Cloud-based software is common, accepted, and here to stay. However, most manufacturers are still using on-premises business software systems, including quality management solutions. Those who haven’t made the shift cite various reasons:
- Operators and other users are wary of change.
- They have been waiting for cloud technology to be “proven.”
- They think the change will be costly.
That last reason—expense—is often literally the bottom line for many manufacturers. However, they typically haven’t accounted for all the costs of owning a quality system and installing the software in their own on-premises IT infrastructure.
Once you fully understand the advantages—including significant cost savings—involved with moving to a cloud-based quality management solution, it’s easier to make the case for switching now, before you get left behind.
Calculating Hidden Costs of On-Premises vs. Cloud Solutions
True cost accounting entails making sure you are capturing and reporting all costs (expenses), both direct and indirect, for the project.
Direct expenses are straightforward, but indirect costs/expenses (which include overhead) can become complicated. Indirect costs can be classified as overhead or general and administrative (G&A).
- Overhead includes all indirect costs incurred to produce goods or services.
- G&A expenses are the overall costs of running a business.
Once identified, indirect costs are passed on to customers as part of the cost of the goods or services.
When comparing on-premises and cloud-based Software-as-a-Service (SaaS) quality management solutions, most companies don’t fairly evaluate and calculate the true costs (expenses) of hosting the solution within their own IT infrastructure. They only consider the most “visible” costs:
- Purchasing the licensing and annual maintenance.
- Initial purchase cost for any hardware and database licensing. (The key word is “initial;” long-term, ongoing hardware replacement costs are easily ignored.)
When organizations compare those one-time costs to the annual fees for “leasing” a SaaS solution, the SaaS solution will ALWAYS lose! However, this comparison is inherently flawed because it doesn’t include ALL the costs of the on-premises solution.
Capturing All the Costs
Let’s look at some examples of where to capture the direct and indirect costs of deploying a business software program in your on-premises IT infrastructure. Capturing all these costs is essential for comparing total cost of ownership (TCO) of on-premises and SaaS solutions.
Financial Perspective: Operating Expense (OpEx) vs. Capital Expense (CapEx)
Your organization’s finance team will be seriously considering the following:
- Capital Expense—On-premises deployment models typically involve buying the license (CapEx) and then paying the annual maintenance fee.
- Depreciation—Finance needs to depreciate a software purchase, typically over a 5-year period.
- Cloud (SaaS) subscription—SaaS software uses a subscription model, with ongoing payments for use of the software, and is treated as an operating expense, not a capital expense.
- Cloud (SaaS) scalability—A pay-as-you-go and pay-for-what-you-need model allows you to optimize expenditures and minimize outgoing cash flow.
Direct and Indirect Costs
Direct costs include items such as all your hardware: servers, storage, and databases, as well as installation, maintenance test environments, and more.
Indirect costs include people and labor: the time necessary to apply fixes, patches, and updates; regular maintenance and upgrading; maintaining and upgrading backup systems; as well as real estate (you need to put your system somewhere!), electricity (not only to run the equipment, but for HVAC, lighting, safety and security systems), and lots more.
Operational costs include implementation time, downtime, disaster recovery, delays, and much more.
I think you get the idea: there are numerous hidden costs involved in owning, operating, and maintaining any on-premises software system.
Stop Ignoring Hidden Costs
The costs we’ve enumerated here are not really hidden, so much as ignored.
Every experienced businessperson knows about operating and capital expenses. Everyone who has ever used a software product in business knows that the server must be somewhere, the database is in some back room, the workstations are everywhere, and that sometimes the system needs to be shut down in order to upgrade.
It’s right there, plain as the nose on your face! So, I think it’s reasonable to assume that many manufacturers aren’t blind to the hidden costs of owning an on-premises software system. Instead, they essentially choose to ignore them. Like everything else, costs like these become known as “the cost of doing business.”
Is it time to re-think your investment in your quality management solution? If it’s time to right-size and update, visit InfinityQS and learn how our SPC-powered Quality Intelligence solutions can transform your business.