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

Man Selecting Dollars for SavingsLike nature versus nurture—the debate over on-premises versus cloud software wages on. Today, more enterprise companies choose software as a service (SaaS) offerings because they can “pay-as they-go” with customer support and regular enhancements.

Still, some companies still prefer the in-house on-premises option offered by traditional which normally requires annual maintenance fees (averaging 22% of the software licensing costs per year) in order to have technical support as well as enable your I.T. department to solve issues by downloading and installing hotfixes and service packs.

So, if the Cloud costs less in subscription costs per year than on-premises software maintenance, then the Cloud should the 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.

First, consider the original upfront licensing fee. In addition, many companies forget to consider the total cost of ownership (TCO) of their on-premise 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, hardware repairs, or security issues.

And don’t take our word for it. Analyst Derek Singleton at Software Advice created a TCO calculator designed to allow companies to compare cloud or SaaS, versus on-premises.

According to Singleton, buying a SaaS system lowers your sunk costs by allowing you to minimize your upfront investment. By spreading out your costs over time via a subscription license, you can better manage your financial risk.

“Many people focus on the subscription license as the true cost savings but your licensing costs for a SaaS and on-premise system, in my model, will catch up to each other by year 3 if you factor in the net present value (NPV) of a SaaS license,” says Singleton. “The true savings of a SaaS system come from not having to manage your own IT infrastructure to manage hosting, data security, hardware maintenance.”

The numbers don’t lie.

Ok. So 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-premise 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.

What if those engineers or salespeople brought in well over $1,000,000 of additional revenue to your company? That is the opportunity cost. In this scenario, the opportunity cost of on-premise 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-premise of $15K for years 2 and beyond. In reality, $15K per year doesn’t begin to cover the annual IT costs for on-premise.  The net benefit in TCO terms still favors SaaS.


Enterprise product companies know to compare the total cost of ownership (TCO) between SaaS and on-premises, and the savvy ones are looking at the opportunity cost difference as well. To learn how cloud-based solutions can further drive ROI, read this white paper.