With the cloud technology market set to reach $159billion by 2014, executives are considering purchasing SaaS software solutions rather than building on-premise software solutions. According to research carried out by Capgemini, the insurance industry is beginning to adopt cloud technology to deal with increasing cost strains. Adrian McDonald, EMEA president of EMC claims that “Successful organizations will use cloud to reduce the unit cost of IT by more than 38%” , but can these two software solutions really be compared?At first glance, installing an off-the shelf solution can look attractive as initial cost is usually lower than the initial investment of building an on-premise solution. To get an overall picture of total cost, we need to look beyond this initial investment to consider maintenance costs, customization and integration of existing software, and the ability to manage IT internally, which can all drive up costs.
To compare both solutions, they must be compared in a normalized way. A net present value (NPV) calculation can provide more insight. For example, an on-premise solution involves an initial payment of $80,000, with additional licensing payments of $8,000 annually. Or, a SaaS subscription costs $30,000 annually. After three years, the on-premise solution will have cost $96,000 while the SaaS solution will cost $90,000. In year 4 the SaaS model will have cost more than the on-premise solution, $120,000 versus $104,000 respectively.
Although the SaaS solution will appear to have cost more overall in year 4, consider the following:
- Maintenance costs: SaaS models are maintained by the cloud service provider (CSP), saving costs on internal IT, while also removing responsibility from the company to the CSP. SaaS upgrades are usually carried out in small increments over time rather than in one large upgrade, resulting in more frequent system upgrades to keep up with ever changing technology. An on-premise system usually requires a system overhaul after 4 or 5 years – which may cost as much as the initial set up.
- Customization of software: SaaS solutions are more likely to be used when the software function is not a core competency of the company. When SaaS solutions are customized the cloud service provider ensures the customization is maintained during upgrades, while on-premise solutions may need to be altered after system upgrades. For an on-premise solution it is essential to have an internal IT team to take care of these issues, hence increasing costs.
- Hardware investment: Both solutions may need an investment in new hardware to support new software. SaaS solutions require a strong and secure internet connection to allow access at all times. An on-premise solution may require an internal hardware investment to support the software.
These are just some of the issues to consider relating to the costs of SaaS and on-premise software solutions, as it’s a time consuming and complex process. To make this process easier, softwareadvice.com has developed a ‘total cost of ownership’ calculator, which is well worth a look.
To learn more about the Build Versus Buy debate, read this whitepaper.