The Cost & Benefits of On Demand vs On Premise Procurement Software

Purchasing accounting, ERP class software can be tough, not only deciding which of a dozen vendors to choose, but what type of solution you need – on-demand or on-premise. Read this and uncover the total cost of ownership and benefits associated with each type of solution to determine the right fit for your organization.

ERP software enables organizations to save time, money, and effort throughout the procure-to-pay cycle. It has a direct and immediate ability to cut costs and control spending.

While there are dozens of ERP software solutions available, there are really only two types offered: “on-premise” procurement software and newer “on demand” software.

With on-premise ERP software, a software vendor sells you a “copy” of their product for an up-front fee. You then buy the computer equipment necessary to run the software along with the other underlying programs you need (e.g. application server, database). You manage the installation and implementation process. You are responsible for keeping the system up-and-running and up-to-date.

With the newer on-demand model, the software vendor assumes much more responsibility. There is no installation process, no computer equipment to buy and manage, and no ongoing maintenance. Instead, the vendor runs the on-demand service for you. It is available without having to buy a “copy” of the software for an up-front fee. Instead, an all-inclusive monthly subscription covers the cost of the ERP software and the cost to manage and support the procurement software at an external location on your behalf.

On-Premise Software Cost Components

 With on-premise software, you have quite a few cost components to compute.There is hardware and software to buy and install. There is an implementation project to manage. There is internal system support to keep the system up-and running.

Here we define each of the cost components.

 License Cost

 This is the cost to buy perpetual usage rights to the software.

 Support Cost

 This is the cost for support of the software you’ve purchased. It is typically 20% of the license cost.

 Upgrade Cost

 This is the cost to buy a new “major” version of on-premise software. Most providers release major versions of their software every two to three years, and if you don’t upgrade within a certain timeframe, you may lose critical aspects of support. Upgrade license costs are typically 25% to 75% of the initial license cost.

 Server Cost

 This is the cost to purchase and install test and production computer equipment for running on-premise software. Remember to account for upgrading computer equipment, typically once every 3 years.

 Database Cost

 This is the cost to purchase and install a relational database required to run your on-premise software. The database will be used to keep a historical record of your purchasing transactions. Like the on-premise procurement software, the onpremise database software requires a license cost and an ongoing annual support cost.

 The Cost and Benefits of On-Demand vs. On-Premise Procurement Software

 Application Server Cost

 This is the cost to purchase and install the software required to run your on-premise accounting application – software like Sage MAS90/200, Sage MAS500.

The application server, like the database, requires a license cost and an ongoing annual support cost.

 Implementation Cost

 This is the cost to install, configure, and customize the on-premise software. It is a one-time set-up cost. Often internal project resources combine efforts with a 3rd party implementation firm to do get the on-premise software up and running. A “small” on-premise implementation typically runs $25K a “midsize,” implementation around $100K plus, and a “large,” enterprise class implementations can cost a $1mil or more.

 Often implementation cost is quoted at an hourly or daily rate with a total “estimated” but not committed. Beware of this structure as the services vendor has little incentive to complete the implementation quickly or efficiently

Internal Support Cost

 This is the total burdened cost for internal resources required to operate and maintain the on-premise software. Typically these resources can be classified into three categories: administrative, quality assurance, and support/operations. If you have a large IT organization with many on-premise applications you can share or split resources. These resources must handle “end user” support, perform regular maintenance of the on-premise software, and continually test any changes needed before they are made to the production system.

 Training Cost

 This is the cost to train your “end users” on using the procurement software, and train your IT and administrative users on running, managing, and maintaining the on-premise software.  Training is required upon initial installation, and then again with every major upgrade. Costs will vary depending on system complexity and team size.

The Cost and Benefits of On-Demand vs. On-Premise Procurement Software

 On-Demand Software Cost Components

 With on-demand procurement software, you have far fewer cost components than on-premise software. There is no hardware or software to buy and install. There is no implementation project to manage. There is no internal system support required. Instead, there are only 3 costs – subscription cost, upfront purchase cost & training cost.

 Subscription Cost

 This is the annual cost to subscribe to the on-demand software.

 Training

This is the cost to train your “end users” on using the procurement software.

 Which solution provides a quicker ROI & has a lower TCO?

 

It doesn’t take a genius to figure the answer to this question, now does it?

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