Calculating the Total

Cost of Product
Development Solutions
On-Premise Versus the Cloud
Research demonstrates that
cost may be one area where
cloud-based solutions have
the upper hand

engineering.com
INTRODUCTION
While the cloud is being increasingly adopted for product development, barriers to that
adoption remain. Some product development teams worry that using the cloud will risk
the theft of their intellectual property or will unduly delay the transmission of large prod-
uct files. As these risks are being overcome by proven security strategies and quick access
to applications on a cloud platform, the next hurdle to overcome is cost of ownership. On
this count, cloud-based solutions fare quite well.

This paper will review how the use of on-premise data processing and storage compares
to cloud-based Software as a Service (“SaaS”) for product development when it comes to
total cost of ownership (TCO).

COSTS: ON-SITE VS. CLOUD

When delivered as a cloud-based solution, computer aided design (CAD) and product
data management tools can be licensed on a monthly basis, potentially leading to great-
er flexibility and lower costs. According to Business Advantage’s “CAD in the Cloud 2017”
survey, respondents rated “being able to pay only for what we use” as a primary reason
for choosing cloud-based CAD software. The 2016 Future of Cloud Computing Study from
Northbridge reported that expected return on investment from users of cloud-based
solutions is on the rise, increasing from 78 percent in 2015 to 82 percent in 2016.

Defining the TCO of applications and infrastructure for the purposes of comparing cloud
to on-premise computing is remarkably contentious. Numerous studies propose various
methods of calculation, with different weightings on such variables as whether or not
a firm has the existing IT infrastructure in place, whether their personnel already have
the necessary skills or require training, and what cloud service provider the firm uses.
One such study published by the University of Osnabrueck, called “Costing of Cloud
Computing Services: A Total Cost of Ownership Approach”, uses meticulous arithmetic to
derive several methods for calculating TCO.

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For the purposes of this paper, we will break down the costs into three broad categories:
capital expenses, operating expenses and indirect costs.

CAPITAL EXPENSES
Typical capital expenses for on-premise deployments include:

• Upfront licensing fees for product development software

• Hardware for processing and storing product development data, along with the
proper network infrastructure
• Upgrades to more powerful desktop computers to fully leverage the software’s ca-
pabilities
• Potentially acquiring more seats than necessary at the outset to ensure that all
team members will have access and to take advantage of volume discounts
Some of these costs may be reduced when purchasing a cloud-based business platform
model:

• On the cloud, it’s no longer necessary to host data locally, removing the upfront cost
of hardware
• Teams can use less expensive hardware for their work if they leverage cloud process-
ing for computing-intensive tasks
• For all software, on-site or on the cloud, there is a cost in labor hours to set up, con-
figure and test the software before it is used in production. However, cloud-based
solutions typically have lower up-front effort due to the fact a business will not
have to configure any operating systems, although they may still have to perform
user-specific or team-specific configuring.
• Finally, cloud-based solutions are often renewed on a monthly basis, making it pos-
sible to add or remove seats as necessary to match demand.
It’s worth noting that capital costs are typically blended with operating costs when com-
paring the two models. For instance, imagine a license fee structure for three users that
consists of a one-time $5,000 fee per license and 15% maintenance fee per year. Over the
course of five years, that would total (3 x 5,000) + (15,000 x .15 x 5) = $26,250.

Vendors of cloud-based solutions typically charge on a monthly basis per user. In this
case, the cloud-based model could add up to be more expensive if there was a flat $150
per month fee per user, which would total $27,000 for three users over five years. That fee
for a cloud-based solution, however, would cover many other operating costs, such that
the overall decision requires further analysis as set out below.

OPERATING EXPENSES
Along with the upfront costs mentioned above, software and servers require regular
maintenance including annual maintenance, security and bug-fix patches, all of which
must be upgraded by the IT staff, who must be paid for their labor.

On-premise data storage requires a disaster recovery plan, which itself commands a cost.
Any internal data center will also require continual upkeep, including power, cooling and
floor space. The cost of maintaining a firewall and security for on-site data is another cost
to be considered.

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In contrast, cloud-based software solutions leave the maintenance work to the service
provider who rolls out regular updates, bug fixes and provides customer support. Backing
up and recovering stored data is typically a part of a cloud package. Other expenses, such
as powering data centers or managing security firewalls are also covered by the cloud
vendor.

