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. Less common, but increasingly popular, is subscription pricing or a lease of the system. In either case, you’ll likely have additional license costs each year if you add new users or modules to the system.
Almost all SaaS systems are sold on a subscription basis. Subscription terms range from monthly to annual to multi-year. Many vendors will offer discounts for longer terms or upfront payment, but as SaaS has grown more popular, many vendors have been aggressive in raising rates when terms expire.
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. This might involve installing the software, configuring the database, and ensuring the software works on each user’s computer. Similar costs may be incurred if you undertake a major upgrade down the road.
While there is nothing to be installed with a true SaaS system, many vendors of mid- to high-end systems charge a set-up fee for the work they do on their end. It’s unlikely you would incur these costs again as there is a lower probability that you would ever undergo a major upgrade to the system. SaaS upgrades are typically incremental in nature.
Customization & Integration
Generally speaking, on-premise software is more customizable as vendors have had years to improve their developer tools. As a result, on-premise buyers typically spend more on customization and integration. Of course, the more you customize, the more you will have to maintain and update when major upgrades occur.
Traditionally, many SaaS systems have not offered robust developer tools, so buyers chose not to customize much, or sought out flexible on-premise systems. This is changing and Salesforce.com has led the way with its Force.com platform as a service (PaaS). Expect to see more customization and integration opportunities, and related costs, with SaaS systems.
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. The cost of this migration depends on the amount and format of the data. You may first need to convert the data to another format, consolidate it with other sources, or “scrub” it for duplicate, obsolete, or otherwise bad entries. In our model, we assume that 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. This may involve sending employees to vendors’ training centers, bringing trainers on-site, participating in webinars, or creating custom courses and documentation. And of course you will need to train new employees as they come on board. 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.
Maintenance & Support
On-premise models typically require an annual maintenance contract, which includes support, ongoing updates, and patches for bugs and issues. These contracts are typically priced at 15% to 22% of the initial license cost. The terms are often negotiable, and pricing can change when the contract term expires.
For simplicity, 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. However, many SaaS vendors offer premium support options at rates similar to what on-premise vendors charge.
An on-premise system will likely require a new or upgraded hardware to properly run the system. This could include applications and databases servers, end-user's PC and networking infrastructure. While older hardware may be used, current releases typically require more computing power than their predecessors.
Because SaaS vendors host the software, you will not need to buy any server hardware. And if you have modern PCs with web browsers, you shouldn’t need to purchase new PC hardware to run your system. However, some buyers may still want or need new hardware such as a server to backup data from their SaaS provider.
You can use this section to model other costs that you feel are missing from our calculator. A major cost we omit due lack of predictability is the cost of employing an internal IT staff to maintain the system. Be sure to factor this cost in your model. 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.