Cloud or On-premise ERP Software—Which Is Right for Your Business?

Cloud ERP software is a major focus of several recent enterprise resource planning (ERP) user conferences run by leading vendors like Oracle NetSuite, Plex Systems, Epicor, Acumatica, and FinancialForce, to name but a few.

The main takeaway from these events is that businesses are no longer early adopters of cloud ERP software; they are mainstream adopters. It seems that cloud security concerns are diminishing of late and, as a result, cloud adoption is on the up.
 
But, does cloud ERP software resolve all the issues associated with on-premise ERP software, like lengthy implementation and high costs?
 

Typical Cloud ERP Software Deployment Benefits

Some businesses still misunderstand cloud ERP software; others face challenges when implementing and using it. However, by and large, most businesses can greatly benefit from it.

Faster Time to Value

It’s much quicker to implement cloud ERP software solutions than on-premise solutions, given that standardized out-of-the-box (as much as possible) functions and processes are recommended, if not mandated outright. Deploying cloud ERP is also an opportunity for companies to streamline their business processes.
 
It’s faster and simpler to deploy cloud-based administrative software like HCM or CRM than its on-premise counterpart. That’s because this type of software is standardized and there’s a reduced need for customization.
 
On-premise ERP customers that have to create workarounds for certain processes due to a lack of sufficient technology can benefit from the business processes managed by operational cloud software, which renders workarounds obsolete. Think, for example, of mobility and fast in-memory computing, which today enable highly differentiating processes in cloud field service management (FSM) software. These technologies’ quick process optimization leads to better customer satisfaction.

Lower and Predictable Costs

Companies have to fork out a significant initial capital investment for on-premise ERP systems (for software and hardware), which increases down the line when these companies have to buy new hardware. Businesses can avoid these hefty costs with cloud ERP software solutions. What’s more, cloud ERP replaces upfront costs with monthly fees, giving businesses predictable costs and more stability.
 Cloud ERP Buyer's Guide for Manufacturing

Lesser IT Burden

Cloud ERP software solutions are maintained by the vendor, which reduces the chance of system crashes or service failures. Sure, service outages happen, but many serious cloud providers have established failover practices and redundant data centers. If nothing else, the onus is on the vendor to fix any issues, or face penalties and lose customers.
 
Cloud ERP software can also reduce staffing costs. It lessens the need for in-house IT support, and the company’s IT staff can focus on core competencies and tasks that add value, rather than mundane IT chores.
 
In the case of multi-tenant cloud ERP software deployments, every tenant (company or division) will be on the same release. This results with faster innovations for the software vendor (i.e., the vendor no longer wastes resources on managing multiple product releases and disparate install bases), no version lock, vendor-managed updates, stronger communities and collaboration, and easy and predictable upgrades (à la Google Apps or Microsoft Office365).

Increased Adoption of New Technology

How can companies using an old and esoteric technology stack (e.g., AS/400, Delphi, etc.) that isn’t web enabled (let alone has mobility support) or supported by the provider take advantage of new technology and compete in the digital transformation age? Cloud computing has the answer.
 
Businesses typically adopt cloud ERP software by necessity, for example, when they need to quickly roll out some software solution to geographically dispersed subsidiaries. Cloud computing enables businesses to adopt the latest technology—such as in-memory databases, mobility, advanced analytics, the Internet of Things (IOT), and artificial intelligence (AI)—more quickly. Just by leveraging these latest tools, companies can adopt new business models to compete in digitized markets.
 
But it’s important to bear in mind that software vendors can overplay the advantages of cloud software. They boast removed IT roadblocks and seamless integration. What you really get fewer IT roadblocks and remote access.  

What Are Some Possible Cloud ERP Software Caveats That You Should Care About?

Regulatory Burdens

Jumping into deploying cloud ERP software without carrying out thorough due diligence, preparation, and research into any necessary tradeoffs and caveats is a fool’s errand.
 
One reason for this is that some industries and regions still impose a regulatory burden on otherwise easy multi-tenant cloud ERP software deployments. For example, the life sciences industry requires that all IT systems are validated, including software enhancements. How is that possible with cloud solutions, which are continuously updated? One solution is a dedicated private single-tenant cloud whereby every new software upgrade is validated at regular intervals (say, every 18 months).

Repeated Updates

True multi-tenant cloud providers can update their platforms as often as three times a year. This can cause continual training headaches for users, who need to get used to the new look-and-feel and workflows of their ERP solution repeatedly. And let’s not forget that these solutions aren’t as simple and intuitive as, say, Office365, Gmail, or other consumer-like software apps.

Strict Data Hosting Laws

Some countries have strict data residency laws that don’t allow for local data to be stored outside of the country. ERP software providers will have to offer physical data centers in the countries in which their customers operate. Regardless of that residency requirement, what about a remote plant or division in a place with poor connectivity and scarce Internet availability? One solution could be a local ERP software appliance that periodically updates via a private line connected to the company HQ’s software.

