ERP Software: Own, Lease, or Rent?
In the first of this two-part series discussing On-Premises, Hosting, and SaaS strategies, Guest Blogger Mike Silver examines how the three bear similarities to concepts that many business owners are already familiar with – that of owning, leasing, or renting their office space.
We all know the difference between owning, leasing or renting when it comes to our office space, a warehouse, or a retail store. We know the difference between owning, leasing, and renting a car. But do we know the difference between owning, leasing and renting our technology? Today, every time a discussion includes something about technology we hear the word “cloud”.
So how do we make a decision about this own, lease or rent dilemma? First, it helps to understand the differences not only from a technology perspective but also from an investment and financial perspective. In this article I liken Own-Lease-Rent to on-Premise-Hosted-SaaS in hopes of making this simple to understand and to give you an approach to selling, either internally or externally, when this confusion comes into play.
On-Premises = Own
On-premises technology has the same meaning as owning your computer hardware and software. You own the equipment (hardware) and you own (or license from the publisher) your software. Most of the software we have used in the past is on premises and owned by us. We are responsible for maintaining it, for fixing it when it breaks, for making sure it is meeting our needs and for keeping it up and running. Some organizations have internal IT departments to handle all of this and others use outside companies to help them. And, in many cases there are multiple helpers (people or organizations) either internal or external.
On-premises systems give the user the greatest control and flexibility, just like owning your own office building. You don’t have to check with anyone if you want to make modifications; you have control of your data and can manage it any way you wish; you can build your systems to your own specifications that meet the specific needs of your organization. A copy of the software runs on your computer equipment for your use and is not shared with anyone outside of your organization. You have complete control of who accesses your systems, your software and your data.
And, just like buying an office building, you pay for your software once (or finance it) and you pay for the on-going maintenance and upkeep. The initial costs are high and typically require a long-term, capital investment – just like buying a building.
Hosting = Lease
In a hosted environment you typically own (or license) your software and you allow someone else to provide the computer equipment to run it. The computer equipment resides at the hosting company’s facility and you access your software over the internet or “on demand”. Just like an office or factory building lease, you can design the environment, you have exclusive access to it, the building is maintained by the property owner or manager but you are responsible for the use of your space and its contents. With a hosted computing arrangement, you specify and design the needed computer equipment (the environment), you have exclusive access to the equipment, the facility that houses the equipment is maintained by the hosting company (the landlord or lessor) but you are responsible for the software, the maintenance of your software and the related data.
In a hosted scenario it is possible to have different arrangements with regard to ownership of the computer equipment. In some cases, the hosting company will provide the computer equipment and all related maintenance. They will typically support the equipment and include the maintenance and support costs with your regular monthly fees. In other cases, you may purchase your computer equipment on your own and allow the hosting company (the landlord or lessor) to house it and maintain it for you.
In a hosted environment it is important to remember that the software, for all practical purposes, is yours and you access your software on-demand (via the internet). Some hosting companies will provide assistance with the maintenance of your software, but one copy of the software is installed on the computer equipment and it is yours to access and maintain. Software upgrades and maintenance are still your responsibility and you may or may not be able to get assistance with the software maintenance through the hosting company depending on their capabilities. Typically, software implementations, maintenance and upgrades are as costly and challenging in a hosted environment as they are in an on-premises environment.
The costs related to a hosted scenario are similar to that of an office lease. You pay a monthly rental fee for the facilities and the related maintenance (e.g. the building) but the contents are yours to maintain and manage (e.g. the software). Depending on whether or not the hosting company provides the computer equipment or you buy it, the costs for housing and maintaining the equipment can be expensive, coupled with the upfront costs for purchasing software licenses and optionally computer equipment. Remember, in this model you will have an ongoing, recurring cost for your hosting fees.
SaaS = Rent
SaaS which stands for Software-as-a-Service is a concept in which you rent everything (like a shared office environment) including your computing equipment and your software. You typically pay a monthly, quarterly, or annual fee and simply use “the system.” Just like in a furnished rental office, you only pay a monthly fee and there is nothing to own or maintain. You access your “system” (you no longer own software licenses) through the internet and have no responsibility for the computing environment (the building) including any maintenance to your system. Your system provider (or your landlord) is responsible for upgrading your software, your hardware, for making sure everything is working and for expanding your computing resources (your building) as your needs increase. In this case you simply sign-in to your system (or walk into your office) and go to work. Of course, the comparison between renting software and physical goods is not without flaws, as discussed in our post SaaS, Cloud, and Renting ERP Software.
The costs with a SaaS or rental model are typically consistent and predictable over a period of time. Most SaaS companies will charge a monthly, quarterly or annual fee for access to “the system” and there are no other costs to incur. And, just like the hosting model, you will have an ongoing, recurring cost as long as you use and access the system but your up-front investment costs are minimal.
Stay tuned for part two, where we discuss which model makes the most sense for decision makers, under what circumstances.