What is Cloud-Based ERP and Why Your Company Needs it?
September 07, 2021 / Katarina Rudela
Reading Time: 10 minutes
Many organizations today face the common challenge of finding the technology they need in order to remain competitive. Enterprise resource planning (ERP) software is increasingly important for this purpose, as it allows companies to manage their information while remaining innovative and agile. These capabilities require ERP solutions with global connections, continuous updates to ensure they remain current, while allowing organizations to shift their focus from daily data management to developing new growth initiatives.
The decision to deploy an ERP solution often begins with a comparison between on-premise and cloud-based solutions. The current trend is towards cloud platforms, largely due to technological advances that are making this architecture more practical. Benefits of cloud ERP solutions include lower cost, more reliability, higher speed and greater access.
On-Premise vs. Cloud ERP
On-premise and cloud ERP solutions generally provide the same capabilities, but significant differences exist in their approach to providing those capabilities.
An on-premise ERP solution generally includes the software itself and a suite of related tools installed on local servers that the client organization controls and manages with its own staff. This approach places responsibility for maintenance squarely on that organization’s shoulders, but it also means the client only needs to pay for the platform once. However, it also incurs additional costs such as maintenance and updates for both hardware and software.
Furthermore, a client may need to hire additional personnel to install the platform, troubleshoot problems and perform updates. These additional costs can limit an organization’s ability to evolve the software, especially when combined with the time constraints and competing priorities that are present for most businesses. These issues can prevent the ERP solution from receiving the regular updates needed to ensure that its functionality, security and usability can meet future requirements.
On-premise ERP also requires the client to obtain an enterprise-grade infrastructure, including servers, databases and operating systems (OSs). This infrastructure also needs other components like antivirus (AV) software and backup power, which is impractical for many companies. In addition, an on-premise deployment requires IT support, which requires staff to take their focus away from strategic initiatives that could drive growth for the company.
Offsite access is another issue that a client must consider when deploying an on-premise ERP system. The technical decisions made during this period can affect offsite access, further lengthening the deployment process. Factors to consider when deciding whether to allow offsite access include hardware selection, the time required from the IT team and buy-in from stakeholders.
A cloud-based ERP solution is hosted offsite on a cloud platform. The provider manages the solution, allowing clients to focus on running their business rather than performing IT administration. Cloud-based Software-as-a-Service (SaaS) also places the maintenance burden on the vendor, which includes ongoing software updates that are included in the recurring fee. Deploying cloud ERP requires little to no involvement of the client’s own IT staff, allowing team members to spend more time on developing strategic growth initiatives.
A cloud ERP system allows organizations to shift their focus from technology to business outcomes, largely as a result of the automatic updates. The ability to keep pace with technological advances is a benefit that often surprises business leaders who transition their organization from on-premise ERP to a cloud ERP solution. This capability allows cloud ERP users to evolve with their market, maintaining a long-term competitive advantage.
The chart below summarizes the most important differences between on-premise and cloud software, including cost, maintenance and access:
Cloud software is generally the preferable solution, especially for organizations that lack the staff or expertise to manage their own infrastructure. However, there are specific reasons to opt for an on-premise solution such as business continuity, geographic restrictions and security requirements.
The following chart shows the differences in direct and indirect costs for on-premise and cloud software. Direct costs appear above the water line, while indirect costs are shown below the surface:
The chart above shows that only nine percent of the total cost of ownership (TCO) for on-premise software is in the form of direct costs like software licenses. The remaining 91 percent of the TCO is in the form of indirect costs such as customization, implementation, hardware and maintenance. In contrast, 68 percent of the TCO for cloud software is direct costs like the subscription fee, training and configuration. The remaining 32 percent is in indirect costs such as implementation, customization and training.
The TCO for on-premise software is initially higher than that of cloud software due to the upfront costs such as hardware infrastructure and software licenses. While the TCO of both types increase over time, the increase for cloud software is greater. As a result, the TCOs of the two ERP types converge after about nine years. The following graph shows this trend:
Benefits of Cloud ERP
The strong trend towards deploying ERP in the cloud is the result of many benefits that include the following:
Cloud ERP is easier to implement and needs less time than on-premise ERP, which requires hardware and IT staff. A business will typically need to train existing personnel or hire new staff with the skills needed to maintain a data center, both which are long-term investments. IT staff must also deploy new security measures and ensure users have access to the tools they need to use the software. Cloud ERP doesn’t require many of these measures, making its implementation comparatively painless. Collaboration is also easier, especially when staff members are in different geographic locations.
