Cloud Digital Leader Why cloud technology is transforming business Practice Question
A media company currently licenses proprietary software for video editing that costs $50,000 per seat annually. They are considering a cloud-based SaaS alternative at $5,000 per seat annually. Beyond the licensing cost, which additional financial benefits should they consider when calculating total cost of ownership (TCO)?
⚠ Common exam trap
The GCDL exam often tests the misconception that only direct licensing costs matter, ignoring the broader TCO components like hardware, staff, and facilities that make on-premises solutions more expensive than they appear.
Answer choices
Why each option matters
Answer the question above first, then reveal the full breakdown to understand why each option is right or wrong.
Correct answer & explanation
✓
Eliminated hardware costs, reduced IT maintenance staff, no upgrade cycles, and freed facilities costs — all lowering the true on-premises TCO that should be compared against the SaaS subscription.
The total cost of ownership (TCO) for on-premises software includes not just the licensing fee but also hardware acquisition, IT staff for maintenance, periodic upgrade costs, and physical facility expenses. By moving to a SaaS model, the company eliminates these variable costs, making the $5,000 per seat subscription a more accurate comparison against the fully-loaded on-premises TCO, which often exceeds the $50,000 license alone.
Answer analysis
Option-by-option breakdown
For each option: why learners choose it and why it is or isn't the right answer here.
- ✗
Only the licensing cost difference ($45,000 per seat) matters for the financial comparison.
Why it's wrong here
Focusing solely on the $45,000 licensing cost difference ignores the substantial capital and operating expenditures of an on-premises deployment. A complete TCO model must include hardware acquisition and refresh cycles, IT staff salaries for patching and administration, software maintenance fees, power and cooling costs, physical space, and periodic upgrade projects. These hidden costs often exceed the visible license fee by several multiples, so a license-only comparison severely understates the true cost of on-premises.
- ✓
Eliminated hardware costs, reduced IT maintenance staff, no upgrade cycles, and freed facilities costs — all lowering the true on-premises TCO that should be compared against the SaaS subscription.
Why this is correct
The correct TCO comparison must account for the full set of costs eliminated by moving to SaaS: no upfront hardware procurement or refresh cycles, reduced IT maintenance staff for patching and monitoring, no annual software upgrade projects, and freed data center space for power, cooling, and cabling. When these hidden on-premises costs are quantified and subtracted, the SaaS subscription fee often becomes comparable or even lower over a 3–5 year horizon. This holistic view is exactly what financial decision-makers miss when they only compare license fees, and it is the reason the 'SaaS vs. on-prem' TCO analysis is so favorable to cloud.
- ✗
The SaaS option has an internet dependency risk that may cost more than the savings.
Why it's wrong here
Internet dependency is an operational risk, not a financial line item in a Total Cost of Ownership (TCO) calculation. TCO quantifies direct and indirect costs such as hardware, software, labor, facilities, and maintenance over the asset's lifecycle. While connectivity outages could incur downtime costs, that is a business continuity concern, not a recurring cost component of the SaaS subscription itself, and most enterprises already rely on internet for core operations.
- ✗
The vendor's market capitalization, since larger companies are more financially stable.
Why it's wrong here
The vendor's market capitalization reflects financial stability and long-term viability, which is a procurement and risk-management criterion, not a component of TCO. TCO measures the total economic cost of owning and operating a solution, including acquisition, deployment, operation, and disposal costs. Even a financially stable vendor cannot change the fact that on-premises requires capital for servers, storage, networking, and a dedicated IT staff; those costs are independent of vendor market cap.
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Cloud Digital Transformation
Key term
TCO
Total Cost of Ownership (TCO) is the complete cost of owning and operating an IT asset over its entire lifecycle, including purchase, maintenance, support, energy, and disposal costs, not just the initial price tag.
Key term
Total cost of ownership
Total cost of ownership (TCO) is the complete cost of owning and operating an IT asset over its entire lifecycle, including purchase price, maintenance, support, energy, and disposal fees.
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Written by Johnson Ajibi, MSc IT Security
Senior Network & Security Engineer · founder of Courseiva
This GCDL practice question is part of Courseiva's free Google Cloud certification practice question bank. Courseiva provides original exam-style practice questions with explanations, topic-based practice, mock exams, readiness tracking, and study analytics to help learners prepare for the GCDL exam.