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On-premise vs. Cloud Computing: Key Differences, Pros and Cons

Andriy Stelmakh
July 17, 2023
10 mins to read

Table of Contents

    In the past decades, there were no such concerns about what solutions to choose: on-premise vs. cloud computing. However, the 21st turned out to be the century of the rising digital trends reinforced by the pandemic crisis, which skyrocketed the increased cloud adoption.

    For that reason, organizations widely adopt cloud-based software solutions to address such demands as IT cost optimization, resilience-building, cost efficiency, ensuring agility and digital touchpoints, and supporting remote human resources.

    Indeed. Gartner’s survey proves that 70% of businesses that already use on-demand cloud models plan to increase capital costs toward cloud solutions. The worldwide end-user spending on cloud services is anticipated to grow to 362,3 billion in 2022, up from 242,7 billion in 2019.

    Cloud solutions market growth

    Although cloud computing has become the instant “go-to” option offering multidimensional values, on-premise solutions are still in demand and may be more profitable for specific business requirements. While the cloud industry is on its growth path thanks to accessibility, scalability, agility, lower upfront costs, etc., on-premises solutions do not lag behind, offering more control, solid security, and compliance with regulatory standards. The global survey among companies that provide commercial software conducted by Dimensional Research states that 92% of the company respondents noted that their on-premises software sales have significantly increased over the last five years.

    To define which option will work best for your business, you need an in-depth comparison of both options. For example, while cloud-based services tend to be scalable, it may occur that spendings are huge due to the amount of data storage used. Moreover, if your goal is not scaling but customization, on-premises can be a perfect solution for you. Nevertheless, each option has pros and cons, and properly weighing them while choosing the best way to host your apps will help you run your business with minimum losses.

    Find out more about how cloud & on-premises computing can benefit your business in this short video summary.

    Cloud-computing: what is this and what businesses need it?

    Cloud computing is a model in which an enterprise uses remote servers to host on-demand system resources such as data storage, software, and applications and deliver them to their customers as a service. Data processing and management are performed by a third-party provider. As a result, there is no need to own hardware or purchase infrastructure, which significantly reduces expenses since you pay only for those services you need.

    Of course, not all industries and business types will benefit from cloud computing solutions. Businesses with legacy systems tend to slowly adopt cloud services but it can be a huge challenge to shift their data center software to the cloud. This is one of the reasons why businesses hesitate to move to the cloud.

    While cloud services provide flexibility, scalability, and reduced costs, data security challenges can considerably constrain adopting cloud computing. Although it is still disputable which solution is more secure – cloud computing or on-premises – healthcare businesses are hesitant to use cloud services because they are concerned that sensitive medical records won’t be under total control. To take into account such specific nuances of highly regulated industries and ensure privacy concerns, other cloud models are available, such as private cloud, multi-cloud environments, and hybrid clouds.

    Cloud computing types

    Cloud computing types include cloud computing services and cloud computing deployment models. Cloud computing services offer different levels of control, flexibility, and data management. Therefore, selecting an appropriate cloud-computing service depends on what specific needs of the business have to be met. There are three models that are built on top of one another.

    Cloud service models

    IaaS, Infrastructure-as-a-Service

    Infrastructure-as-a-Service is an IT infrastructure that your business rents, providing you with data storage space, virtual or dedicated hardware, servers, and operating systems. IaaS provides you with the highest control over your IT resources. IaaS functions similar to traditional data centers without the need to be responsible for outages, hardware management, and maintenance. IaaS customers have access to servers, data storage, and networks; however, all these are managed through a cloud-based virtual data center allowing users to customize resources according to their needs.

    Examples: AWS, Microsoft Azure, DigitalOcean, Cisco Metacloud

    PaaS, Platform-as-a-Service

    Platform-as-a-Service provides developers with all necessary services and tools needed to develop, deploy, and manage web and mobile applications. The advantage of PaaS lies in the efficiency it provides to developers since there is no need for them to be concerned about the hard work of setting up and maintaining the infrastructure, storage, networking, capacity planning, and resources acquisition. PaaS solutions can fit those products where multiple dev teams are involved in the deployment process since PaaS provides flexibility and high speed.

