What is the TRUE Cost of Ownership of On-Premise Software?

The past decade has seen the world steadily embrace cloud applications. With the onset of Covid in 2020, digital transformation efforts that were on the roadmap for the next decade have been pushed into the next 6-12 months. Covid has forced organizations to the cloud like no other event in history.

One of the main concerns a company currently running on-premise software has is the cost difference between on-premise and cloud-native SAAS apps. On the surface, it may appear that the SAAS app is much more expensive than the on-premise app. In order to make a fair comparison, we must consider all of the costs on-premise software carries vs it’s SAAS counterpart. On-premise costs consist of the following:

Server hardware and maintenance – this one is obvious. You must provide your own hardware when deploying on-premise software. This does not necessarily mean you need to buy a server, you may be able to spin up a server on AWS or Azure in the cloud. However, that comes with it’s own costs and needs to be recognized. Using AWS or Azure can have variable costs (related to the number of transactions per month or other factors) which may not always be easily quantified up front. Therefore, you might be signing up for something where you don’t know how much it’s going to cost you over the long term. Regardless, whether you purchase your own hardware or use a cloud hosting service, you will need to factor these costs into your comparison to SAAS.
Server room and infrastructure – If the organization is purchasing it’s own server hardware and housing the hardware onsite, space in the building must be used for the hardware. While some hardware is necessary just to have internet throughout the building (modem, firewall, switches, access points), additional hardware like cooling systems may be needed with on-premise servers running. Likewise, increased internet speeds and higher availability costs will need to be factored in, if the applications housed at the location will be accessed remotely. Although difficult to quantify, on-premise servers will use more electricity and hence a higher electric bill than a cloud SAAS app.
Operating System licenses – Along with the servers (either on-premise or cloud hosted), licensing for operating systems and remote access tools will need to be considered. These costs will come back several years down the road when the operating system is upgraded, unless software assurance (an additional cost) is purchased.
Initial setup time – If the on-premise system is being installed brand-new, it will require a more involved setup time than a comparable SAAS system. Servers need to be setup, software needs to be installed, settings on the server may need to be changed, installation issues will need to be worked out, and remote access to the on-premise systems will need to be deployed. Additionally, integrations with other applications requires an on-premise integration app which is usually more difficult to setup than a modern API. This could be a real cost if an outside company is doing the setup, or it may be the cost of internal IT and department staff’s time necessary to deploy the application.
Initial and ongoing training time –On-premise apps usually require a steeper learning curve than cloud SAAS apps. If the training is performed by an outside company, that is a real cost to the organization. However, the increased learning time has a significant cost to the business in that employees (both current and future employees) spend valuable time training instead of performing higher level tasks.
Regular maintenance, updates and upgrades – IT staff must regularly use their time to install updates to operating systems, firmware, and on-premise software to keep it up to date and running smoothly. This is time in which staff could be working on higher level tasks within the organization. In addition, the most skilled and highly paid engineers today want to work on modern software platforms used in the cloud. On-premise software was typically written and uses tools designed in the 1980s. The “A” team (if you will) at a software company is now building SAAS applications in the cloud, while the “B” team is maintaining the legacy on-premise software originally designed over 30 years ago. This means the on-premise software is most likely not going to run as smoothly as a modern cloud app, which increases the time needed for maintaining the system by the organization.
Regular meetings with high level staff regarding on-premise issues – Something you won’t find presented in online calculators is the time spent in meetings with high level (usually executive and board members) employees to discuss upgrades, updates and integrations with other apps. Let us elaborate on this point here:
- Server refreshes (which should happen every 5 years) are expensive and will most likely require presentation by the CIO to the CFO, possibly the CEO, up to and including the board of directors for their approval. The calculation of the value of all parties’ time is almost impossible to determine, especially once opportunity costs (what they could have been discussing during that time instead) are taken into account.
- Updates, upgrades and integrations require a three-dimensional view of hardware, operating systems and multiple software applications. The server hardware is coming up for replacement, and it would be a good time to upgrade the operating system on the server as well. However, the on-premise application has not been certified to run on the new operating system yet. Therefore, the high level employees within the organization must make a decision to put off the hardware replacement or deal with a significant operating system upgrade halfway through the hardware’s life. Or, the critical business application that runs most of the organization needs to be updated to gain a desired feature (or to fix a bug). However, the on-premise integration with another application has not been certified for that version yet. All of these issues are frequent and commonplace with on-premise and require input from department managers and the CIO in order for all systems to be running properly.
More moving parts = more chances for something wrong to happen – The more moving parts you have with a tool, the more variables you have which can cause something to go wrong. A hammer will probably last your entire life because it has no moving parts. A car has many moving parts and needs to be serviced regularly (and still breaks down…). When an employee uses a cloud SAAS app, he/she simply opens their web browser, logs in, and begins using the application. The only causes for downtime are either internet access, workstation issues, or the service itself goes down. On-premise applications introduce additional variables to this like VPNs, remote access apps such as Microsoft RDP or Citrix, legacy on-premise integration apps which can be temperamental, as well as various network environment issues. These additional moving parts in the on-premise world introduce increased complexity to the system which means more downtime vs SAAS.
Opportunity Cost of Up Front Costs vs Subscriptions – The cost of purchasing hardware (if the organization chooses to buy their own vs using AWS or Azure) and any up-front licensing must be compared with what the company can do with that money otherwise. Can the organization invest that money elsewhere and achieve a higher return vs paying a monthly or annual subscription with SAAS? The opportunity cost of money now vs money later surely must be considered.

Calculating all of the costs of on-premise systems are imperative to making an accurate comparison with cloud SAAS applications. Software Advice has a nice little calculator that covers most of the predictable and hard costs of on-premise vs SAAS. It doesn’t, however, include a calculation for additional time needed from staff members to maintain the on-premise software. One would need to spend the time to factor in all of the hard and soft costs of on-premise to make a more informed decision on which is the best route to take for the business.

One caveat of the cloud concerns industry specific software. Obviously, if cloud software is brand new to your specific industry, it most likely will not have many features available today. On-premise software which has been developed for 30 years in your industry will have many more features built in, as it’s had decades to create those features.

Cloud software is fairly new and it does take some time before it can compete head to head with the traditional on premise options. Generalized software (general accounting, CRM, distribution, HR etc which targets many industries) has been in the cloud for 10-20 years now, so you’re seeing generalized cloud systems able to match feature for feature any on-premise system from the 80s. That being said, some industries are only now seeing cloud software being developed for their needs.

We hope this brief overview helps you understand the cost comparison between on-premise and cloud options. Unicom would love to bring expert assistance to your digital transformation efforts. We invite you to contact us today to see how we can help.

Houston: 1011 S Texas 6 # 200, Houston, TX 77077

Waco: 5211 Lake Shore Dr, Waco, TX 76710