HR Software

SaaS VS On-Premise HR Systems: Pros, Cons & Hidden Costs

person working on laptop

A lot of business owners and HR professionals I speak with raise the same question when we talk about HR software: Do we choose an on-premise solution, or a SaaS solution?

There are loads of reasons people ask me this, such as:

  • Which costs the most?
  • Which has the fastest setup?
  • Which option is most reliable?
  • Which option is most secure?

I have written this article to help you answer this question yourself, and to help you compare both options objectively – both have their merits and setbacks, and what’s right for your company might not be right for another.

This is what I will be covering – feel free to skip to whichever bit is most relevant to you:

  1. How Much? On-Premise VS SaaS
  2. General Pros & Cons of a SaaS Solution
  3. Summary

How Much? On-Premise VS SaaS

A good way to look at this is by using the ‘iceberg’ analogy – in other words, the bits you can see don’t make up the whole of the picture. But let’s start with the bits you can see:

  • Initial Cost
  • Subscription
  • Software Licences

With an on-premise solution, your setup costs are almost always going to be a lot bigger. For that reason alone, if you don’t want to make a significant investment, you’re better off with an SaaS solution – you simply pay a subscription fee each month/quarter/year (depending on your provider), rather than ‘buying’ the software outright.

However, that monthly subscription fee is almost always going to cost you more than paying a the on-going licence fees for the software you have bought – so in that respect, an on-premise solution works out more cost-effective in the longer term.

This isn’t where it ends, though – on-premise solutions come with a huge load of hidden costs that don’t show up on paper, and unless you have a very efficient way of handling them, you will normally end up paying significantly more with an on-premise solution than if you choose a hosted SaaS solution.

The diagram above shows you what I mean.

But that doesn’t mean a hosted SaaS HR system is right for you – it just means it’s probably less expensive. I’d now like to explore the main pros and cons of each option.

General Pros & Cons of a SaaS Solution

SaaS stands for Software as a Service – this means that you pay a subscription fee to use software that another company maintains and hosts, rather than installing, hosting and maintaining it yourself.

Here are the main advantages of a SaaS HR solution:

1. Low Cost of Entry

By far, SaaS costs far less to get started with – in fact, when you add up the costs of procuring and deploying the technology, it only amounts to a tiny fraction of an on-premise solution.

2. Low Total Cost of Ownership (TCO)

Unlike an on-premise solution, SaaS solutions have a very low TCO – not only are there no hefty maintenance costs when the software needs fixing or updating, but you don’t have to invest in or maintain any sort of infrastructure as it’s all taken care of remotely. When you factor in the need to purchase and renew software licences, SaaS actually reduces both your Capital Expenditure (Capex) and your Operational Expenditure (Opex), and therefore makes an overall cost saving in the long-term for your organisation.

3. Faster Time to Market (TTM)

When you choose an SaaS solution, the platform has already been prepared, configured and implemented by the solution provider – all the user needs to do is acquire their subscription and then log in. This cuts down the TTM significantly – sometimes hours instead of weeks.

4. Flexible/Scalable Pricing

Most SaaS providers let you change your subscription in real-time as your organisation grows (or shrinks). You are not usually bound into a contract that makes you pay for extra users just in case you hire them (or if you fire them), you can scale up or down pretty much on-demand.

5. Low Risk

You can usually opt for a rolling monthly contract, meaning if you suddenly have no need for the software, you’re not left paying for it. Plus, you are not responsible for any of the infrastructure if something goes wrong – your provider deals with that.

6. More Secure

Security is on the top of the priority list for any SaaS solution provider – not just HR software. Because of the sheer amount of user data they are legally responsible for protecting, they will ensure that a reliable and secure infrastructure is in place for a variety of customer needs – this will normally include everything from backup services to penetration testing. To replicate this level of security with an on-premise solution would be very complex and expensive.

7. Automatic Upgrades

With a SaaS solution, you don’t have to work around awkward downtime whenever an upgrade becomes available – and it’s normally free of charge. If the system needs updating or maintaining, your SaaS provider will take care of all everything, normally within short, pre-notified windows of time that fall outside of business hours.

And now for the disadvantages:

1. Internet Dependent

SaaS software requires an internet connection – if your organisation operates from places where connectivity to the outside world is patchy at best, then an on-premise solution might make more sense.

2. Less Control

With a SaaS solution, you must be comfortable trusting a third-party vendor with the responsibility of looking after your data. Despite the fact that a SaaS provider will likely have superior security and contingency measures, this can still be a big mental barrier to come to terms with – but it might reassure you to learn that many data-critical organisations like banks and building societies entrust SaaS providers with their sensitive data.

3. Less Customisation

If your organisation has plans to radically alter the code of the software you’ll be using, then you’ll be sorry to hear that with a SaaS solution, it’s impossible – the best shot you have is by making a feature request to the company providing it, and hoping it gets taken on-board.

But what you can do, is find out whether or not your provider has an API – this allows you to build other software around your HR system if ever you should want to.

For the most part though, if a provider has everything you want, this is not a concern for most businesses.


So here’s my final summary of SaaS VS On-Premise HR Software:

  1. If you’re looking purely at cost, SaaS is a no-brainer – both long-term and short-term. Mitrefinch is a good example of a cloud HR system.
  2. If you want to get started as fast as possible, then SaaS is the easy choice without a doubt
  3. If you are based in the middle of nowhere (or have poor internet connectivity) you might need an on-premise solution
  4. If you have huge plans to make radical customisations or changes to the software, you should choose an on-premise solution (or write a very compelling letter to the SaaS provider’s Head of Development!)