Cloud vs. On-Premises in the Pharmaceutical Industry: Which Delivers a Lower Total Cost of Ownership?

The pharmaceutical industry faces three major challenges:

• Traditional clinical trial models are costly and complex, taking between 12 to 18 years and costing up to $3 billion. Despite this, only 10% of drug candidates enter clinical development.
• Complex supply chains are made for disruption. COVID taught pharmaceutical manufacturers a thing or two about supply chain vulnerability.
• During tumultuous times, the pharmaceutical industry can count on two givens: Costs will rise even as industry regulatory requirements grow more complex.

Given these challenges, for the heavily regulated pharmaceutical industry, the cloud comes with distinct advantages. Today, about 83% of pharmaceutical companies leverage cloud solutions in some form or fashion, according to a Healthcare Information and Management Systems Society report.

IDC’s Worldwide Quarterly Enterprise Infrastructure Tracker revealed a 62% increase in cloud infrastructure spending in the second quarter of 2024, far outpacing non-cloud investments. The growth is driven in part by “accelerated AI-related investments,” according to the report.

By 2028, Gartner says, the cloud will have completed its move from a disruptive technology to a business necessity.

Cloud computing in the pharmaceutical industry offers many benefits:

• Scalability and flexibility: The cloud allows companies to expand or reduce resources based on their needs.
• Remote access: Employees can access critical data from anywhere, enhancing collaboration across departments and international teams.
• Automatic updates: Cloud providers ensure that the latest software feature updates and security patches are deployed seamlessly, without downtime or manual intervention.

When evaluating cloud solutions, here’s what pharmaceutical businesses should keep in mind.

Capital vs. Operational Expenses

Initial Capital Expenditure (CapEx) for on-premises infrastructure is high, as companies need to invest in physical hardware like servers, networking equipment and storage devices. Companies must also purchase software licenses and secure physical space, which requires significant upfront investment. The cost of acquiring, installing and maintaining hardware can escalate.

On-premises solutions also tend to have higher ongoing Operational Expenditures (OpEx). Energy consumption, particularly cooling, is a cost factor. Then there is the cost of an in-house IT team to manage day-to-day operations, software upgrades and security patches. The need for continuous monitoring and updating of both hardware and software can increase long-term costs for businesses that rely on on-premises infrastructure.

Cloud solutions tend to have lower upfront costs due to minimal in-house infrastructure needs. Companies in the cloud also have significantly lower maintenance costs. VentureBeat estimates that companies can save an average of 43% in infrastructure costs by moving to the cloud.

Scalability and Flexibility

One advantage of the cloud is the pay-as-you-go model. It allows companies to pay for resources based on usage, which can fluctuate with business needs. This model makes it easier for pharmaceutical companies to scale capacity and costs as their needs grow or shrink, offering much more flexibility.

Conversely, on-premises solutions may struggle with sudden or significant expansions. Expanding capacity is time-consuming and expensive. We see this lack of agility as especially problematic during critical moments, such as a surge in vaccine production, where delays can have significant consequences. On-premises solutions also require significant capital investments in additional hardware and infrastructure to scale, leading to higher upfront costs and inefficiencies when usage decreases.

Data Security and Compliance

Studies show up to 95% of cybersecurity breaches stem from human error. It’s a problem in every industry, not just life sciences, where many still run their highly customized enterprise resource planning (ERP) platforms in-house.

Secure and compliant data handling is a federal imperative and a best practice dictated by highly sensitive medical research, patient information and competitive markets. Established cloud-based solutions offer robust built-in security protocols. For example, cloud-solution providers like Oracle NetSuite offer pre-configured security and compliance features tailored to meet the pharmaceutical industry’s stringent requirements for HIPAA, GXP and other. Pharmaceutical companies also benefit from managed cybersecurity services for threat detection and response, enabling swift detection of breaches by experienced teams. This reduces the burden on in-house IT staff, allowing them to focus on more strategic activities.

An on-premises infrastructure provides companies with more control over their security settings. It’s a customization that some businesses may prefer. However, this control comes with a cost.

Organizations must invest heavily in ongoing compliance audits and infrastructure to meet regulatory standards. There is also the expense of dedicated IT personnel to manage security protocols and stay current with threats and requirements. As a result, while on-premises solutions offer the perception of greater control, they often incur higher long-term costs for maintaining data security and regulatory compliance than cloud-based alternatives.

Total Cost of Ownership (TCO)

The TCO includes all the costs associated with purchasing, deploying, using and maintaining a solution throughout its lifecycle. It includes both direct and indirect costs.

It’s important to look at a cloud vs. on-premises decision through a TCO lens. Consider:

• Upfront costs, such as software, hardware, personnel and more
• Operating costs, such as the costs for running the solution, energy consumption and operational resources
• Maintenance and support costs, including technical support, repairs and upgrades
• Training costs, including training employees to use the solution
• Downtime costs, the financial impact of downtime if the system fails or during scheduled maintenance

Research consistently shows that cloud-based infrastructure offers significant cost savings over time.

One of the primary factors driving up the total cost of ownership (TCO) of on-premises systems is the hidden costs associated with managing physical infrastructure. For example, if a server goes down due to flooding, disaster recovery can cost 10s of thousands of dollars in direct and indirect costs depending on system complexity. Life sciences companies’ growing data storage needs require continual hardware upgrades. Even regular software updates demand both time and resources, further inflating costs.

In contrast, cloud infrastructure provides a more predictable cost model with fewer hidden surprises. Cloud solutions deliver a higher return on investment (ROI) by reducing the need for in-house IT support and minimizing hardware expenditures. According to a Forrester report, businesses that migrate to the cloud can see a 40%–60% reduction in IT operational costs, leading to significant savings over time. Cloud-based systems like Oracle NetSuite offer built-in disaster recovery and automated software updates, reducing complexity and cost for pharmaceutical companies.

Making the Move: What Pharmaceutical Companies Need to Know

Cloud technology played a critical role in delivering the first Covid-19 vaccine candidate to the U.S. National Institutes of Health for Phase I trial in less than 50 days, according to a report in MedCity News.

Thanks to examples like this, the value of cloud computing is clear. What’s missing is a clearer understanding of how to squeeze value from cloud implementation, avoiding higher costs than necessary and sometimes unwieldy implementations. Sikich can help in both areas.

Sikich is uniquely positioned to help pharmaceutical companies. With deep expertise in the industry and a proven track record in cloud strategy implementation, Sikich can guide pharmaceutical businesses through every stage of their cloud journey. From assessing current infrastructure to identifying areas for cost savings and efficiency improvements, Sikich’s cloud experts are equipped to help pharmaceutical companies maximize the return on their investment.

Whether you are considering a complete cloud migration or a hybrid approach, Sikich can design and implement a strategy that aligns with your long-term business goals.

Reach out to our team today to learn how we can help you reduce costs, improve scalability and future-proof your operations through the cloud.