Web. In other words, don't buy—rent.

Salesforce pioneered the subscription model in the early 2000s. Now, after several rounds of alternating hype and skepticism, most of the world's largest software makers have converted, too—Microsoft, Adobe, Intuit, SAP and Oracle—drawn by the promise of a reliable stream of revenue for years. According to Technology Business Research, the rush to integrate pay-as-you-go applications is expected to bump worldwide spending on enterprise software from $150 billion (U.S.) in 2015 to $201 billion (U.S.) in 2019, an increase of 34%. While small and mid-size businesses are driving the trend, close to 90% of larger enterprises in developed economies have already embraced the access-over-ownership philosophy across their organizations, from HR and sales to accounting and finance. "SaaS is now the default, and on-premise software the exception," says Mark MacLeod, a venture capitalist and former CFO of FreshBooks, which makes accounting software for small businesses.

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The appeal for customers is clear: cost. For big companies, SaaS not only saves money on up-front costs, but it also dramatically cuts IT expenses, since SaaS providers do all the software maintenance and updates the techies used to do. For smaller customers, the benefits are even more pronounced. Take Lightspeed, which makes point-of-sale software for restaurants and retailers. Its users pay between $76 and $222 a month for an application that might otherwise cost $20,000 to buy outright. Lightspeed focuses on smaller users because millions of potential customers are minted every year. The company's 460 employees already serve 35,000 clients worldwide, all of them happy to pay less for bells and whistles that would otherwise be out of reach—a slick point-of-sale app, plus a back-end system for inventory and customer management that generates the kind of real-time reports and analytics that used to be available only to blue-chip customers.

And because everyone now expects enterprise software to mimic consumer apps, these analytic tools are easy to figure out and use, thanks to interactive dashboards that could just as easily be used to track personal expenses on your iPhone. The best SaaS applications on the market also offer forecasting algorithms (predictive analytics, in IT lingo) powered by vast quantities of data generated by every business that uses the same service. Lightspeed processes around $12-billion worth of transactions every year. Aggregated on the company's servers, that information can be used to help individual clients benchmark their own performance and analyze broad trends. Lightspeed even shares a product and customer database between its retailers, which means one client can order goods from another client and have the payment processed right inside the system. MacLeod calls this the next frontier in SaaS, pointing out that FreshBooks and many others are doing the same thing. "If you can create a payment solution on top of your SaaS solution, you're helping your customers get paid faster, and you can monetize that."

For years, concerns about data security held SaaS back, particularly among big companies. But even big banks have been flocking to the technology, and lawyers have started using SaaS to organize sensitive client information. Clio, a Toronto-based company, sells cloud-based practice-management software and has thousands of law-firm clients. Yes, cloud-based data will always be susceptible to hacking. But physical servers are no guarantee of safety, either. A server sitting in a store can easily be stolen or damaged and the data it contains lost. Data stored in the cloud is at least more difficult to erase. Lightspeed experienced this firsthand, when a fire destroyed its New York sales office. The local manager went to a nearby Apple store, picked up new computers for each employee, and four hours later they were up and running again at another office.

With Forrester Research predicting total subscription fees for cloud-based software to hit $106 billion (U.S.) this year, expect to see a lot more unicorns prancing around—many of them in Canada. Lightspeed, for instance, received the largest venture capital infusion in Canada last year—$79 million. Says the company's CEO, Dax Dasilva: "You don't need to be in Silicon Valley to build a highly valuable company."

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