A lot of AEC firms are realizing that adopting technology for greater productivity and profitability is no longer an option, but a necessity. The competition to win business is greater, and customer loyalty is being replaced with the need for efficiency—valuable relationships are on the rocks. Many firms are willing to look at different types of technology solutions. They may hear a recommendation from a colleague or attend an industry event and see different software and technology options. Given the choice between an on-premise and a cloud-based solution, which is better for your firm?
On-Premise vs. Cloud-Based Solutions
Various traditional on-premise-based software providers are now offering cloud-based solutions. Why? According to Flexera’s study, 2020 State of the Cloud, using cloud-based technology is mainstream. Of the 750 respondents, all of them either use a cloud-based solution or are planning to use one. Even two years ago, Forrester Research concluded, “In 2018, cloud computing will accelerate enterprise transformation everywhere as it becomes a must-have business technology.”
Here are three things to consider:
- What are all of the associated costs?
- How will the purchase impact your firm’s cash flow?
- Is the solution easy to upgrade and optimize?
On-premise software is generally licensed as a one-time perpetual license. Firms often choose to account for this large expense as a Capital Expenditure (CAPEX). In addition to the licensing fee, the purchaser pays an annual maintenance fee of 20% of the license fee. The fee provides access to on-going development patches and new releases of the software. On-premise solutions require additional investment in hardware and software to run the application inside the purchasers IT infrastructure ahead of any implementation.
Some firms mitigate the internal costs of hardware and hosting by contracting for those services outside of their IT department. That too has additional purchaser costs for support, security, and hosting services. The implementation integrations, and deployment take 6 months to a year or more. The costs for an on-premise solution require a significant outlay of cash up front for licensing, implementation, maintenance, and IT infrastructure. ROI is usually achieved within 5-7 years of the initial investment.
A cloud-based solution often does not require a large upfront license payment. Instead, the customer pays an annual or monthly subscriber fee that is generally accounted for as an Operating Expenditure (OPEX). There are no maintenance fees. The hardware, additional software, networking, hosting, maintenance, and security costs are included in the subscription and are the solution vendor’s responsibility. There is generally a fee to configure the solution along with integration fees. Because the solution is often built on one code base, the base solution has already been “implemented.” The costs and activities to implement are commonly referred to as a “configuration.” The vendor commonly conducts the integration through web services or an Application Programming Interface (API). The implementation and integration generally lasts 3-6 months, and customers often achieve an ROI within the first year.
Impact to Cash Flow
In AEC firms, cash flow is often very tightly managed because of the lower margin services they provide. Unpredictable costs are most often associated with on-premise software than cloud-based solutions. The unpredictability has to do with the upgrade costs of professional services associated with an on-premise solution. Often the upgrade requires significant work to migrate the custom code created during the initial implementation. The vendor outlines the cloud-based solution costs upfront in the contract, and include upgrades and new releases as part of the subscription.
Another facet of cash flow is whether you treat the expense as a CAPEX or an OPEX. As mentioned above, on-premise solution purchases often are treated as a capital expense. Therefore, companies use cash or lines of credit to purchase the software, hardware, and fund the implementation. This is cash that they might normally use for other growth activities (such as making acquisitions and purchasing modern equipment, etc.).
A cloud-based solution purchase is usually funded by operating funds. The subscription fees often scale up or down based upon the usage of the system. Given the seasonal nature of the AEC industry, cloud-based solutions often allow for firms to bring down the subscription cost during the winter and scale up during the spring, summer and fall.
Configuration vs. Customization
Most on-premise solutions allow for full system customizations. You can have developers change the code in the solution to fit your needs. This can be costly and will certainly lengthen the timeline to go live, but can be helpful when specific functionality can’t be found in other solutions. The biggest risk is that those customizations must be migrated and often re-developed in order to be compatible with latest release or upgrade to the solution. Some firms customize so much that when a new upgrade is released, it is cost prohibitive to upgrade. It is not unusual to find a customer who has been running an on-premise solution that is behind in new releases and upgrades.
Many cloud-based solutions often are coded with best practice capabilities. The solution has a layer in the platform for configurations that enable custom workflows and data capture for each of their customers. This way the cloud-based solution always upgrades the core code layer in platform seamlessly. There is no need for customers to reconfigure the custom workflows and data points they have configured into their specific instance of the system. Vendors typically roll out new functionality 4-6 times per year in a cloud-based solution. On-premise providers offer new functionality only 1-2 times per year.
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Agile Frameworks offers its MetaField solution as a subscription, cloud-based solution that is accessible on any computer or mobile device. Click here to learn more about the difference between cloud-based or on-premise software >