Cloud ERP provides greater accessibility and mobility than on-premises ERP. Team members can access the tools and data they need from any location, provided they have a computing device with internet access. They can do this in real time without needing other team members in the same room to make key business decisions. This improvement in collaboration and accessibility helps teams remain more agile and productive.
Cloud ERP allows organizations to shift the cost of ERP from capital expenditures (CAPEX) to operational expenditures (OPEX). The primary direct cost of a cloud platform is the recurring subscription fee, which is an OPEX that’s usually charged on a monthly basis. Operating a local data center allows an organization to pay for software once in the form of software licenses, but it also requires a large CAPEX to buy and deploy servers. In addition, cloud ERP generally has lower OPEX because users only pay for the resources they use. In comparison, an on-premise solution requires an infrastructure that can support an organization’s maximum workload, whether that capacity is currently required.
Modern cloud platforms provide greater system availability, also known as uptime, than most organizations are able to obtain with their own data centers. Uptime is becoming an increasingly important consideration in migrating ERP to the cloud because systems often lack the idle period needed to take it down for maintenance. This trend is largely the result of greater globalization, in which users are distributed across many time zones. Vendors have the primary responsibility for maximizing uptime on a cloud platform, so organizations should carefully examine vendors’ capabilities before making a decision. Uptime of 99.5 percent is a common minimum standard for many cloud platforms, although some specify uptime greater than this in their service-level agreements (SLAs).
Data security is becoming more strictly regulated, especially in industries like finance and healthcare. Organizations routinely have compliance requirements for data security from multiple sources that may be challenging for them to achieve on their own. Major cloud ERP vendors usually implement a comprehensive, end-to-end security model that includes measures such as user authentication, physical security and system monitoring. These capabilities provide their clients with greater peace of mind because their ERP platform meets legally mandated security requirements.
The routine tasks of running a data center such as backups, maintenance and monitoring all require significant resources to accomplish. Cloud ERP platforms allow clients to focus on their core competencies because the vendor assumes most of the burden for maintenance and management of the system. This benefit means that clients can spend more time growing their business instead of conducting daily operations.
The real-time, mobile access that cloud ERP platforms provide lends itself to a higher degree of usability than an on-premise system. Users such as customers, partners and vendors are able to connect from any location in the world, resulting in a more positive experience.
Software updates is another task that data center owners must perform on a regular basis. Cloud ERP providers routinely offer instant and recurring updates to their software and related tools, eliminating concerns about whether the software is current. This issue is particularly important for security, due to the rapid evolution of cyberattacks.
The cost of using a cloud ERP system is far more predictable and transparent than that of an on-premise solution. Cloud ERP clients typically pay a fixed monthly subscription fee in the case of an SaaS model, or a variable fee based on usage for a pay-per-use model. Furthermore, a cloud ERP platform doesn’t directly incur expenses for hardware or software upgrades, as the vendor bears responsibility for these tasks.
Today’s businesses must be able to quickly change the scale of their operations to remain competitive. Cloud ERP generally provides resources on demand, allowing organizations to easily increase their IT capacity. In contrast, an on-premise ERP solution could require a company to obtain and deploy additional infrastructure when scaling its operations.
The primary challenges of using an ERP cloud platform often depend on an organization’s size. For example, a large enterprise may need to spend a lot of time getting buy-in from key stakeholders before making this transition. These organizations may also need to train multiple team members to serve as cloud ERP champions during this process. A larger business that has been using an on-premise ERP solution for some time may also find that it needs additional support from the ERP provider to transition to the cloud. In addition, organizations with particularly stringent requirements for data security may not be able to realize the full benefits of a cloud platform because they must maintain direct control over some of their data.
A number of best practices can help facilitate the implementation of a cloud ERP solution. These include building the business case for this change to obtain support from decision makers. This process should include highlighting the benefits of cloud ERP, especially the cost savings. It should also include the potential challenges and the plans for overcoming these challenges. A business case for ERP should also discuss the resources needed to implement cloud ERP, including personnel, time and money.
Early planning is one of the most effective investments you can make when moving your ERP capability to the cloud, which should include documentation and training. It’s also important to check in with team members frequently and follow up with anyone who has questions you can’t immediately. This approach ensures that all team members are prepared to succeed in using the new cloud ERP tools. You should also keep IT staff informed about the changes they can expect, including when and how these changes will occur, which can help avoid pushback on the transition. A consultant that specializes in ERP migration can also be a good investment if you need additional support with this process.
Organizations of all sizes now use ERP solutions to manage their business processes, although there is still debate about the best way to implement them. The transition from an on-premise to a cloud ERP platform provides many benefits, especially for a growing business that needs to drive business growth by scaling its operations quickly. The primary advantages of cloud ERP for most organizations include the cost reduction, improved access and greater efficiency.
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