Can the Cost of SaaS Be Justified?

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Can the Cost of SaaS Be Justified?

Cloud-based solutions provide benefits but come with a recurring price tag. Let's see how that monthly cost stacks up against an on-prem solution.

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Talk of going to the cloud has become commonplace in Information Technology for the last several years. As part of the cloud movement, the concept of Software as a Service (SaaS) has gained quite a bit of momentum — paving the way for customers to log into their configured instance and focus on meeting the needs of the current (or future) customers. Since the solution lives in the cloud, the need for an on-premises solution is not a requirement — nor is having to worry about patching and maintaining those systems.

However, for those benefits, one has to agree to a monthly fee — which is typically much higher than the yearly licensing renewals for the on-premises counterparts. This makes me wonder if SaaS solutions are milking corporations far more than their on-premises competitors.

Consider This Scenario

Consider a corporation that is at the crossroads where a new solution is about to be introduced. As part of the research, there are two viable options that will meet the requirements for the business.

The first is a SaaS solution, which is priced at $100, per month, per user. The second is an on-premises product, which has a first-year license cost of $100 per user, with a renewal cost of $60, per year (per user). There will be 500 users of this new application.

Both solutions arrive with a great deal of functionality in place, but when comparing the needs of the corporation, there are gaps that need to be addressed through development resources. For the sake of high-level estimation, the consensus is that 50% less work will be required to customize the SaaS solution when compared to the on-premises solution.

To keep things on an even playing field, the use of consulting services will be employed for the customization and development work. The teams will be structured as follows:

SaaS Solution Team (Monthly Cost = $132,720)

  • 4 Development Staff

  • 2 QA/Testing Staff

  • 1 Manager/Scrum Master

  • 1 Product Owner Resource

On-Prem Solution Team (Monthly Cost = $211,680)

  • 8 Development Staff

  • 3 QA/Testing Staff

  • 1 Manager/Scrum Master

  • 1 Product Owner Resource

Both teams are expected to utilize six months to fully configure, design, and validate the application.

From a hardware perspective, the on-premises solution requires time from a database administrator and a server/network administrator. As a result, the on-premises solution requires the following additional costs:

  • 1 database administrator

  • 1 network administrator

  • 4 database instances/servers (2 for production, 2 for non-production)

  • 2 redundant application servers for production (w/SAN Storage)

  • 2 application servers for non-production

From a production support perspective, the expectation is that there will not be a difference between the two options. So, these costs will be left out of the analysis.

The Cost Comparison: Year One

The first year for the new solution will comprise of six months’ development and testing, with the final six months consumed by application adoption. The side-by-side comparison for year one is listed below:

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For the initial year, the on-premises solution requires nearly twice as much as the SaaS solution — consumed by hardware costs, admin staff and additional development time.

The Cost Comparison: Three Years

For years two and three, the assumption is that development time will not differ between the two solutions. As a result, development costs are being omitted from this scenario.

With the on-premises solution, the expectation is that $125,000 in partial database and network administrator time will be required. The remainder of the $155,000 is consumed by yearly license renewals totaling $30,000. From a SaaS perspective, only the monthly licensing costs are required, which totals $600,000 per year.

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With all the high-level estimates, the cost difference for the two solutions over three years is a difference of only $16,240.


When I started this article, I decided to provide estimates as I completed each section. I didn't work ahead as I gathered my thoughts. In fact, I didn't rely on a spreadsheet, just high-level estimates typed into the Sublime text editor I typically use to create drafts of my DZone publications.

I was surprised to see just how close the costs were between the SaaS option and an on-premises solution. While some may argue that a five-year cost comparison would favor the on-premises solution, a hardware refresh and additional administrator time would be required — again making the cost comparisons closer than one might imagine.

Another aspect might be to employ a Platform as a Service (PaaS) to help drive down the costs for the non-SaaS offering. However, I wanted to perform the direct comparison to SaaS and an on-premises solution for the basis of this article.

Based on the information within the scenario I provided, there isn't a runaway winner when comparing the estimated costs for a SaaS to an on-premises solution. While every situation will be different, I realized that SaaS solutions are not likely milking corporations when compared to non-SaaS solutions.

I am interested to read your thoughts regarding similar analysis efforts you have encountered. Was there ever a run-away winner in your SaaS vs on-premises decision?

Have a really great day!

saas adoption ,cost estimation ,cloud ,on-premise

Opinions expressed by DZone contributors are their own.

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