A multi-year TCO breakdown for on-premises and cloud deployments of SAP S/4HANA — exposing hidden costs and highlighting when each model makes financial sense.
On-Premises SAP S/4HANA involves significant upfront capital expense (CAPEX) for perpetual licenses and infrastructure, followed by annual maintenance fees. Cloud S/4HANA (Subscription) transitions to an operational expense (OPEX) model with pay-as-you-go subscriptions.
| Cost Factor | On-Premise | Cloud (Subscription) |
|---|---|---|
| License Fees | Large one-time purchase (~$1M for 500 users after discounts). You own the software rights indefinitely. | No upfront cost — ~$600K per year for 500 users. Licenses are “rented” for the term. |
| Support & Upgrades | ~20% of license fee per year ($200K annually on a $1M license). Upgrades are manual and on your schedule. | Included in subscription. Quarterly updates from SAP. No separate upgrade fees. |
| Infrastructure | Customer’s responsibility. Requires data center, hardware, IT ops staff. Significant upfront costs. | Included in subscription. SAP or hyperscaler hosts and manages the infrastructure. |
| Customisation | Maximum flexibility. Higher development costs and longer implementations. | Standardised environment. Less flexibility but simpler and faster to implement. |
| Scalability | Fixed capacity. Adding users requires new licenses and hardware. | Elastic. Increase subscriptions as needed (mid-term or at renewal). |
The key difference is financial timing: on-premises requires more CAPEX upfront, while cloud spreads costs over time (OPEX).
For the complete S/4HANA licensing overview, see SAP S/4HANA Licensing: The Complete Guide.
On-premise requires data centres, servers, storage, networking, power/cooling, and skilled BASIS/DBA staff. These “hidden” costs are often overlooked. In cloud, they’re embedded in the subscription — potentially reducing internal IT workload.
On-premise customers execute their own upgrades — a costly project every few years. Cloud delivers regular updates (quarterly), eliminating large upgrade projects but requiring continuous testing and change management.
Heavy customisation on-premise incurs higher development costs. Cloud’s limited customisation can lower support costs and simplify upgrades, but may require costly workarounds for unique requirements.
On-premise, you own the licenses forever — you can let maintenance lapse and retire the system at minimal cost. Cloud subscription access is lost when you stop paying. Migrating data out can be an unexpected project cost.
For user license type details, see SAP S/4HANA Licensing Types Explained.
In the first 3-5 years, cloud subscriptions often appear financially attractive because you avoid the big upfront costs. Our illustrative example shows approximately $2.5M (on-prem) vs $3.0M (cloud) over 5 years — in the same ballpark.
Over 10 years, the equation can flip. After initial licenses are paid, on-premise only pays yearly maintenance (~22%). A $1M on-premise license with $220K/year support will cost approximately $3.2M over 10 years. A comparable cloud subscription at $600K/year totals $6M — roughly double.
The breakeven point is typically around the 5-7 year mark. Apply an NPV analysis — paying $1M upfront ties up capital that could be used elsewhere. CFOs may prefer subscription even if slightly more expensive over a decade for budget flexibility.
If your company plans to use S/4HANA for 10-15 years as a strategic platform, owning licenses can be financially advantageous. If you anticipate scaling up/down or possibly switching systems, cloud offers more flexibility.
Cloud offers elasticity — scale up by paying for more users. Scaling down is trickier mid-term but adjustable at renewal. On-premise licenses are owned assets: you can’t sell them back, leading to potential “shelfware.”
On-premise (or private cloud) provides freedom to tailor S/4HANA to your specific needs. Cloud (public multi-tenant) limits you to standard best-practice processes — a good fit for simplicity but may not accommodate unique requirements.
On-premise grants maximal control over upgrade timing. Cloud promotes continuous innovation with quarterly releases — beneficial for access to new features but requiring continuous adaptation.
For RISE with SAP deployment model comparisons, see SAP S/4HANA Deployment Models and Licensing Implications.
Many enterprises adopt a hybrid approach — running certain workloads on-premise and others in the cloud. Also consider SAP’s “RISE with SAP” packaging, which bundles cloud hosting and licensing into a single subscription.
For a detailed comparison of RISE with SAP options, see RISE with SAP vs Traditional On-Premise SAP Licensing.
Run a side-by-side financial model for 5-year and 10-year horizons including all hidden costs (infrastructure, personnel, upgrades, exit costs).
Always benchmark SAP’s quotes against industry peers. Discounts of 50%+ are achievable on large deals for both on-premise and cloud. See our pricing benchmarks guide.
Evaluate whether standard cloud processes meet your needs or if customisation justifies on-premise costs. Map critical processes to SAP standard vs. custom requirements.
Cloud requires continuous adaptation to quarterly updates. Budget for ongoing testing, training, and change management resources.
In cloud contracts, negotiate data extraction rights, reasonable notice periods, and read-only access post-termination for compliance needs.
Yes, but it’s not trivial. Moving from cloud to on-prem typically requires purchasing new perpetual licenses. Moving from on-prem to cloud may involve SAP conversion credits for existing licenses. Plan any switch carefully and negotiate transition terms upfront.
Not always. If you factor in on-prem hidden costs (infrastructure, IT staff, upgrade projects, hardware refreshes), cloud can be competitive even over 10 years. The answer depends on your specific circumstances, scale, and discount levels.
RISE with SAP bundles cloud hosting, S/4HANA licenses, and business services into a single subscription. It simplifies procurement but may limit flexibility. Carefully compare RISE pricing against assembling the components separately.
SAP often provides conversion credits for existing licenses to reduce the cost of new cloud subscriptions. The value of these credits varies significantly — negotiate hard, and consider engaging an independent advisor to maximise credits. See our S/4HANA licensing conversions guide.
Our SAP licensing specialists help enterprises model the true cost of on-premise vs cloud S/4HANA deployments and negotiate optimal deal terms.
This article is part of our SAP S/4HANA Guide pillar. Explore related topics: