Comparing server hosting vs onsite servers – which is better value?

It’s time to replace the old server with some new hardware but moving to a hosted server is another option. How can the value of each option be compared?

When comparing the value of private hosted servers with on-premise IT equipment it is very important to understand the complete set of risks and values each option offers.

When conducting a cost analysis of each option typically the upfront cost of the physical server hardware, associated backup systems, software, warranties, interest charged (if financed) and installation fees are taken over 3, 4 or 5 years and then compared with the monthly cost of the hosted alternative over the same period.

A number of factors are often left out of the comparison which means that the comparison is not really an "apples to apples" comparison.

Hidden costs of on-premise server option

There are number of costs associated with on-premise server that are often not factored into a value comparison.

Ongoing maintenance/support costs

If support and maintenance is provided on an hourly basis the true cost of the system over the period of its use is unknown and could be much higher than expected. This can be managed through a fixed-fee maintenance contract but these can be costly. Maintenance and support would include operating system and security updates, adding and removing users, checking the backups, managing AntiVirus, firewalls, server security and general fault fixing. The maintenance costs also start to increase exponentially as the age of the equipment increases. Extended warranties will also be needed if keeping equipment more than 3 years.

Risk related costs

Businesses do take on a number of risks when they purchase and maintain their own equipment. The up front investment made means a lock-in to the technology, solution, hardware and in some cases the IT support company that installs it. If the implemented solution fails to deliver and creates ongoing downtime, data loss, and/or hardware failures then it can be difficult to improve things without investing more capital.

Additional risks are associated with the lack of physical protections around the server. Flood, fire and theft are the main risks associated with storing a server within an office environment instead of a secure DataCentre. An overall risk related cost is often not factored into a comparison.

Lack of scalability and flexibility

Physical on-premise servers and software are not flexible and therefore cannot be optomised to suit your business environment at all times. Over time as your business requirements change your IT must be able to change with it. Investing up-front in on-premise equipment means you are betting on your business IT requirements remaining the same for the entire time you expect to be using the equipment. If your business does change and you are locked into a physical server solution then changing it can be costly.

Opportunity costs

If a firm was to invest funds up front on a new IT system rather than spending a monthly fee on a hosted server then the capital or borrowing capability available to the firm for alternative investments in the business are diminished. Other areas where the capital could be invested include staff productivity, marketing activities, processes to improve client retention etc.

All these costs should be factored into a value comparison between hosting and on-premise servers.

The hidden value of server hosting

A number of benefits offered by server hosting beyond the obvious remote access, DataCentre security and the monthly subscription model can be overlooked when making a comparison.

Integrated disaster resiliency

Server hosting offers smaller firms high levels of disaster resiliency. Failover systems which take over if primary hardware or datacentre failures occur significantly reduces the potential of costly downtime. This is because rather than having a single server in your office you now have multiple servers and other equipment sitting waiting to take over if anything fails. This level of disaster resiliency was in the past only available to firms with very large IT budgets but now with virtualised server hosting even the smallest firms can ensure they don’t have any downtime in their business.

Fixed IT spend

Having a very clear idea of how much IT will cost the business is an important benefit of server hosting because like an insurance policy you are hedging against potential large one-off maintenance costs by paying a smaller amount each month. Protecting the business from unknown maintenance costs makes good business sense because when budgeting you can accurately predict if your future IT spend is affordable.

Built-in flexibility and scalability.

Server hosting provides for a fully flexible solution which means if your business needs change then your IT (and associated costs) change with you. If you purchase a new practice, add staff, reduce staff, move to semi-retirement and divest then all these changes are reflected in your server hosting levels and associated costs.

You also know exactly how much the additional cost will be as in Habitat3’s case pricing is based on users. On-premise solutions are not able to provide that level of flexibility. To build in capacity for growth in an on-premise solution you will be paying now for the ability to perhaps use the additional capacity some day in the future. With server hosting you only pay for what you need - month to month.

Quality of Service

When using a hosted server on a month to month contract your service provider is working to retain your business every month. Therefore the service provided is at the highest level. If you purchase a server and installation fees up front the bulk of the profit is secured by your provider on day one. They have far less incentive to maintain the level of service you receive over time as they are now focused on selling the next solution to the next client.

Some conclusions

We don’t believe firms should be looking to server hosting in order to find cost savings when compared with on-premise servers but rather to secure much more value for a similar overall spend.

Server hosting offers a known cost per month, reduces business risk and ensures a level of flexibility that on-premise equipment simply can’t offer. In some cases an initial assessment may suggest that the on-premise solution is cheaper but if all factors are considered server hosting offers much greater value.