By Russ Haskin, Senior Director, Business of Law Consulting

In part three of this blog series on cloud readiness, Russ Haskin, Senior Director Business of Law Consulting, Wilson Allen, reveals the misconceptions surrounding the costs of on-premise and cloud solution purchases.

For parts one and two:

The path to the cloud’s silver lining (Cloud Series Part 1)

Alignment with vendor vital when assessing cloud options (Cloud Series Part 2)

Early in 2020, the prevailing theme was that firms expected a cloud system purchase to cost less than its on-premise comparison. Firms went into cloud discussions expecting their annual spend with a vendor would decrease dramatically. They directly compared cloud subscription pricing and maintenance costs for current on-premise solutions. Unfortunately, that method was incorrect.

As discussed in earlier blogs, the old licence and maintenance model was for on-premise solutions where the firm purchases licences to use the software and then pays a recurring (typically annual) payment for support and continued usage. That model requires the firm to house the software on hardware provided and maintained by the firm. This last sentence is vital. The maintenance of servers and support software is essential to the on-premise model. The firm has to monitor and upgrade the software as years pass by, and they also monitor and upgrade the servers that house the software.

For example, a firm I worked with that wanted to move to the cloud paid $75k yearly maintenance on an on-premise, 15-year-old financial management system. When they went to replace that system, they were shocked that the cloud annual subscription pricing could be 3 to 4 times what they were currently paying in maintenance. To complicate the scenario, the new system’s on-premise maintenance pricing was well below the current cost the firm was paying. That pricing dynamic threw leadership for a loop.

Put simply, a direct comparison of the old licence and maintenance pricing of the past and cloud subscription offerings of the present is a fool’s errand. They do not compare. With that in mind, I thought it might be beneficial to explain why. Of course, this does not justify cost structures or say pricing is perfectly in line. Instead, discussing why the models are different and the approach firms need to take when comparing systems is informative.

Below is a basic chart illustrating the typical costs between a cloud subscription offer and an on-premise solution:

Obviously, there is nuance in the above illustration. Each firm will have a different value within each of these expenditures. For example, a firm could have support staff that maintains many systems and supports other IT initiatives. There would be no or minimal cost savings for that typical expenditure in that scenario. Also, different vendors have different approaches to cloud offerings. Therefore, firms must analyze the whole picture for a comparison to be valid. Expanding on this, below is a way some firms will compare their annual spend. These numbers are purely examples and illustrative for a five-year comparison. They are not inclusive of all factors. Each firm must do its own analysis:

The key in the above illustration is that much of the upkeep costs switch to the vendor in a cloud offering. They perform all the maintenance and keep the firm’s solution in line with industry expectations. That is the primary differentiator between offerings. It is also why the annual cloud subscription costs tend to be much higher than annual on-premise maintenance. The vendor takes on more responsibility for the solution and must price accordingly.

My message to clients is that if cost savings are a required benefit for shifting to the cloud, then they must perform an evaluation either on their own or assisted by an expert. Only an inventory of the total costs to maintain the firm’s current infrastructure will allow the firm to compare new cloud offerings appropriately.