The Deployment Cost Question#
The SaaS vs on-premise decision is often framed as a simple choice between modern and legacy. But from a financial perspective, it is a complex trade-off between different cost structures, timing, and risk profiles.
Understanding the Cost Structures#
SaaS Cost Structure#
Subscription fees: Predictable, typically per user per month.
Implementation: Lower initial cost, but not zero.
Integration: Often requires middleware or custom development.
Customisation: Limited, reducing costs but also flexibility.
Infrastructure: Included in subscription.
Upgrades: Included in subscription.
On-Premise Cost Structure#
License fees: Large upfront payment.
Implementation: Higher initial cost.
Infrastructure: Servers, storage, networking, data centre.
Support: Annual vendor support fees (18-22% of license).
Upgrades: Additional cost for each upgrade.
Staffing: Higher internal IT requirements.
Five-Year TCO Comparison#
Mid-Market Scenario: 100 Users#
| Cost Category | SaaS (5 Years) | On-Premise (5 Years) |
|---|---|---|
| License/Subscription | $900,000 | $600,000 |
| Implementation | $300,000 | $500,000 |
| Infrastructure | Included | $200,000 |
| Support | Included | $200,000 |
| Upgrades | Included | $150,000 |
| Internal Staff | $150,000 | $400,000 |
| Total | $1,350,000 | $2,050,000 |
Enterprise Scenario: 500 Users#
| Cost Category | SaaS (5 Years) | On-Premise (5 Years) |
|---|---|---|
| License/Subscription | $4,500,000 | $2,500,000 |
| Implementation | $2,000,000 | $3,000,000 |
| Infrastructure | Included | $800,000 |
| Support | Included | $1,000,000 |
| Upgrades | Included | $500,000 |
| Internal Staff | $500,000 | $1,500,000 |
| Total | $7,000,000 | $9,300,000 |
The Break-Even Analysis#
Break-even between SaaS and on-premise typically occurs between Year 3 and Year 7, depending on:
User count: Larger user counts favour on-premise (subscription scales linearly).
Customisation requirements: Heavy customisation favours on-premise.
Infrastructure efficiency: Organisations with efficient infrastructure reduce on-premise costs.
Staff efficiency: Organisations with efficient IT operations reduce on-premise costs.
Factors That Shift the Equation#
Factors Favouring SaaS#
- Limited IT staff or expertise
- Rapid deployment timeline
- Standard processes that align with vendor best practices
- Multiple locations without data centre presence
- Preference for operating expense over capital expense
Factors Favouring On-Premise#
- Heavy customisation requirements
- Data residency requirements not met by SaaS
- Integration complexity requiring on-premise control
- Large user count making subscription expensive
- Existing efficient infrastructure and IT staff
Hidden Costs in Both Models#
SaaS Hidden Costs#
Integration middleware: SaaS integration often requires additional tools.
Data egress fees: Moving data out may incur charges.
Premium support: Basic support may be inadequate.
Add-on modules: Core subscription often requires additional modules.
On-Premise Hidden Costs#
Infrastructure refresh: Hardware typically requires refresh at Year 5-7.
Security hardening: Additional security tools and processes.
Disaster recovery: Separate DR infrastructure required.
Technical debt: Upgrades deferred to reduce cost accumulate.
NZ/AU Specific Factors#
Currency exposure: SaaS subscriptions are often USD, creating exchange rate risk.
Network costs: SaaS requires reliable internet; on-premise can operate offline.
Local support: SaaS vendors may have limited NZ presence.
Conclusion: Model Your Specific Situation#
General TCO comparisons provide guidance, but your specific situation matters. Model your costs based on your user count, customisation requirements, infrastructure situation, and IT capabilities.