    Examples: Microsoft Azure, Heroku, AWS Lambda, Google App Engine, IBM Cloud Foundry

    SaaS, Software-as-a-Service

    Software-as-a-Service is a commonly applied cloud solution for businesses as it provides developers with completed products that are managed by a third-party provider. As in the case of PaaS, with SaaS, you do not need to worry about underlying infrastructure and service maintenance. You get a certain software that you need to utilize without the need to download IT stuff and handle technical issues. Therefore, your technical and dev teams can be more focused on other issues since a third-party vendor takes care of managing and upgrading the software.

    Examples: Salesforce, Dropbox, Hubspot, Slack, Google Apps, Microsoft Office 365, Zendesk, Concur

    Deployment models of cloud computing, Euristiq

    Apart from the classification of cloud computing into services, cloud computing is also categorized into the following deployment models:

    Deploying resources on-premises: is it considered cloud?

    On-premise is a computing model which installs infrastructure on the in-house physical location. All the servers, networks, and storage are located on your own premises so that you have complete ownership. Basically, this type fits businesses with specific requirements that need designing of applications tailored to their special use cases and with high privacy concerns. However, today’s ever-evolving cloud providers contribute more and more to diligent elaboration upon data-encryption issues, making them prevail over on-premises solutions.

    There is also one other way of looking at this division. Most projects that are hosted on-premises at their development stages are eventually moved to the cloud. And if those projects use the cloud just for data storage and they do not use Cloud Platform services, like AWS, are they considered cloud or on-premises?

    Cloud computing vs. on-premise: key differences

    Whereas one business opts for a cloud-based solution, another one can benefit from on-premises. The primary factor for each business is data security and both options have their pros and cons. In terms of investments, it is arguable since installation and maintenance of an on-premises environment may cost more in the beginning; however, in the long run, it can win over cloud-based costs if scaling your business is not your number one target. There is a set of criteria we compiled in this table for your consideration before defining which option will best suit your business.

    Costs1. High upfront costs.
    2. Drastical increase in costs if the data centers have a shutdown
    1. Lower price with pay-as-you-go model.
    2. More expensive for a big company but becomes cost-effective over time
    DeploymentDeployed on in-house facilitiesDeployed in the cloud
    Security1. Higher security thanks to increased availability and own control1. High security; data is backed up at regular intervals
    2. Vulnerability to attacks targeted at individuals
    ControlMore controlLimited control

    1. Costs

    Businesses are always trying to quantify cost savings, return on investments, and the potential for new revenue opportunities before selecting the best option, which will justify their assumptions. The thing is, there is a battle between cloud providers, on-premises data centers, and hardware manufacturers whose first goal is to offer their clients cost-effectiveness. With the pay-as-you-go model, cloud computing services are more beneficial since a company pays only for a service for a specific time frame (on a monthly or annual basis). But in the case of migration and long-term perspective, it may end up with hefty spending. But not permanently.

    According to Gartner’s research, initially, investments in cloud computing can be higher compared to on-premises (considering migration investments, for example). However, in the long run, they turn out to be declined when companies learn how to apply optimization practices and efficiently manage public cloud costs.

    Nevertheless, on-premises can be more cost-effective if your business does not need to store vast amounts of data. On the other hand, calculations on upfront investments on hardware, storage space, IT maintenance, and salaries for IT specialists may be frustrating.

    2. Deployment

    The distinction between the hosted cloud and on-premise software is obvious: data centers on the cloud are fully maintained by a cloud provider; if deployed in-house using the company’s infrastructure, data centers are under full control of the company. You may still get access to the resources in the cloud, whether it is a public, private, or hybrid solution. The glaring difference lies in the third-party responsible for the deployment on the cloud, while on-premises deployment encompasses maintaining all related operations.

    3. Security

    If at first glance, it may seem that on-premises data centers are a more secure solution to your business since they are under your complete control, it’s not always true. However, the statistics show that 79% of organizations reported at least one of the cloud data breaches for the last year. And again, it does not mean that on-premises infrastructures are always more secure than cloud-native solutions. The increased number of cloud incidents is caused by several factors, especially this year.

