The Hidden Costs of Hosting – Part 1 – Capturing the Costs

Brad Forrest
By Brad Forrest | December 6, 2019
Account Manager

Fact checked by Stephen O'Reilly

In 1921, the automotive industry invented the automatic transmission, but it took decades before it truly became popular—there were many reasons for this: consumers were wary of the new development (and don’t really like change), they were waiting for the price to come down, they were waiting for truly solid (“proven”) technology to be offered, to name a few.
The obvious advantage of an automatic transmission is that the driver needn’t worry about a clutch pedal and manual shifting when driving—it’s easier to drive. Now, of course, automatic transmissions are everywhere—in fact, today they are the standard. Whatever the reason, I liken this slow adoption of the new automotive technology to the time it’s taking the manufacturing industry to embrace the newer cloud technology.

Most manufacturers are still using on-premises business software systems, such as quality management solutions. I think it’s safe to say that most manufacturers don't want to truly assess and account for all the costs of owning a quality system and installing the software within their own IT infrastructure. The cloud is here; it’s been here for a little while now. It’s here to stay.
I think it’s time to fully understand the advantages—including significant cost savings—involved with switching to cloud technology and making a wise (right) move…before you get left behind.

Calculating Hidden Costs of On-Premises vs Cloud Solutions

From my previous job (10+ years) selling Enterprise Resource Planning (ERP) solutions designed specifically for government contractors, I learned what true cost accounting really entails: making sure you are capturing and reporting all costs (expenses), both direct and indirect, for the project—so you can get paid by the government for your work on the contract (such a novel idea!). 
The direct expenses are straightforward, but the indirect costs/expenses (which need to include overhead) can become very complicated (see the figure below). 
  • Indirect costs can be classified as either 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
Indirect Costs
Once identified, indirect costs must be distributed to contracts in reasonable proportion to the benefits received. Similarly, when comparing on-premises vs. cloud (Software-as-a-Service, or 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 simply look at the costs of purchasing the licensing and annual maintenance 
  • They might add the initial purchase cost for any hardware, database licensing, etc. (but the key word is “initial”—the long-term, ongoing hardware replacement costs are easily ignored)
  • Then they compare those costs to the annual fees for “leasing” a SaaS solution
  • Unfortunately—with this simplistic calculation—SaaS will ALWAYS lose! 
Manufacturing Quality Software on the Shop Floor 

Capturing the Costs

The following are some examples of where to capture the costs of deploying a business software program within your own IT infrastructure, both direct and indirect, which need to be used when calculating the true cost of ownership for an on-premises model vs. a SaaS solution, and determining (fairly) which is the less expensive option:

Financial Perspective: Operating Expense (OpEx) vs. Capital Expense (CapEx) 

Your organization’s finance team will be seriously considering the following:
  • On-premises deployment models typically involve buying the license (CapEx) to own the software and then paying the annual maintenance fee 
  • Depreciation — Finance needs to depreciate a software purchase, typically over a 5-year period
  • Cloud (SaaS) is a subscription model — with ongoing payments for use of the software, and are treated as an operating expense, not a capital expense
  • Cloud (SaaS) offers easy scalability — pay as you go, optimize expenditures, and minimize cash flow (“Cash is King,” right?—which is something the finance team will really, really appreciate)

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, etc.), and lots more.
The 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 an on-premises quality solution…or an on-premises software system of any kind.
Stop Ignoring Hidden Costs

Stop Ignoring Hidden Costs

The costs listed above are not really hidden, so much as ignored. Every experienced business person 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—no, they essentially choose to ignore them. Like everything else, costs like these become known as “the cost of doing business.”
I could expound on the many reasons to move your quality system to the cloud, but it’s been done before, by my colleagues, and—honestly—done well:  
Please read (or re-read) either or both of the other blogs in this series:  
Take advantage of the technology at your fingertips today: contact one of our account managers (1.800.772.7978 or via our website) for more information.

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