SaaS vs on-premise software: costs, control and security compared
Who runs what in SaaS, single-tenant hosting and on-premise, a five-year cost example with every assumption shown, and a decision table for regulated data.
Your company has to replace a business application, and the shortlist has a SaaS product and a version you would install on your own servers. You need to compare cost, control and security on one page before anyone signs. On-premise software runs on hardware you own or rent, operated by your own staff. SaaS runs on the vendor’s infrastructure, and you use it over the internet, usually for a subscription. Between the two sits single-tenant or “private” SaaS, where the vendor runs a separate copy just for you.
The license price is rarely what decides it. Staff time, upgrades, security work and the rules your data falls under usually weigh more. This guide shows who runs what in each model, a five-year cost example with every assumption labeled, and a decision table for regulated data. For the definition of SaaS, see What is SaaS?. For how SaaS reaches you over the network, see SaaS in cloud computing.
On-premise and SaaS in plain terms
Think of getting to work. Owning a car means you choose it, modify it, park it, insure it and fix it when it breaks; you pay a lot up front and a little every month. A taxi means you pay per ride and the driver handles the rest, but you cannot repaint the taxi. A car with a driver leased only to you sits between them: nobody else rides in it, and it costs more than a taxi.
On-premise is the owned car. Multi-tenant SaaS is the taxi. Single-tenant SaaS is the leased car with a driver.
Who runs what
The US National Institute of Standards and Technology (NIST) defines SaaS as “the provider’s applications running on a cloud infrastructure”, reached through a browser or a program interface. You do not manage the servers, the operating system or “even individual application capabilities” (NIST SP 800-145). Microsoft’s shared responsibility matrix adds a line that holds in every cloud model: “For all cloud deployment types, you own your data and identities.”
| Area | On-premise | Single-tenant SaaS | Multi-tenant SaaS |
|---|---|---|---|
| Data center, hardware, network | You | Vendor | Vendor |
| Operating system and patches | You | Vendor | Vendor |
| Application upgrades | You decide when | Usually agreed with you | Vendor’s calendar |
| Customization | Anything, including code | Often deeper than multi-tenant | Configuration and extensions |
| Data, settings, users and access | You | You | You |
| How you pay | License, maintenance, hardware, staff | Subscription, usually higher | Subscription |
The rows for hardware, operating system and data follow NIST’s definition and the on-premises and SaaS columns of Microsoft’s matrix. The upgrade, customization and payment rows describe how the models usually work; your contract sets the actual terms.
Five-year cost example
Example (hypothetical): a 50-person company choosing an application. Every input below is an assumption for illustration, not a vendor’s price.
On-premise:
- License: $60,000 once, covering up to 100 users.
- Server hardware: $15,000 once.
- Maintenance and support: 20% of the license a year, so $12,000 a year.
- Staff time: a quarter of one administrator’s year at $100,000, so $25,000 a year.
- Five years: $60,000 + $15,000 + 5 x ($12,000 + $25,000) = $75,000 + $185,000 = $260,000.
SaaS:
- Subscription: 50 users x $40 x 12 months = $24,000 a year.
- Staff time: a tenth of one administrator’s year, so $10,000 a year.
- Setup: $10,000 once.
- Five years: $10,000 + 5 x ($24,000 + $10,000) = $10,000 + $170,000 = $180,000.
SaaS costs $80,000 less over five years here, and much less up front. Year one is $112,000 on-premise ($60,000 + $15,000 + $12,000 + $25,000) against $44,000 for SaaS.
Now double the users to 100. The on-premise license already covers them. The SaaS subscription becomes 100 x $40 x 12 = $48,000 a year, and five years cost $10,000 + 5 x ($48,000 + $10,000) = $300,000. On-premise, at $260,000, is now cheaper by $40,000. Per-user pricing scales with headcount; an owned license with fixed staff costs does not. Run this with your own numbers before you decide.
Security and compliance
Neither model is secure by default. On-premise, every layer is yours, from the door of the server room to the user list. Microsoft, which sells cloud services, lists common gaps in on-premise environments: delayed patching, weak physical security, incomplete network monitoring, outdated hardware and untested backups. In SaaS, the vendor carries those layers, and you keep data, identities and settings.
Regulated data adds paperwork in both models. A vendor’s ISO/IEC 27017 or similar certificate tells you how it runs its side; see ISO/IEC 27017 explained for how to read one.
Decision table for regulated data
| Situation | Leans toward | What to check |
|---|---|---|
| The system must run with no internet connection | On-premise | SaaS is reached over the network by definition (NIST). |
| US health data (electronic protected health information) | Either | The HIPAA Security Rule lets a business associate hold that data for a covered entity only if the entity obtains “satisfactory assurances” of safeguards (45 CFR 164.308(b)(1)). Ask for the agreement before the trial. |
| A US federal agency or contract that requires FedRAMP | SaaS with an authorization, or on-premise | Look up the service in the FedRAMP Marketplace, which listed 544 certified services on October 17, 2026. |
| Data must stay in one country | Single-tenant SaaS, or SaaS with a region commitment | Get the data location written into the contract, not only into the sales deck. |
| Core processes need code changes | On-premise or single-tenant SaaS | Multi-tenant SaaS limits you to configuration and extension tools. |
| No staff to run servers | Multi-tenant SaaS | Count the staff hours in the cost example before you decide otherwise. |
Common mistakes
- Comparing the license with the subscription and nothing else. In the example, staff time is $125,000 of the $260,000 on-premise total. Why it happens: the license is the only number on the quote. Instead: add hardware, maintenance and staff time for five years, as the example does.
- Assuming on-premise is safer because the servers are in your building. Physical control does not patch software. Why it happens: owning the hardware feels like control. Instead: list who patches, monitors and tests backups, and check that someone actually does.
- Assuming SaaS makes you compliant. The vendor’s certificate covers the vendor’s side; access, settings and data stay with you. Why it happens: compliance pages on vendor sites read like guarantees. Instead: map each rule you follow to the party that carries it.
- Ignoring growth. At 50 users SaaS wins by $80,000; at 100 users on-premise wins by $40,000. Why it happens: the comparison is run once, for today’s headcount. Instead: run the cost at today’s users and at your three-year forecast.
For the boundary between SaaS and the platforms you build on, see SaaS vs PaaS.
Sources
- NIST, SP 800-145, The NIST Definition of Cloud Computing, September 2011.
- Microsoft Learn, Shared responsibility in the cloud, updated August 24, 2026.
- 45 CFR 164.308(b)(1), Electronic Code of Federal Regulations, checked October 2026.
- GSA, FedRAMP, checked October 17, 2026.
In three sentences
On-premise software runs on infrastructure you own and staff, multi-tenant SaaS runs on the vendor’s shared infrastructure, and single-tenant SaaS gives you a vendor-run copy of your own. In the hypothetical example, SaaS is $80,000 cheaper over five years at 50 users and $40,000 more expensive at 100 users, because per-user pricing grows with headcount. In every model you keep responsibility for your data, users and settings, so pick by cost over time, customization needs and the rules your data falls under.
