There are many different scenarios in which you may wonder about On Site servers vs a cloud based product. In this article, I’m going to cover email. Since we’re talking about business email here (and not your cheap POP3/IMAP setup) we’ll be discussing Microsoft Exchange. When it comes to hosted exchange, we have a strong preference for Office 365, so that is the cloud service that we’ll be comparing to having an onsite exchange server.

Office 365 vs On Premise Exchange Server

Office 365 vs On Premise Exchange can be a difficult decision to make as they are so many factors involved, but hopefully this article will lay them out in a clear and direct manner.

In the past, when an organization needed a Microsoft Exchange platform, the obvious choice was usually to buy an Exchange server and host it at its offices or data center. But as we push forward with cloud computing, hosted Exchange has become a cost effective option for organizations of all sizes. The question these days for organizations is which solution to go with? Is Office 365 a better option vs on premise Exchange?

For some scenarios, let me just answer that question right off the bat. For small and medium businesses, Office 365 is an easy choice. It’s not until you enter the large scale enterprise that an on-premise Exchange server is still competitive with Office 365.  I will cover the major selling points of each below, and it should be clear why an on premise Exchange server is no longer the best option for most SMBs (there are some exceptions, so I won’t say it’s the best option for every SMB out there).

Advantages to Office 365 vs On Premise Exchange

  • Scalability – this is one of the major advantages to Office 365. When you buy a standalone Exchange server you will need to buy a certain size of server to support your current users, as well as plan for scaling upwards in the future (assuming you are one of those businesses that plans to grow). In this scenario to be cost effective you need to accurately predict your growth – otherwise you will end up with either a completely excessive server (if you don’t grow as predicted) or the need to upgrade or buy new exchange hardware and plan an exchange migration too quickly (if your business grows faster than expected). The advantage of Office 365 here is complete scalability – since it runs on Microsoft’s hardware you can go from 2 users to 2,000 as quickly as you can create them.
  • Reduced IT Overhead – another major advantage of Office 365 is the lowered IT overhead required to run it. You will still need someone capable of setting it up and configuring DNS, users, computers, phones, etc, but for the most part these tasks pale in comparison to the time and knowledge required to set up and run an Exchange set up.
  • Reliability – thanks to the scale of Microsoft’s Exchange Online operations, they are highly reliable. They aren’t without the occasional issues, but for the most part they are as reliable as or more reliable than any company’s on premise Exchange server could ever be. It will also stay running during any office power outages, internet cuts, or other sorts of mishaps (though an internet cut would obviously still affect users in that area/building, but not traveling users like an on premise Exchange failure would). Also, when there is an outage, the company’s IT is generally not required to fix anything – just check the Office 365 health page and wait for service to return (usually very quickly).
  • Spam/Virus Email Filtering – Office 365 includes this on Microsoft’s end, so there is no need to buy and configure a filtering device or pay to have your email run through an external filtering service.
  • Backups – Already handled by Microsoft, so you don’t need to worry about on and offsite backups of your data. You can still run your own backups of your emails/calendars/contacts if you wish, but Microsoft takes care of this on their side already
  • Other Apps – Sharepoint, Office Apps, and Lync are included in some of the Office 365 plans. These are items that could potentially be set up on-premise as well, but would require additional time, costs, hardware, etc…

Advantages to On Premise Exchange vs Office 365

  • Costs Won’t Rise as Much During Growth – Costs are less likely to rise as much during business growth as long as the server can handle more users (which I touched upon in the “scalability” section above). Office 365 costs are perfectly linear, so you will pay anywhere from $4 to $20 per user per month (depending on the plan you chose). With an on-premise Exchange server, most of your cost is put down up front, so the cost of growth can be less sharp. This is dependent on many factors and assumptions though, so a careful cost analysis should be made beforehand.
  • No Need to Set up Dir Sync – When using Office 365, all but the smallest of organizations (I would say roughly 25 users or less) should be using Active Directory Sync (dirsync) to synchronize  their company’s Active Directory with Office 365 (to avoid managing two separate directories). It does require some time, a small server (a virtual machine is usually best), certificates and some know how to set up. Since an on premise Exchange server is already integrated with the local Active Directory, setting a dirsync is not necessary.
  • Full Control – As convenient as Office 365 is, it is still a 3rd party email service. For most organizations this should be fine, but there are likely those out there that need to have full control over their email data, handling, and processes. Office 365 is HIPAA compliant, so general medical offices need not worry, but for an organization with stricter or more specialized security needs, a 3rd party email system might not be acceptable.
  • Integration – Some corporate applications require to modify the Exchange install or hook into Exchange in a particular way that won’t be supported in a shared hosted environment. Blackberry Enterprise Server is a good example however Microsoft do support this function. With Office 365 you are always stuck with the fixed solution Microsoft provides. With your own on-premise server set up you are free to modify and add to your heart’s content. It must be noted that it isn’t that common to have Exchange integrated applications these days, especially for the smaller organization.


Now I can’t do an exact cost breakdown for every organization because every situation is so unique, but I can go over the basics so you can break down the costs for yourself.

  • Hardware – This is obviously the big initial investment for an on premise Exchange server, which doesn’t exist for Office 365. Obviously this can be done on the cheap, but if one were to make it equal to Office 365, this hardware would need to include hardware redundancy, backups, and multiple database copies distributed across data centers in case of complete failure of the first one. A small organization cannot cost effectively do this.
  • Monthly – Besides a few items discussed below, this one applies really only to Office 365. Their plan options are $4, $6, $8, or $20 per user per month depending on your plan. You can compare Office 365 plans here. This cost is completely linear and rises and falls with the number of users. The easiest way to compare this with an on premise Exchange setup is to break down the cost of the Exchange server(s) with the number of years you want them to last with the average number of users you predict will be on them (at which point you can get an average per user per year dollar amount).
  • Software Licenses – Don’t forget though, Exchange on premise isn’t’t free of charge. You have Windows Server licenses for each server, Exchange Server licenses for each Exchange server, user client access licenses for every Exchange user (costs go down with the more you buy) and then you will have backup software licenses, anti virus licenses for the server and most likely an AV/SPAM filter product for all inbound mail at the very minimum.
  • Setup Time – Both Office 365 and an on premise Exchange server will have set up times, though its unlikely that on premise Exchange would be faster or easier that putting a credit card into the Office 365 site. You will have to make predictions for both of these depending on your situation and compare the time/cost of setup. If you decide you want a dirsync server for Office 365, you should include that in its predicted setup time. We feel that migration from the old mail platform to a new Exchange system or Office 365 is about the same so is a wash.
  • Maintenance Time – Both options will involve time helping, troubleshooting, and setting up end users. However, only on premise Exchange will ever require maintenance of the server and Exchange itself. If you have a dirsync server, I recommend it just be running as a VM and will likely require little to no maintenance over its lifetime.
  • Administration – We feel both options are about the same for actually administering users, accounts, passwords etc.
  • Electricity/Running Cost – This will mostly only apply to an on premise Exchange server. Depending on your setup, it can include electricity, cooling costs, or just data center costs (if that is where you run the server from).

Once you have totals for all these sections they need to be added up together and then divided by the number of users and the number of years you want to capitalize over. A good year estimate is 4 or 5 years. Beyond that your servers will be aging, and your software out of date and you will need to start over again. With Office 365 there is no need for any upgrades or starting over.

Hopefully you will find this comparison article helpful and if you need further assistance please give Squeeze Technology a call at 949-287-4500.