    Cloud adoption has skyrocketed due to the desperate struggle of companies to ensure remote working conditions for their employees since the start of COVID-pandemic. The State of Cloud Adoption in 2021 report states that 50% of software applications were developed in the cloud, while 30% are anticipated to migrate to the cloud within the next two years.

    The main cloud-based vulnerabilities are:

    Based on that, we can assume that the cloud incidents caused by the above-mentioned factors target individuals. Based on the Verizon Data Breach Investigations report (DBIR), Gabriel Basset, the Verison researcher, states that phishing attacks and misconfiguration errors are the most common sources of data breaches. She said that stolen credentials are the common factor for data breaches both for cloud and on-premise solutions (the overall number of breaches is 61 percent). And according to the report data, nothing proves that cloud-native approaches are less secure.

    Though on-premises security risks are under the guidance of the company’s internal staff and can be mitigated, there should be sufficient practices and proper security protocols involved, which means that you should continuously monitor and update security measures.

    4. Compliance

    For an on-premises environment, it is important to adhere to governing regulations, especially those concerning the fintech and healthcare industries. As an owner of the on-premise storage, you have to be responsible for audits and potential penalties if your business does not comply with regulations. Defined perimeters of on-premises make it a more straightforward process compared to the cloud, where companies have to keep abreast of dynamic changes to achieve compliance. In the cloud, complying with regulatory standards is the same as with an on-premises policy; however, in the context of cloud specifics with its multiple data points and potential vulnerabilities, companies require appropriate vulnerability management tools and continuous monitoring at the host level.

    Therefore, in the case of cloud computing, companies need to ensure that their cloud provider meets the regulatory mandates within their specific industry. Moreover, there are types of companies that are not allowed to be cloud-based due to severe concerns of privacy and security of their records and transactions.

    5. Control

    According to the Dimensional Research report, increased availability of on-premises environments is the third driver why customers of on-premise software companies select on-premises (54%). Security and data protection were the first two main factors.

    When there is a threat or malfunction in the operating systems in the cloud you might not have access to fix it since all data encryption is shared with a third-party provider. That’s why many businesses still do not want to transit to the cloud.

    Cloud adoption: our experience

    We had an interesting case of a document-generated system for a financial enterprise that required high security. It was decided to host the solution in the cloud and not on-premises and here’s why.

    One of our clients, a large investment company based in London, wanted to introduce digital transformation to their enterprise. They eventually settled on a cloud-based system that could automatically generate documents, collecting data from microservices and data storage that communicate with each other. Our engineers designed server architecture and developed a back-end for this internal system, which enabled cloud adoption.

    We chose the Microsoft Azure service as it was partially used by the client before and offers the necessary security protection for the client’s financial data. The solution generates letters, documents, and brochures that are required as a backup of all company operations by law. Created documents are stored in the cloud and can be accessed by users or third parties like printing companies. They have access only to the documents that they should have access to.

    In case you are interested in cloud migration, we have a step-by-step guide that covers all the details one should pay attention to when devising a cloud migration strategy.

    On-premises vs. cloud summary: benefits and drawbacks

    We cannot reach a final verdict specifically for your business unless we evaluate your existing systems and consider your requirements and goals. Therefore, we decided to summarize the above-mentioned comparison of solutions by splitting them into pros and cons, albeit they are general ones. Nevertheless, it will guide you toward an appropriate solution. In any case, you can contact us if you need help with software development.

    Cloud: Benefits

    Cloud: Drawbacks

    On-premises: Benefits

    On-premises: Drawbacks

    So is cloud more reliable than on-premise?

    There is no precise answer. While some businesses tend to devote their systems to the cloud and scale up, others with more sensitive data are afraid of hijacking and cyber attacks. And even if an on-premises environment cannot be 100% safe, it still encourages more confidence, especially for those businesses with extra privacy concerns.

    Anyway, what solution to choose depends on your specific case, goals, and business needs. Many companies in finance use hybrid cloud providers like Amazon Web Services and Microsoft Azure since they provide end-to-end encryption. We recommend consulting with a software development specialist to get expert advice.

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