29. March 2022

SaaS vs On-Premise | What are the implications for the Total Cost of Ownership?

This is exactly the question that many companies have when they are faced with the decision of a new software for their product information.
But what does SaaS actually mean and is on-premise still a valid option?

SaaS

SaaS stands for Software as a Service and means that both the software and the infrastructure are operated by the corresponding service provider. The user usually accesses the service via a browser and does not have to worry about anything else. All that is required is a monthly fee, an (ideally fast) Internet connection and a laptop. A good example from the everyday life of many readers is Netflix. You pay a monthly fee and can then use the service on your laptop, TV or smartphone.

On-Premise

On-premise or, to stay in the same jargon, Software as a Product is the “old” way of using but also developing software. Specific release versions are purchased via download, on CD or stick and are then available for unrestricted use. In addition, there are often maintenance fees of ~20-25% of the initial costs. The software is then installed independently in the company’s own IT infrastructure and must also be maintained there. Often own employees or developers are needed to maintain the software. A good example is Microsoft Office, before Microsoft switched to a subscription model with Office 365. After purchasing the CD with a product key, Office could be used indefinitely with the purchased functionality.

Advantages of SaaS Solutions

The differences between SaaS and on-premise are quickly understood. But is there one type of software delivery that is better than the other, or are they both on par?

We’ve taken a look at the key benefits of SaaS solutions.

IT administration

As a user of a SaaS solution, no separate IT administration is required. It is only necessary to ensure that the end device of choice is connected to the Internet and has an up-to-date browser.

If software is installed and hosted by the company itself, the underlying infrastructure must also be administered in addition to the functionality of the software. If the infrastructure fails, all software instances are affected as well.

IT infrastructure

Likewise, as a user of a SaaS solution, there is no need to operate and maintain your own IT infrastructure. In addition to the costs for hardware maintenance and the above-mentioned costs for software administration, the energy costs alone should not be underestimated, as these are currently at an all-time high. Professional SaaS providers can leverage significant economies of scale here and use every kWh efficiently.

IT security

More and more companies are falling victim to cyber attacks, often in the form of ransomware attacks. In such attacks, local computers are usually infected by email attachments. These then in turn infect the connected infrastructure and can lead to considerable damage and loss of time.

As a user of a SaaS solution, a) the provider takes over the maintenance of its infrastructure and ensures that all systems are protected against cyber attacks in the best possible way and b) local computers are not directly connected to the provider’s infrastructure and thus cannot infect it. Should a company fall victim to a cyber attack, laptops can simply be replaced and work in the SaaS solutions can continue without interruption.

Implementation speed

An important factor when evaluating different software solutions is often time. Many readers are familiar with the time-consuming implementation projects of ERP software, which last for months. Even though customizing a SaaS solution is of course just as time-consuming as with an on-premise solution, the initial setup and the corresponding costs are non existing. SaaS solutions are usually operational within minutes or hours and have minimal costs for e.g. onboarding compared to on-premise solutions.

Updates

One also needs to consider updates and new functions. Quite a few companies were initially very happy with their on-premise solution – it had all the features they needed – but then quickly realized that time moves on very quickly, especially in the area of software. Often this leads to costly updates to participate in new functions or in the worst case to an outdated software that no longer offers many of the features hoped for to set itself apart from the competition.

In particular, the fact that SaaS solutions allow continuous provision of updates and new features leads to a time and security-related advantage that release-dependent on-premise solutions cannot compensate for.

Total Cost of Ownership

Die Vorteile von SaaS Lösungen sind ebenfalls schnell verstanden. Doch wie verhält es sich beim Thema Kosten? Sind diese doch einer der Haupttreiber bei der Entscheidungsfindung von Software Projekten. Können SaaS Lösungen hier mithalten, oder sind On-Premise Lösungen bei den Kosten haushoch überlegen?

Setup costs

Setup costs are usually don’t incure for SaaS solutions. At least when it comes to true multi-tenant SaaS solutions. Here, a new company including login data is simply created in the system; a complex installation as with on-premise solutions or the hosting of single-tenant SaaS solutions on AWS or Azure is not required.

Running costs

With SaaS, the running costs are also limited to minor IT activities, such as configuring the firewall. Other ongoing and non-transparent costs such as the maintenance of the IT infrastructure or energy costs are not incurred.

System usage costs

In the case of on-premise solutions, the costs of system use are usually estimated as maintenance costs, and for SaaS solutions, the corresponding subscription fees. Since the subscription fees are usually higher than the pure maintenance costs (they also include electricity, maintenance, infrastructure, updates, administration, etc.), many decision-makers fall into the trap of putting maintenance costs on a par with subscription fees.

Support costs

Support costs usually balance out, sometimes they are more pronounced with SaaS solutions because the local IT cannot help out.

Update costs

Update costs are not incurred with SaaS solutions, users always benefit from the latest version without having to pay for a new release and without the effort of changing releases. Updates of on-premise solutions usually cost 30-50% of the initial investment. In addition, the effort and risks of the installation must be borne by the user.

Scaling

For on-premise solutions, there is a certain price for a fixed range of functions. There is no other way, because once deployed, users can use the system to its full extent. The clear advantage of a SaaS solution, on the other hand, is that the systems are usually scalable. Thus, subscription fees are based on the number of users, data sets or computing power. As a company, it is thus possible to start small and scale according to real needs.

Cost over 5 years

SaaS solutions show clear advantages not only in the static cost blocks but also in a longer-term total cost of ownership analysis.

Conclusion

Which model is ultimately chosen always depends on the individual requirements. In short, there are only a few requirements (e.g. full control) that make an on-premise solution more attractive than a SaaS solution in today’s world.

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