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ERP On-Demand & On-Premise Total Cost of Ownership

The out of pocket investment for on-demand business systems is generally limited to the subscription fee. The structured pricing model facilitates a predictable investment which is easy to budget, reduces cost overrun suprises and eliminates the capital investment and recurring maintenance payments for unused licensing, over-licensing and shelfware.

 

While a few CRM vendors who do not offer hosted CRM software solutions have introduced skewed financial calculations and FUD (fear, uncertainty and doubt) alleging higher total cost of ownership (TCO) with on-demand systems when compared to non-hosted solutions, the overwhelming evidence and analyst research suggests the contrary. According to analyst Ray Wang of Forrester Research, "For companies with 100 users, they definitely see a savings in two areas: total cost of ownership and the total economic impact on return on investment is higher for SAAS. " Forrester Research Vice President and Principal Analyst William Band comments "In comparing on-premise to SaaS, be aware that SaaS solutions offer faster time to value; frequent, automatic updates; independence from IT; and good usability."

 

Analyst Sheryl Kingstone of the Yankee Group distributed the following quantatative research at a San Francisco IDT conference in order to show how on-demand systems continue to incur lower TCO over a five year period.

 

5 Year Total Cost of Ownership Forecast

 

On-Demand Costs

Cost Category
Year 1
Year 2
Year 3
Year 4
Year 5
5 Year TCO
 
User Licenses
60,000
60,000
60,000
60,000
60,000
300,000
 
Professional Services
45,000
15,000
15,000
15,000
15,000
105,000
 
Hardware Infrastructure
9,000
-
-
9,000
-
18,000
 
Networking Operations
-
-
-
-
-
-
 
End User Support
45,000
45,000
45,000
45,000
45,000
225,000
 
Customization Costs
-
15,000
15,000
15,000
15,000
60,000
 
Training Costs
15,000
-
-
-
-
15,000
 

  SAAS TOTAL
174,000
135,000
135,000
144,000
135,000
723,000
 

On Premise Costs

Cost Category
Year 1
Year 2
Year 3
Year 4
Year 5
5 Year TCO
 
User Licenses
50,000
-
-
-
-
50,000
 
License Support
9,000
9,000
9,000
9,000
9,000
45,000
 
Professional Services
75,000
17,500
75,000
17,500
17,500
202,500
 
Hardware Infrastructure
30,000
-
30,000
-
-
60,000
 
Networking Operations
67,500-
12,500
12,500
12,500
12,500
117,500
 
End User Support
120,000
120,000
120,000
120,000
120,000
600,000
 
Customization Costs
-
17,500
17,500
17,500
17,500
70,000
 
Training Costs
15,000
-
-
-
-
15,000
 

  ON PREMISE TOTAL
366,500
176,500
264,000
176,500
178,500
1,160,000
 


Assumptions: 30 users with Sales, Marketing and Customer Support CRM implementation

We highly recommend preparing your own Total Cost of Ownership analysis if you are trying to evaluate the relative costs of hosted and non-hosted solutions. Each scenario is unique and the results will be dependent upon your circumstances.


Another Comparison Point

Another comparison reference shared the below cost of ownership analysis for hosted and non-hosted CRM applications.

On-Premise Assumptions: Number of users
35
  On-premise per user software cost
$795
  Annual software maintenance
22% of software cost
  Cost of server(s) for on-premise software
$9,000
  Annual hardware maintenance cost
12%
  Fully loaded cost of IT resource for support
$90,000
  Allocation of FTE to support software (Ops/DBA/support)
25%
  Cost of firewall
$2,500
  Cost of UPS
$1,200
  Cost of operating system and RDBMS
$6,500
   
Hosted Assumption: Hosted cost per user per month
$70

 

Cost Component
Rationale
Year 1
Year 2
Year 3
Year 4
Year 5
Total
On-premise software With an On-Premise license you purchase the version that is current at the time and begin using it. As major functional enhancements are made, new versions will be released. Updates to the version you purchase are usually included under the maintenance agreement. Releases of new versions are rarely covered as part of the maintenance plan. Check with the vendor during negotiations.
9,275
9,275
9,275
27,825
On-premise annual maintenance plan On-Premise provides a variety of support / maintenance options. Typically these agreements are annual and expressed as a percentage of the original software license fee.
2,041
2,041
2,041
2,041
2,041
10,203
Primary server - depreciation charge On-Premise requires a central server to process and store customer data. The same server runs both On-Premise for the Web (as a web server) and the database that serves normal On-Premise users while in the office. The server can be quite basic, but needs to have data backup capability and sufficient processing to handle the predicted number of user accounts. This price assumes a single processor with 2 MB memory; 100GB hard drive; network card; remote management card and RAID level 3 drive capable. The cost is calculated based on three year straight line depreciation.
3,000
3,000
3,000
9,000
Primary server - hardware support contract

The hardware manufacturer will charge an annual fee to provide support for the server that includes on site service calls with guaranteed response times and replacement of failed or defective parts. These are generally priced at a percentage of the annual hardware cost.

1,080
1,080
1,080
1,080
1,080
5,400
Backup server - depreciation charge This server is a hot backup that can support the system if the primary system fails. It is a duplicate of the primary server. This provides less redundancy than will be provided by a hosted vendor.
3,000
3,000
3,000
9,000
Software for primary and backup servers This is the cost for the operating system software and relational database application to run the software. Most enterprise solutions will use Oracle or MS SQL Server as the database. The cost is double as the same software is required on the back up server. The software is depreciated over three years.
4,333
4,333
4,333
13,000
Backup server hardware support contract The hardware manufacturer will charge an annual fee to provide support for the server that includes on site service calls with guaranteed response times and replacement of failed or defective parts. These are generally priced as a percentage of the annual hardware cost.
1,080
1,080
1,080
1,080
1,080
3,240
Network firewall/router - expensed asset To secure your On-Premise data from unauthorized access and to isolate the On-Premise system from the rest of your internal systems and network, you will need a firewall/router that keeps the On-Premise system separate.
2,500
2,500
Backup power supply - expenses asset To avoid system crashes, which can cause major disruption to the On-Premise Database, you need to maintain constant power. This is for a uninterruptible power supply system that can run On-Premise Servers for two hours. Price also includes remote management cards to enable monitoring and remote management of the UPS.
1,200
1,200
Installation IT support

Assume 50% during initial set up period of 3 months. Installing the On-Premise software is relatively simple; however, building the server and the network connectivity will require a dedicated IT professional for 3 weeks.

11,250
11,250
Ongoing IT support Owning your servers requires that you have an IT support professional to monitor and manage your servers. Duties include applying patches to the operating system and applications; restarting services as needed when they fail; managing backup of data files; assuring adequate disk space; etc. Assume 8 hours per week for support of the two On-Premise for the Web servers and related software and hardware.
22,500
22,500
22,500
22,500
22,500
112,500
   
Total Cost On-Premise Software
61,259
46,309
46,309
26,701
26,701
207,278
   

Total Cost On-Demand Software
29,400
29,400
29,400
29,400
29,400
147,000
   

Net Difference  
<31,859>
<16,909>
<16,909>
2,700
2,700
<60,278>

 

Page Update Coming An additional analyst study and a new TCO analysis with multiple user counts is underway and will be appended to this page in the future.

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