Vertical Industry Fit

Some legacy on-premise ERP software systems have been customized beyond recognition to perform specific business processes. With cloud ERP software, companies can mostly make light customizations that don’t alter the code. Does this give cloud ERP a competitive advantage and the chance to be as good a fit as its heavily customized on-premise ERP counterpart? Perhaps. But, the more vertically focused the ERP software provider is, the more likely the solution will fit the customer’s needs straight away.
 Cloud ERP Buyer's Guide for Distribution

Understand What Costs Extra in the Cloud

Prospective ERP customers need to understand what a cloud ERP software subscription license entails, since vendors won’t necessarily volunteer that information during software demonstrations. Customers leave these demos thinking they’ve got all the information they need, but, all too often, this isn’t the case.
 
Namely, many customers are unaware that many ERP vendors offer basic, intermediate, and advanced software editions. Prospects should clarify whether the proposed cloud ERP software subscription includes advanced capabilities such as advanced inventory management, contract renewals, demand planning, recurring billing, revenue recognition, e-commerce functionality, incentives planning, and financial planning and consolidation capabilities.
 
Many vendors also offer generous discounts to close a sale. But, can you keep these discounts when your contract is renewed? Can you get a quote from the vendor for additional users to ensure your software can scale with the growth of your business? How much will an upgrade from a basic edition to an advanced edition cost, and can the vendor fix this price?
 
How about downgrades? What happens if you realize you don’t need all the functionality or users you initially thought? Some vendors may offer downgrades quarterly, after the first year of the contract.
Even cloud ERP software customizations are not necessarily free after a certain number of gratis threads, custom fields, and scripts on shared servers. The number of free web services and third-party integrations is also limited, and everything else comes for an extra price.
 
Guaranteed system performance can also come at a cost. Prospects should find out the workload and transaction volume (e.g., orders, shipments, compliance checks, etc.) the cloud infrastructure can handle.
 
It’s a common belief that customers can easily terminate their cloud ERP software contract once the initial term is up. The breakup isn't necessarily that easy. Will the vendor give you all your data history? Legally and ethically they must, but they might drag on their feet a bit. As a commendable example, Acumatica gives its customers a local private database copy for safe keeping (with seven-day rolling backups). The vendor also offers free local sandboxes—on-demand self-service production environment replicas for development and testing teams, DevOps engineers, cloud architects, and security professionals. These capabilities can help developers prepare new releases, new customizations, etc.
 
Other topics that prospective and existing ERP software users should consider discussing with the cloud provider are:

• Security and disaster recovery practices
• Vendor cloud certifications
• Service level agreements (SLAs)
• Support (cloud software isn’t immune to bugs and patches)
• Documentation
• Audit trails

 

Cloud ERP Could Be for You (but Do Your Research)!

There’s no debate that cloud represents the future of ERP, but on-premise ERP deployments won’t become obsolete for some time. The latter also have a lower long-term total cost of ownership (TCO), especially when you take into account the cost of all the cloud extras. However, Cloud ERP software deployments offer faster time to value.
 
When selecting ERP software, companies must focus mainly on the business, rather than on mere technical functionality. Change management, training users, and inconvenient discussions over whether and how to standardize business processes are more complex than resolving technical issues. If you resist the urge to customize on-premises ERP software, on-premise upgrades should be just as easy as those in the Cloud.
 
Cloud ERP is not necessarily by a default cheaper, smarter, or even simpler. Cloud ERP implementations are often simpler due to the incremental little steps approach, whereby in the beginning it is possible to avoid engaging big projects, pricey consultants, and justifications to the executive committee. One can start with a small departmental buying with a limited number of users. Once that project has been the success, the entire organization can slowly get used to the software and its expenses.
 
Cloud ERP solutions seem as good fit for young startup companies which lack the time and organizational capabilities for a classical lengthy on-premise ERP implementation. Those fast growing companies also tend to be happy with the functional limitations of Cloud ERP if there is at least the ease of use and integration to other Cloud solutions.
 
On a down side, Cloud ERP might be riskier for companies that have an unstable cash flow. Namely, the user companies do not have the “leverage” over the vendor, such as to stop paying for maintenance (while still using the software on-premise, as in the case of in case of an on-premises implementation) during any disputes and grievances with the Cloud vendor (who can turn off the service if necessary).
 
ERP software vendors have been heavily promoting the cloud deployment model, but existing and prospective users should understand the facts to cut through the hype. To determine the real benefits of cloud ERP software, users need to keep their expectations realistic and eyes wide open.  

Related Reading:

TEC 2017 Cloud ERP Software Buyer's Guide for Wholesalers and Distributors
TEC 2016 Human Capital Management Buyer's Guide: Understanding Employee Engagement
Steady Growth and New Cloud ERP Software Initiatives Announced at Acumatica Summit 2017
Cloud Industry Trends to Watch by Epicor Insights