Cloud vs On-Premises Software: Know Your Total Cost of Ownership

Like nature versus nurture—the debate over on-premises versus cloud software wages on. Today, more enterprise companies choose cloud software-as-a-service (SaaS) offerings because they can speed time to deployment and adoption, “pay as they go” with customer support and regular enhancements, and eliminate long-term capital expenses associated with on-premises software.

Still, some organizations value the control and familiarity of on-premises systems, which typically require annual maintenance fees averaging 22% of licensing costs. These fees cover technical support and enable IT teams to manage updates and hotfixes internally.

Why Oracle Agile’s End-of-Life Is Accelerating the Shift to SaaS PLM Solutions

For organizations evaluating SaaS versus on-premises software, particularly in today’s rapidly evolving product lifecycle management (PLM) landscape, making an informed decision is crucial. The recent announcement that Oracle Agile PLM will sunset its on-premises solution is prompting many businesses to reassess their options and evaluate the true total cost of ownership (TCO) of their PLM systems.

So, if cloud software costs less in subscription costs per year than on-premises software maintenance, then the Cloud should be a clear choice. However, if the cloud option is more than the annual on-premises maintenance costs, would on-premises be the better option?

Not necessarily.

How Do You Calculate Software TCO?

In addition to the original upfront licensing fee, companies must consider the TCO of their on-premises investment, including hardware, network, backup, and development systems. The TCO includes the cost of human capital, such as project management, database, server, firewall, security, backup, and help desk resource—not to mention the overtime pay for weekend work to install emergency hotfixes, make hardware repairs, or address security issues.

Is Cloud Cheaper Than On-Premises?

TCO is one angle for comparison. What about the economic term “opportunity cost”?

When a business pays a large upfront cost for a software solution, it no longer has that cash available to grow the business. There are simply fewer funds to devote to their core competency. Consider this scenario: Is there an opportunity cost to your business if you buy on-premises software for $250,000 plus 22% for maintenance for a total of $305,000 in the first year (and $55,000 each year thereafter) versus an annual cloud-based subscription cost of just $70,000 for SaaS for the same number of users.

The SaaS option saves you $235,000 in the first year. That money could be spent on engineers to build more products or salespeople to help grow revenue.

The Hidden Opportunity Cost of On-Premises PLM: Why SaaS Delivers Greater ROI

What if those engineers or salespeople brought in well over $1 million of additional revenue to your company? That is the opportunity cost. In this scenario, the opportunity cost of on-premises is $930,000 just for the first year. And it just keeps getting bigger every year thereafter—often dwarfing the financial TCO model.

The scenario above shows a gross benefit to on-premises of $15K for years 2 and beyond. In reality, $15K per year doesn’t begin to cover the annual IT costs for on-premises. The net benefit in TCO terms still favors SaaS.

SaaS vs. On-Premises: It Pays to Dig Deeper

Advancements in technology give product companies more options than ever when selecting enterprise software. It’s important to make informed decisions when evaluating SaaS versus on-premises solutions. Savvy product companies know to compare the TCO between SaaS and on-premises and look at the opportunity cost difference as well. The numbers will typically point in favor of a SaaS solution, but it’s important to do your due diligence.

Considerations for Choosing a New PLM System

The sunsetting of Oracle Agile PLM’s on-premises product is an opportunity to reimagine your PLM strategy. When selecting a new system, consider the following:

• Scalability: Will the solution grow with your business and adapt to future needs?
• Integration: Does the platform connect seamlessly with your existing tools and processes?
• Security: Are data protection, compliance, and access controls robust and up to date?
• Cost: Evaluate not just the licensing or subscription fees, but the full TCO, including migration, training, and ongoing support.
• Vendor Support and Roadmap: What is the vendor’s track record for support, innovation, and long-term commitment?
• User Experience: Will your teams find the system intuitive and efficient for day-to-day tasks?
• Cloud Maturity: For SaaS solutions, assess uptime guarantees, data residency, and the provider’s cloud expertise.

From Legacy PLM to Cloud: Building a Proven Migration Path for Long-Term Growth

Making the transition away from Oracle Agile PLM’s on-premises system or other legacy PLM systems can seem like a significant undertaking, but with careful analysis and a clear understanding of your organization’s priorities, you can select a next-generation PLM platform that provides a proven migration path and supports your growth ambitions.

To learn how cloud-native solutions can further drive ROI beyond initial investment, test-drive our cost calculator to find out what your product development mistakes cost and how you can reduce or eliminate those costs with a single source of product truth in the Cloud.