Which Is More Expensive Cloud or On-Premise Purchased CRM?
The debate between operating expense (aka opex, the cloud's approach) and capital expense (aka capex, the on-premise approach) is waged daily at companies. Although there are trade-offs no matter what a firm chooses, it's clear that opex is increasingly favoured. In the age-old rent-versus-buy debate, the cloud is making rental very compelling.
With the rise of cloud computing over the last couple of years, everybody thinks they have a pretty clear grasp of the facts regarding the conflicting arguments. Most are based on supposition, not actual research, until the Yankee Group ran the numbers. Although it has been a few years since the Yankee Groups breakthrough study, comparing hosted CRM systems to on-premise solutions for small and medium enterprises (SMEs), it still sheds valuable light on the debate over cloud verses in-house and even shatters a few myths.
Contrary to popular belief, on-premise systems were shown to be more expensive to operate annually than their cloud-based counterparts, with the overall cost 60% higher on an annual basis – even after the first year! Previously, on-premise solutions were presumed to be cheaper to run after the initial cost of implementation. The Yankee Report determines many advantages for the Software as a Service (SaaS) market, including significant Total Cost of Ownership (TCO) savings on reducing implementation, hardware, data centre and personnel related costs, training, software maintenance, power consumption and updated technology; all the while ensuring businesses are always on the cusp of the latest software, via automatic updates.
Here are the key advantages noted by the Yankee Report:
•Faster implementation and ramp-up time to productive use of applications
•Lower upfront and ongoing costs
•No additional IT infrastructure for servers, networks
•No additional IT resources to support both your infrastructure and your applications
•Guaranteed service-level agreements (SLAs)
•Cloud vendor provides an enterprise-class infrastructure with appropriate servers, networking, and storage systems and they are responsible for: frequent upgrades of your application with each new version release; regular customer data backups and required restores, and they must meet the latest security and compliance requirements.
Why it’ difficult to evaluate the TCO
As Cloud technologies continue to evolve, more and more software buyers are seriously evaluating software as a service (SaaS) solutions against on-premise offerings. While there are many factors that influence which deployment model is best for any particular business (e.g. ability to manage IT internally and speed of deployment), the cost of the system is often a key factor.
Too many people want to compare cloud vs on-premise costs in a purely single dimension, which is akin to judging a book solely on its cover. For on-premise, they mistakenly believe that costs stop and start with how much new hardware/software is needed to put a solution into place. And for cloud, similarly, all they see is that recurring monthly service cost. Total Cost of Ownership is the most accurate, objective way to place on-premise and cloud solutions on an ‘apples to apples’ comparison table. This is because of the innate disparity between the two paths when viewed through a traditional lens.
But comparing the true cost of a Cloud-based system against an on-premise system can be time-consuming and is often a complex undertaking. Furthermore, average software buyers generally aren’t very familiar with all factors that can influence costs.
For instance; most buyers understand that on-premise licenses are typically purchased with a large, upfront investment and SaaS licenses are purchased for a relatively cheaper subscription price. But many forget to consider costs of their investment. That is, they don’t look beyond the licensing costs to consider how other factors such as the need to customize the software and integrate it with existing applications can influence the TCO of their software purchase.
Even then there are intricacies like maintenance, support and training requirements that can make creating an ‘apples to apples’ comparison of the TCO on-premise and Cloud software difficult. If you’re not a seasoned veteran in modelling all these costs, comparing them can become overwhelming.
Run the numbers, do your math and find out where your needs stand. If you don't understand what your 5, 8, 10 year (or longer) TCO looks like, you cannot pit the cloud and physical systems head to head at an accurately analytical level.
8 influencers for the TCO of a software purchase
Consider this list of costs and risks that are frequently overlooked
1. License & Subscription
- Most on-premise systems are sold through a perpetual license; you pay up front and own a license to the system in perpetuity.
Almost all SaaS systems are sold on a subscription basis. Subscription terms range from monthly to annual to multi-year.
2. Installation & Set-up
- On-premise systems require some initial set-up, even if you don’t intend to customize them or integrate with other systems. Plus you will require the necessary IT infrastructure (servers etc).
While there is nothing to be installed with a true SaaS system, many providers charge a set-up fee for the work they do, their end.
3. Customization & Integration
- On-premise buyers typically spend more on customization and integration. The more you customize, the more you will have to maintain and update when major upgrades occur, which will increase future operating costs.
Traditionally, many SaaS systems have not offered robust developer tools, so buyers chose not to customize. However, more and more SaaS systems are offering API integration with a suite of cloud applications.
4. Data migration
- When deploying a new system, it's often necessary to migrate your data from your existing system, especially if that data is saved on spreadsheets or paper files. These costs are equal for SaaS and on-premise systems and will represent a one-time, upfront investment.
- Training of users is critical to get the most out of your new software. Training costs may be a little lower for SaaS systems, since they are more likely to use online training or in-line help functions, which are cheaper.
6.Maintenance & Support
- On-premise models typically require an annual maintenance contract, which includes support, ongoing updates, and patches for bugs and issues. SaaS vendors typically bundle basic maintenance and support fees into their subscription fees. Bundled support levels vary but usually only cover baseline support and fixes on the vendor's end.
- An on-premise system will likely require a new or upgraded hardware to properly run the system. Because SaaS vendors host the software, you will not need to buy any server hardware.
- A few other costs you may consider adding are consulting fees for business process re-engineering, improved broadband connectivity, storage and backup, redundant Internet connections, or other network infrastructure.
The most pivotal fact highlighted by the study remains that, for many businesses, particularly SMEs, considerable savings can be achieved by avoiding the initial investment and the cost of future upgrades involved in an on-premise solution. In absolute terms, the set-up costs of subscription-based, cloud-accessed CRM solutions are lower than those of an on-premise solution. The cloud has become the new frontier for businesses and, as the Yankee Report demonstrates, the value it can provide for an SME is hard to beat.