Commercial real estate pros know that the asking price is just one factor in making a purchase decision. Commissions, fees, taxes and necessary upgrades are upfront costs; maintenance staff and expenses are on-going operating and repair costs. Making a smart decision means incorporating all cost factors – the Total Cost of Ownership (TCO) – before signing a contract.
The same due diligence can be applied to your valuation and underwriting software: comparing on-premise software coupled with in-house hardware and staff vs. subscription-based Software-as-a-Service (SaaS). As experts in both software and commercial real estate, rSquared has tips on how to decide.
Subscribe vs Buy
SaaS software is a subscription service; software for an in-house server is a purchase. Which is better for your organization?
The software subscription vs. buy decision is much like purchase vs. lease for company automobiles:
- Purchase your software and you have an asset, the cost of which can be amortized for tax purposes. In making a purchase, you take full responsibility for the costs of maintaining and upgrading. You may be able to expense third-party costs for upkeep. Staff downtime associated with upgrades and maintenance is unlikely to qualify as an expense.
- Subscribe to software and the cost is an operating expense, much like leasing a vehicle. Responsibility for maintaining and upgrading the product is with the provider, not you.
- An advantage for SaaS software: Unlike a leased vehicle, you won’t need to wait until the end of a lease period to get the shiny new model with advanced features – SaaS companies typically add new features and performance enhancements to encourage your continued subscription.
- Giva, Inc. research indicates that costs of deploying a purchased software application will range, depending on the application, between 50 and 85% of the total cost of application ownership.1
- SysAid estimated on-premise software adds 30-40% to overall IT costs.2
“Many people focus on the subscription license as the true cost savings, but your licensing costs for a SaaS and on- premise system, in my model, will catch up to each other by year 3 if you factor in the net present value (NPV) of a SaaS license. The true savings of a SaaS system come from not having to manage your own IT infrastructure for hosting, data security and hardware maintenance.”3
-Derek Singleton, Analyst, Software Advice
- SaaS software. Unless your valuation and underwriting can be done on the back of a napkin, you need software that keeps up with the times.
Purchased proprietary software requires a license. If the software is off-the-shelf, the user’s license fee is paid upfront as part of the initial contract and in annual renewal fees.
A SaaS subscription includes licensing. Many providers offer tiered plans to provide for a varied number of users, which allows your company to pay only for the number of licenses you need.
On average, annual renewal costs equal 20 to 25 percent4 of the software’s initial purchase price. Customized software may be more expensive.
- SaaS is the better choice for most companies – it’s easy and cost-effective. If you have a small staff and thus need the minimum number of licenses, on-premise may be a better bet.
When you choose on-premise software, you’ll need supporting hardware: servers, network infrastructure and desktop and mobile devices. If you have already invested in hardware, you’re in luck – unless you intend to grow as an enterprise. As your company expands, you’ll need additional servers, routers and infrastructure and a place to put them, which can be a square footage cost and may require a temperature-controlled room.
With a SaaS subscription, most hardware costs are borne by the provider, not you. Most providers use cloud-based server farms with virtually unlimited computing capacity.
An additional advantage of using SaaS as your hardware source is that SaaS places fewer demands on desktops and mobile devices – your devices will run faster and have a longer lifespan without a direct software install consuming valuable hard drive space.
“A company that purchases new on-premise software also may need to purchase higher-capacity servers, databases and routers, new computers or mobile devices, and upgrade its physical facilities and network infrastructure. And, it’s perpetual – as the company grows, it will continue to need new hardware to keep up with the increasing demands on its network and IT systems.”
– Sal Caldarone, CEO & Co-Founder, rSquared CRE
- SaaS is the hands-down winner – the provider bears the cost of hardware upgrades.
In our next rBlog post, we’ll discuss three more essential factors that should be included in any software TCO analysis. Meanwhile, if this subject intrigues or impacts you and you’d like to learn more, download our white paper on SaaS vs On-Premise Software TCO. It offers guidance on how to conduct a thorough and accurate software TCO analysis to help you purchase the software that’s right for you and your organization.