Understanding what’s best for your business: SaaS vs. on-premise.
The trade-offs are complex. The results and consequences are obscure. The need to decide SaaS vs. on-premise swiftly, perceptively and without disruption mandates careful scrutiny.
For channel-intensive businesses, the decision to opt for a Software-as-a-service (SaaS) cloud-computing provider versus developing an internal, on-premise hosting center is a major challenge; the nature of innovation coupled with the demand for customizable, mission-critical software presents a complex dilemma for manufacturers: To build or not to build?
We, of course, provide SaaS solutions here at Computer Market Research, but that does not mean it’s the best solution for your sales channel; in fact, an on-premise solution may very well be the better alternative. Following is information designed to give you a well-rounded perspective of the SaaS vs. on-premise, and by the end, guide your decision-making to the appropriate conclusion.
Understanding SaaS vs. On-Premise
What is SaaS?
This is hosted offerings where all required hardware and data storage is located “out on the Internet.” These services—typically presented as a subscription-based model where the consumer only pays for what is used—combine networks, servers, licenses, and applications, which are configured to generate huge efficiencies of scale.
Pay what you use (subscription model)
- If you scale up, you pay more
- If you scale down, you pay less
No mandated hardware investment
- Bundled and calculated into a subscription payment
- Bundled and calculated into a subscription payment
What is On-Premise Data Storage?
All mission-critical equipment (hardware, licenses, servers, OS, etc.) is acquired, installed, controlled and operated within the four walls of your business; additionally, physical security, electricity and balance sheet entries to carry assets are managed on-premise.
All investments are on you
- If you need to scale up, you will acquire an additional investment
- If you need to scale down, you will acquire a “sunk cost” or write-off
- On-going license(s) fees
- Scaling down may not result in a discount
- High probability to invest in additional licenses
- Responsible for all hardware refresh and/or upgrades
Cost & Activities – The Tip of the Iceberg
One of the more challenging components of understanding SaaS vs. on-premise is proper identification of the (hidden) costs and activities associated with each implementation. In other words, differentiating the costs that are obvious, and the costs that are not.
Compare and Contrast SaaS vs. On-premise
1.) Cost, Cash Flow, and Accounting
Pro: Lower up-front cost
- Costs classify as OPEX (operational expenditure)
Con: Mitigated price control
- Lack of control of pricing structure due to feature enhancements, the timing of updates, etc.
Pro: TCO (Total Cost of Ownership) may be lower than SaaS (or break even between 2-4 years)
- Less obvious than up-front costs, however, your TCO will be lower due to one-time license fees and annual maintenance
Con: Equipment failure risks, high-upfront and training costs
- On-premise deployments can put a serious financial strain on companies due to the high initial investment required
Your cost-of-entry for SaaS is lower than on-premise because there is no hardware you need to purchase. This indicates your CAPEX (capital expenditure) will be much lower if choosing to go with a SaaS vendor because there is less up-front capital to consider. Depending on your budget, the SaaS model is also likely easier to receive approval due to the as-needed (OPEX) pricing structure it entails; your costs are predictable, which leads to more accurate budgeting.
With the SaaS model, there are typically two costs to consider:
- Reoccurring service fees
Given the configurability of SaaS, the pricing structure of implementation is flexible as it’s relative to your needs (e.g., storage, number of channel partners, the volume of claims and transactions, etc.). Support and maintenance fees are typically fixed and incurred within your subscription; there is typically no penalty associated with technical support or service errors on the vendor-end.
Given the unique requirements of each business, implementation costs (CAPEX) are typically negotiable. It is not uncommon for SaaS vendors to waive certain implementation costs due to some arrangement in monthly fees, such as contract extensions, signing up for premium services, etc.
With the on-premise model, there are no monthly subscription fees to consider because most of the charges stem from annual or multi-year plans. Furthermore, you own the hardware, which means you have the ability to virtualize your platforms, storage devices and computer networking resources for other internal needs. If your SaaS vendor is to go out of business, you lose all services, which means you may be subject to serious productivity issues and partner dissatisfaction.
However, there are several extra costs you may need to consider when evaluating SaaS vs. on-premise, such as training costs (IT supporting internal users), insurance for equipment failure, on-premise maintenance fees, etc. Ultimately, with on-premise, your costs are less predictable, which will affect how you budget, so it’s imperative to bring accounting and your CFO into the discussion during evaluation.
2.) Implementation & Scalability
Pro: Ease of deployment
- Quick set-up, on-demand scalability, as well as, easily scale down and less IT intervention
Con: Customization and integration
- Although configurable, SaaS providers may not be as flexible to customize your solution to fit your business needs and requirements. Additionally, cloud services frequently roll out new updates and features, which may affect stability in function and ease of use.
Pro: High level of control
- More flexibility to customize your solutions; tailor the end-user experience and develop deep proficiency and expertise in the applications you deploy
Con: Additional infrastructure hurdles
- Longer implementation, difficult to scale down, slower release updates, and customization is more expensive
Scalability, for companies in rapid growth mode, may view the SaaS model as the more viable solution. Whether you have recently acquired new channel partners, attempting to enter new territories or disrupt uncharted markets, a SaaS provider will provide you peace of mind, knowing you have the resources intact to handle any situation. If more/less storage space is required, the SaaS provider can automatically provision changes and adjust monthly pricing accordingly.
SaaS providers can get you up and running in a matter of days/weeks given the systems are already in place. In addition, what takes SaaS providers days/weeks/months to do can take an IT department months or years to complete. This largely depends on competing IT projects and lag time associated with internal provisioning and logistics that go into acquiring the proper hardware.
In addition, SaaS vendors may have limited flexibility to customize your solution to fit your exact needs. Given the amount of customers a SaaS provider may have, there has to be some level of consistency in their implementation. Although this concept varies significantly, developing an on-premise solution will give you exactly what you need whereas a SaaS provider cannot always guarantee.
Nevertheless, if you have a high peak-to-average load ratio, customization may not be as important to you as utilization. Therefore, It is up to you to decide which factors are of the highest priority.
Once your on-premise infrastructure is in place, any business changes that require you to scale down may result in a “sunk cost,” as it becomes too complex to backtrack systems you built “by hand.”
Pro: Industry Excellence
- It’s likely the SaaS vendor maintains a cloud-based environment that is more secure than the customer, which includes disaster recovery and backup
Con: Software and data live outside your walls
- Difficult to ascertain who has access to what, or where the location of data is
Pro: Requirements and regularly processes
- Great for companies that do not require much “data shuffling;” highly customizable to fit internal process compliance
Con: No alternative
- Disaster recovery and the backup may be of critical concern and require an additional investment that must be implemented by the customer
No matter what your software vendors say no one cares more about your data than you do. The reality is that if your company opts to go with a SaaS provider, you leave your company vulnerable.
However, vulnerability does not necessarily equate to irrationality. SaaS vendors have their own internal data they want to protect, and likely use the same system protocols to protect customers as they do their own; so if we apply the “no one cares more about your data than you do” rule, your vendor—at the very least—cares just as much about data security as you.
If you decide to outsource your channel computing needs, you’re given the added benefit of some form of disaster recovery, which may give you some added peace of mind. That’s because most SaaS vendors have redundant instances in very secure data centers in multiple locations.