On-premises: the license model for server-based software

Software man­u­fac­tur­ers are in­creas­ing­ly offering the cloud computing model: software-as-a-service. One of the best-known examples is the Microsoft Office suite, which is available for a regular license fee. But until 2010, the on-premises model was standard for the Microsoft Office package and other software providers. On-premise refers to licensees in­stalling the software in their own IT en­vi­ron­ment – without the cloud or internet access. We explain what exactly on-premises is, what ad­van­tages, and dis­ad­van­tages come with the license model for server-based software, and where on-premises is still relevant today.

On-premises refers to the use of the company’s own servers and IT en­vi­ron­ment – on site. With this usage model, a customer often buys or rents server-based software as a licensee, which is installed on their own servers or rented servers. Since the licensee runs the software in their own data center on their own or rented hardware, this is also called “inhouse”.

In contrast to cloud computing, customers of on-premises models have full control over data and also assume re­spon­si­bil­i­ty for the as­so­ci­at­ed risks. Use of the provider’s hardware is not possible with on-premises. This clearly dif­fer­en­ti­ates the model from cloud computing al­ter­na­tives.

However, licensees not only take on re­spon­si­bil­i­ty but also all costs incurred in the use of the software. These typically include main­te­nance fees and expenses for running software and hardware. In the case of open-source software, a close community often handles further de­vel­op­ment and bug fixing in practice. The dis­ad­van­tage here is that warranty claims are not possible. If necessary, support or provision of software updates can be purchased from relevant service providers.

Licensees gain access to the software via a desktop ap­pli­ca­tion or a web-based user interface. Companies that manage sensitive data usually opt for a desktop-based ap­pli­ca­tion in order to rule out potential security gaps and unau­tho­rized access to the system.

Since 2010, the im­por­tance of on-premises has con­tin­u­ous­ly declined as the license model is in­creas­ing­ly giving way to the more modern cloud computing model: software-as-a-service (or “SaaS” for short). With this model, the licensee pays a usage fee that covers operation and main­te­nance in addition to the software. Unlike the on-premises model, the usage license is not purchased on a one-time basis but needs to be renewed through regular payments. All hardware and software resources are made available by the provider.

Before the switch to cloud computing, well-known examples of es­tab­lished on-premises products included the Microsoft Office package, the Adobe Creative Suite, and SAP. Today, the license model for server-based software continues to be the better al­ter­na­tive to modern SaaS for many companies. The main reasons for this include strong data pro­tec­tion and complete control over data and access.

Another and par­tic­u­lar­ly fre­quent­ly used benefit compared to cloud-based al­ter­na­tives is the pos­si­bil­i­ty to customize the software. The standard software forms the un­der­ly­ing foun­da­tion and is the basis for software cus­tomiza­tion or extension according to special customer re­quire­ments and areas of ap­pli­ca­tion. However, this also comes with sig­nif­i­cant costs for the ad­just­ments or an increase in license fees. Moreover, updates that later become necessary will be more difficult and expensive to perform than with the standard software.

The on-premises model has many pros and cons:

• Control: Licensees gain full control over all data and can decide who gets access. The customers are also re­spon­si­ble for the uti­liza­tion of internal resources, and for running the software.
• Data pro­tec­tion: With the inhouse model, licensees retain all data in their own data centers; third parties do not receive any access to this data. This makes com­pli­ance with statutory data pro­tec­tion reg­u­la­tions easier, since cloud servers are often located in countries with different data pro­tec­tion rules.
• One-time costs: On-premises licensees pay a one-off fee that includes purchase of the software and unlimited use. However, the in­vest­ment costs are ac­cord­ing­ly higher than with sub­scrip­tion-based models.
• In­de­pen­dence: Licensees are in­de­pen­dent from external service providers and from the licensor. Access to data is always ensured – even without an internet con­nec­tion.
• In­te­gra­tion: The licensed software can be in­te­grat­ed deeper into the customer’s in­fra­struc­ture and in­ter­linked with other programs.

• Hardware: Licensees require the necessary hardware that is com­pat­i­ble with the software. Ongoing main­te­nance is the re­spon­si­bil­i­ty of the customer.
• Workload: Licensees need to install and run updates, patches, and backups to ensure stability and fix errors. This not only requires time, but also technical know-how within the company and among employees.
• License costs: In many cases, a license is limited to a certain number of work­sta­tions. Companies with lots of employees may therefore face high costs.
• Ongoing costs: Es­pe­cial­ly in the case of cus­tomized software, high ongoing costs may arise for software ad­just­ments and updates in order to keep the software op­er­a­tional and fix errors.
• Lack of support: Typically, the further de­vel­op­ment of the software is dis­con­tin­ued by the man­u­fac­tur­er sooner or later. Once this happens, support also tends to come to an end.
• Resources: Although licensees have full control over software use, they are required to commit their own resources.

Although the im­por­tance of cloud computing is steadily growing, on-premises is still the better choice in many cases for companies and or­ga­ni­za­tions. In sectors like finance or health­care, companies are subject to par­tic­u­lar­ly strict data pro­tec­tion re­quire­ments. With on-premises, sensitive data can be protected more ef­fec­tive­ly from unau­tho­rized third-party access since the company itself manages the data and internal processes. The company defines who gains access to which data.