Today it’s very common IT systems are provided as a Software-as-a-Service (SaaS), as opposed to a solution installed on local servers, or “on-premise”.

In finance most systems are available as a cloud service where the supplier not only provides the software but also takes care of maintenance, hosting and data storage. Newer ERPs such as Dynamics 365, Workday and NetSuite are SaaS solutions. The same is true for financial support systems such as AP Automation software.

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Is the cost of the software impacted when choosing a cloud solution?

In this article we will look at the cost of the software and any differences that arise – when comparing a SaaS-model subscription to a traditional on-premise license.

When you buy software for an on-premise installation, you pay a lot in the beginning for licenses, hardware and implementation. Once the system is up and running, the maintenance fee is low, but from time to time it’s complemented by ad-hoc upgrade fees of both the software and the hardware.

If you buy that same software as a SaaS-solution, the license cost, maintenance and data storage is spread over time – typically with a set monthly fee during the entire period of usage.

The license cost is the top of the iceberg

Above we visualize the total system investment using an iceberg graphic.

When investing in a locally installed system the direct cost consists of the initial purchase of licenses from the software provider. This would be the visible top of the iceberg. Indirect costs, such as hardware, maintenance fees and the time spent on operations by an internal IT staff is hidden below the surface.

When comparing to a SaaS-solution the visible direct subscription fee is higher than the license cost of an on-premise solution. There is no doubt that the top of the iceberg is larger. However, in the contractual subscription fee additional services such as data storage, maintenance and upgrades of the software are included.

Nevertheless when looking at the value of the software supplier contract it may seem more expensive with a SaaS-solution.

Are there any hidden savings when investing in a cloud solution?

When an organization switches from on-premise to cloud-based business systems, some costs disappear. Unforeseen expenditures for upgrades and the replacement of outdated hardware are eliminated.

Another positive outcome is the reduction of work for the internal IT department. Maintenance, security checks and upgrades are performed by the software supplier. The long-term effect is that the business requires less internal IT resources – or existing resources can be used for other initiatives.

Which are the hidden costs of an on-premise solution?

The illustration below highlights the indirect costs that are related to locally installed software. It can be very difficult to foresee when additional costs arise as it depends on when critical upgrades of the software are released or when hardware becomes outdated. Projects related to software upgrades tend to require large internal resources, both from IT and other business functions.

Foreseeable expenditure

If you work with budgets or the forecasting of future costs, the SaaS-model is probably best. You know the full cost of the software – even before you implement it.

Are there any other advantages with a cloud solution?

When one single vendor software supplier is in charge of software, infrastructure and hardware, overall system performance improves.

Cloud services also offer a high level of data security. Shared resources mean large scale advantages against data hacking. When authorized staff surveil the day-to-day operations and upgrades are implemented without delay, security and performance of the software will be preserved throughout the full period of usage.

Read more about data security of cloud solutions in our previous post Saas security from treacherous to trusted