The debate over the Total Cost of Ownership (TCO) of cloud vs. on –premise software choices is still a hot topic. Pundits debate the merits of renting vs. owning. But complicated questions like quantifying the long-term costs of IT management, plus the intangibles (uncertainties like downtime) – can make comparing the two a bit like apples to oranges.
We wanted to confirm for ourselves what the advantages of a Cloud CRM vs. an On-premise installation – and here’s what the experts had to say:
Cloud CRM has the edge in terms of stability, ease-of-use and scalability – and comes at a predictable price most SMBs can easily absorb.
In general, however, there’s no straight answer on which costs less – cloud or on-prem? According to VP and Corporate Counsel at Pemeco, Jonathan Gross, the answer depends on the app under consideration and the factors at play in your business, including timeline, staffing and related opportunity costs.
On premise vs. cloud – what’s the difference.
With the liberal use of “cloud” as a marketing slogan, it can sometimes be easy to confuse definitions. Which is why it’s critical to first understand the difference.
An on-premise solution is hosted on your own server or data center. People used to get on-premise software from a CD or a flash stick. Today, it’s usually accessed through an emailed download link.
Analysts agree: On-premise will cost you less up front. You pay a one-time license fee, along with a maintenance subscription covering things like vendor support. These are far cheaper than the cost of your cloud subscription over time.
However, Gross wrote the biggest error when evaluating on-premise’s total cost of ownership is to forget to factor in ongoing costs.
According to Gartner, the annual cost to own and manage software apps can be up to four times the cost of the initial purchase.
Think of it this way: on-prem software is effectively a capital investment. You buy it and you’re responsible for it. You need to make sure it’s set up properly – or call in costly, time-consuming third party consultants – which can significantly prolong your implementation. There’s also the cost of maintaining supporting infrastructure: hardware and database software needs to be maintained and periodically refreshed (usually every five years) to ensure it’s free of database corruption and latency issues.
And then there are the regular software updates, patches and fixes; making sure your software and network is secure; setting up your network connection so your CRM can be accessed remotely. All of that consumes many hours of your time.
Plus, customizations done on on-premise tend to get less vendor support; if an integration breaks because of a software update, you’ll likely have to pay to have it re-written, while you temporarily lose access to that functionality.
Cloud CRM, in contrast, is accessed through the internet. Your data is hosted on your provider’s data center. They take care of IT management: that includes maintenance, updates, patches and fixes, network access, backups, server redundancy, security and more.
There are many myths about cloud software – which we’ve addressed before.
Unlike its on-prem counterpart, cloud CRM functions more like an operating expense. After your initial setup (where you may pay extra for services like data migration, customization and training) you pay a predictable subscription rate. You’re essentially “renting” the software and its supporting infrastructure as a service; hence the correct technical term: Software-as-a-Service (SaaS).
ZDnet Columnist and Founder of tech research firm Vital Analysis, Brian Sommer, indicated one potential “massive” SaaS benefit: upgrades and patches come as part of your subscription. Meaning, you don’t have to buy a new solution every few years to retain access to the leading edge; instead, updates are installed automatically on your vendor’s data center without you doing any work.
Sommer added that there are additional savings when it comes to expansion: companies can leverage SaaS to establish “new offices anywhere in the world with no lost time, no hardware purchases and no extra anything. All these firms needed is an Internet connection and a computing device to have a new instance.”
In short, SaaS CRM offers companies stable, convenient and scalable access to leading edge software.
Nevertheless, SaaS isn’t perfect – there are risks. For example, you might end up paying more for SaaS compared to on-premise over the full lifecycle of the solution (which can be up to a decade or more in the case of CRM).
4 things to keep in mind when comparing TCO
Ultimately, you’ll want to carefully evaluate your choice. There are a few critical decision-factors, according to Gross.
- Time horizon – What is the expected lifecycle of your software? For a humongous Enterprise Resource Planning system with hundreds if not thousands of users, that timeline may span decades, making it worth doing in-house. Some office tools, however, may be only in use for a couple years by a single team.
- Available IT resources – Sure, if you’re at a tech titan with profit margins above 20% — the sky’s the limit; you can build your dream infrastructure in-house and reap huge benefits. But for many SMBs, working on a shoestring budget, you need to consider your limitations.
- Opportunity costs – For example, how many people can you dedicate to maintaining your software – and what are the opportunity costs of having them preoccupied with IT management? You need to consider whether it’s worth it having your CFO, for example, pulling double duty maintaining your CRM and finances. By freeing up workers with cloud CRM, you can have them to focus elsewhere. (One of our customers who recently moved to our cloud service – Langara Fishing Adventures – provides case in point.)
- Uncertainty and risk — One final consideration is risks of downtime or security breaches. In smaller organizations, a single individual might be responsible for all IT-related responsibilities. But employees need to take vacations and sick days; what happens if your server goes down while your sole IT person is still in Barbados, their cell phone switched off while they’re sipping mojitos on the beach?
The advantage of cloud CRM for SMBs
Ultimately, cloud service offerings can have substantial advantages. Indeed, according to a groundbreaking 2014 report by Computer Economics, cloud adopters often experience a 20+% reduction in their IT spend.
For those with limited capital expense budgets and difficulty predicting future usage and business needs, SaaS models can be liberating. It helps them to reduce operating expenses and offer services that compete with larger organizations – while freeing up staff to focus on revenue-generating activities.
We’re so confident companies will save on a SaaS CRM like Maximizer CRM Live – we invite them to do their own TCO comparison.
We’re putting together TCO calculator in the near future, allowing you to plug in costs and see the long-term savings for yourself. Stay tuned! In the interim, check out this cloud vs. on-premise TCO calculator provided by Softwareadvisor.com. (Both Sommer and Gross were consulted in setting it up.)