SaaS vs On-premise: What are the Costs?
In the first part of our series, Evaluating a Student Information System, I outlined the major risks to consider when selecting a SaaS or on-premise solution.
But now the big question, which goes hand-in-hand with the risks... what are the costs? Although the costs in the near-term can be relatively straightforward, a key component that can be easily overlooked is evaluating the cost implications over time. I would recommend a 5 year Total Cost of Ownership (TCO), since most on-premise vendors charge 20% of the license fee for annual maintenance which equates to a 5 year re-purchase of the license.
As with any projection, a 100% accurate TCO is unrealistic since technology and business needs are rapidly changing. But a TCO serves as a good benchmark for budgeting and an apples-to-apples comparison for potential vendors. Some vendors backload many costs of an SIS in the latter years which, without a TCO, would give the impression of a much more favorable return on investment.
Components: Total Cost of Ownership in SaaS vs On-Premise
License & Subscription Fees
Cost to purchase the software
The majority of on-premise solutions charge a licensing fee which grants the organization full ownership of the software in perpetuity. The software is priced by the number of users or in the higher education space by Full Time Equivalent Students (FTE) and the entire amount is required to be paid up-front. Often, major upgrades or new software releases generally require additional payments.
In comparison, SaaS solutions are sold as a subscription on either a monthly, annual or multi-year basis. As with on-premise, it is priced by the number of users but all upgrades are included and happen seamlessly with no new installation required.
SaaS subscription is usually charged monthly. On-premise license is an upfront lump-sum cost.
Hardware and Operating Systems Software
Cost of equipment to run the software
Another major cost difference between on-premise and SaaS is the hardware requirements. An on-premise solution usually requires a sizable upfront hardware cost that could include application servers, databases servers, and networking infrastructure. This hardware also must be maintained and upgraded to meet the needs of a growing organization.
With a SaaS solution all of these costs are shouldered by the vendor.
SaaS cost is 0$. On-premise, fully depreciate all the all hardware and operating software over 5 years.
Cost of installing and configuring the software.
It is often assumed that there is no implementation cost with SaaS. This can be a false assumption. While the SaaS vendor will provide a “platform” with all software installed, the configuration of the system is a major effort that cannot typically be done without understanding the customer’s specific business processes and tailoring the new ERP system to the needs of the organization.
SaaS implementation costs usually run 60-80% of on-premise.
Cost of changes to meet specific needs outside the current software offering.
Customization costs are hard to estimate without the customer’s needs fully scoped. Most customization is about integrating third party systems and will require additional programming cost no matter which type of solution is chosen.
Customers often feel that there is more flexibility and availability of developer tools for on-premise, but customization comes at a price and will have ripple effect down the line in terms of maintaining continuity with any software upgrades.
The customization costs for SaaS and on-premise is about the same.
Cost to migrate historical data into the SIS system
Unless you’re starting a new school from scratch, there will be a data conversion cost and it should be about the same for both SaaS or on-premise. The cost is highly dependent on the volume of data, what format it’s in (paper, spreadsheet, database) and the quality of the data (does it require scrubbing for duplicates and bad entries).
The data conversion costs for SaaS and on-premise is about the same.
Cost to train all relevant users of the system
A Student Information System can be a complex piece of software that does many things, so employee training should be expected. The cost will depend on whether the vendor needs to go on-site and if any customize training is required. Some organization attempt to train a small core that will then train the rest of the organization. Training costs will typically be less for SaaS since the IT department does not need to be trained in the ongoing infrastructure maintenance of the system.
SaaS training costs usually run 60-80% of on-premise.
Maintenance and Support
Cost to maintain and support the software on an ongoing base
In addition to the software development cost that vendors pass on through a license fee, there’s a cost for ongoing updates, bug fixes and e-mail, chat and phone support (help desk) to handle any issues. This is passed on via a maintenance and support fee which can be between 15-25% of the software license cost.
On-premise solutions charge the software license fee in one up-front lump sum and the maintenance fee separately on a monthly or annual basis. When purchasing SaaS, the software license and maintenance are bundled together in a monthly fee. Be aware that the maintenance might not cover the more involved help and troubleshooting in which case a premium maintenance contract is usually available that provides support over and above the standard level.
SaaS cost is $0. On-premise, is the accumulated maintenance fee over 5 years.
Cost of people to run the system
The third major cost difference between a SaaS and on-premise s is the personnel necessary to run the system. For a large institution, this usually consists of network administrators, database administrators, help desk and software support staff, data analysts, institutional research and/or report development staff. Budgeting an average low six figures per person including health and benefits is a good idea.
A SaaS solution will require a lower headcount than on-premise because the infrastructure and security is hosted by the vendor. The degree of this headcount difference will be dependent on the specific needs of the organization. A SaaS solution will require many of the same internal skill sets (report writing for example) unless these services are bundled into the SaaS fee, which is not a standard practice.
SaaS personnel costs usually run 40-60 % of on-premise.
Security and Other Software
Cost of security software
Security is often overlooked when considering cost. With an on-premise solution, the organization bears these costs while the SaaS vendor will maintain security and bundle the cost in the subscription fee.
Also, additional software (server licensing, SQL licensing, reporting tools, office suite software) might be required to complement and effectively make use of the SIS system. This will be necessary regardless of whether a SaaS or on-premise solution is selected.
SaaS security costs usually run 25% of on-premise.
Backup and Disaster Recovery
Cost of backup hardware and software
Cost of backup and recovery can be difficult to assess since everyone has differing notions about what a good backup and recovery strategy consists of. The highest level of backup and recovery offers immediate access to data and very rapid recovery in case of a disaster scenario. This of course could be very costly upfront which must be weighed against the risks of not having adequate plans in place, which can be a much greater cost down the line.
Potential buyers sometimes erroneously assume that with SaaS, they have fully mitigated their risks and don’t have to worry about back. But a good backup plan means that critical data must be backed up in at least three locations: production data, cloud backup, and an on-premise backup. Good risk management dictates that the customer maintain control of and a copy of all mission critical data in the event that something happens to the vendor, or a decision is made to move the data to a new system.
SaaS backup and recovery costs usually run 25% of on-premise.
Additional Cost Considerations
Typically, hidden costs occur when the customer is not fully aware of its information technology needs, prior to purchase and implementation. If the research in the discovery process is insufficient, then post project costs will most likely increase in the form of additional system customization, training, reports and dashboard development.
Another factor that is often overlooked when considering a new SaaS solution is the age of the existing on-premise hardware and software licenses that are being replaced. It might seem obvious but the older the hardware and licenses, the better. SaaS vendors include a software investment component to their subscription fee so if an on-premise solution was recently purchased (within the past 2 years) the cost might not have been fully recouped. Infrastructure as a service (migrate the existing software to the cloud) is a good option to be considered in this case.
After all of the costs ( outlined above ) are determined for each vendor and plugged into a spreadsheet, the recommended next step is to calculate the Return on Investment (ROI). This would be necessary regardless of which option is chosen since the ROI will help evaluate the efficiency in labor and equipment savings that can be expected.
I will go over this in more detail in a future post. In the meantime feel free to contact me through our website if you wish to discuss your current needs.
Check out Part 1. Evaluating a Student Information System: What are the Risks?
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About the Author
Joe Stefaniak has been a leading expert for almost 30 years in the development and implementation of software solutions for higher education. His expertise is in helping colleges and schools streamline operations and manage information for better decision making through analysis and application of best practice software. He founded SCAN Business Systems in 1986. Its flagship product, Campus Café, has grown into a leading provider of educational student information systems. He holds a degree in Business Administration from Northeastern University.