Large businesses with an established infrastructure can better afford on-premise deploy-
ments. That said, there are still potential benefits for large firms to move to the cloud,
although they are not as great as for small and medium sized enterprises. In a study by
Hurwitz & Associates, the TCO for cloud-based vs. on-premise deployments for both SMB
and mid-market firms was: 55% lower for 52 users, 50% lower for 100 users, and 35% low-
er for 200 users.

INDIRECT COSTS
Indirect costs are harder to quantify than capital and operating costs, but they exist none-
theless. For instance, an on-site server may experience down time when upgrades are
necessary, resulting in company or division-wide downtime. Downtime causes a cascade
effect that can negatively impact each area of a business, from productivity and revenue
to reputation.

Because businesses that offer products in the cloud are focused on ensuring continuous
connectivity, backup solutions are a regular part of business operations. Service providers
usually offer uptime guarantees that assuage the fear of a loss of service.

OTHER CONSIDERATIONS
One of the primary benefits of an on-site server solution for product development is con-
trol. Updates can be installed when engineers and designers are ready to say goodbye to
the old and hello to the new. Upgrades and bug fixes are predictable, as the IT depart-
ment will be able to schedule times to perform these operations, rather than get caught
off-guard by a service provider’s lapse in service.

However, deploying a network and installing software can take months. With cloud soft-
ware, deployment is more or less instant. This in turn speeds up time to market.

The same is true as software upgrades are rolled out. There’s no need to shut down busi-
ness or perform updates over the weekend. Furthermore, the improvements to the prod-
uct development process are instant, aiding an ongoing improvement in productivity.

It’s worth noting that not all upgrades will improve productivity. When major overhauls of
familiar software are performed by a service provider, a new learning curve could be thrust
upon product development teams, who will need time to become comfortable with the
changes.

A recent report from engineering.com found that firms with cloud-based product de-
velopment software reported launching products on time and within cost targets more
frequently than other respondents. While all respondents cited meeting cost targets as a
poor area of performance, those without a formal system (on-site or in the cloud) reported
the greatest challenges with meeting project costs. Cloud users, however, reported the
greatest success at meeting project costs.

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TOTALING THE COSTS
The study by Hurwitz & Associates mentioned earlier compared the costs incurred for
both on-premise and cloud-based infrastructure for CRM and ERP. When looking at firms
with 100 users over four years, the total expenses for cloud computing was $697,656,
while the cost of installing and operating an on-premise solution was over twice as much
at $1,400,570.

The study didn’t review product development tools in particular, so we propose these
figures as a directional benchmark rather than being absolute in relation to cloud-based
product development solutions.

CASE STUDY
BRM Aero, which develops lightweight sport airplanes, recently adopted a cloud-based
business platform that includes product development for creating the structure of its
Bristell aircraft. BRM Aero deployed an aerospace-specific software solution on Dasssault
Systèmes 3DEXPERIENCE business platform on the cloud. The team used this solution to
perform 3D modeling and simulation of folded and unfolded models of sheet metal parts.

As a small business, BRM Aero benefits from the monthly licensing model associated with its cloud-based business solution.
(Image courtesy of BRM Aero.)

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In addition to performing design work, such as modeling shapes and determining manu-
facturability, BRM Aero uses the 3DEXPERIENCE business platform on the cloud for their
product development needs, with traceability and secured intellectual property capabili-
ties built into the work environment.

Milan Bříštěla, CEO and Founder of BRM Aero, pointed out that these capabilities coupled
with lowering the expenses necessary for product development, are important to smaller
companies, “3DEXPERIENCE on the cloud is a cost-effective way to benefit from superi-
or design technologies without the administrative hassles and costs. Our resources are,
hence, free to focus on aircraft development and not IT management.”

If you would like to learn more about BRM Aero’s use of a cloud-based solution, please
visit https://www.3ds.com/customer-stories/single/brm-aero/.

CONCLUSION
The decision of whether to use an on-premise solution or a cloud-based business platform
should be made based on the needs of the entire company. The specific needs of a prod-
uct development team, in which factors such as size, whether the product development
team is geographically dispersed, and whether there is not already a large infrastructure
in place, will ultimately determine which route to take. However, the TCO for a cloud-
based business platform will often be a factor in favor of these solutions.

Thank you for reading. If you found this report useful, please share it with your colleagues.

Michael Molitch-Hou
Managing Editor, engineering.com

You can learn more about business agility on the

3DEXPERIENCE platform at:
https://3dexperience.3ds.com/cloud/

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