Cloud ERP deployment models: How to choose the right option

SaaS ERP

SaaS ERP is multi-tenant software that’s delivered online through a subscription. Subscribers’ data and applications reside on a shared server, but the data is separated so customers can’t see each other’s information.

A SaaS ERP vendor manages the infrastructure, including the timing and content of patches, upgrades and capacity changes. Customers using out-of-the-box functionality likely won’t find that to be a problem, but companies that require customization may find the arrangement too rigid.

Most SaaS ERP deployments offer some level of configuration, but configuration options are usually limited. Organizations that require custom business logic should likely choose another option. In some cases, using SaaS could lead to regulatory concerns if, for example, the vendor can’t meet a company’s data sovereignty requirements.

This ERP deployment model works well for companies that don’t require specialized business logic and need rapid time to value more than extensive customization. SaaS ERP is most often chosen by small and midsize enterprises, shared-services teams and companies that are replacing a lightly modified legacy system.

Hosted ERP

Hosted ERP is similar to an on-premises deployment, but the application and database is in an external data center instead. The hardware and infrastructure are usually owned by an external hosting partner, and the partner typically also handles network security, backups and connectivity. The software is on a dedicated server, and a company’s data is not mixed with other customers’ information. As with an on-premises system, upgrade timing and rollout, patches and customizations are controlled by the customer.

Hosted ERP is a good choice if a company needs extensive customization but prefers to outsource infrastructure and wants to preserve their current system design. Organizations that run mission-critical ERP add-ons which require testing prior to each system upgrade often choose hosted ERP also. Manufacturers with plant-floor integrations, companies that want to move existing systems to the cloud to improve their disaster recovery, and companies with a lack of on-site IT employees frequently use hosted ERP.

Private cloud ERP

Private cloud ERP involves a dedicated ERP, which is typically managed by the vendor on their own cloud infrastructure or on a hyperscaler cloud platform such as AWS, Azure or Google Cloud Platform. The key distinguishing factor for private cloud ERP versus hosted ERP is the vendor-managed environment.

As with hosted ERP, private cloud ERP follows a single-tenancy model, so the application is not shared with other customers, and it offers companies full control over custom features, including the timing of upgrades and patches and which add-ons run alongside the core ERP system.

Private cloud ERP is likely a good fit for enterprises that are interested in cloud and want to use vendor-managed infrastructure but are unable to make the constraints of a multi-tenant SaaS deployment work for them. Private cloud ERP is often used by companies with many customizations or industry add-ons and organizations that must adhere to stringent regulatory requirements.

Hybrid ERP

Hybrid ERP splits a company’s operations into segments, with some living in on-premises software and others running as SaaS services. For example, a company using hybrid ERP might have their finances or manufacturing run in a traditional on-premises infrastructure but have modules such as HCM or CRM run as SaaS applications. Integrations tie the various segments together.

Hybrid is a good choice for companies with one domain that has very specific needs. For example, a manufacturing plant may require direct integration with automation systems that have very low latency, which a public SaaS can’t always provide. A CRM system that serves a predominantly mobile sales force may require a cloud-first approach, or data sovereignty rules might require certain company subsidiaries to run distinct systems within certain national boundaries.

Hybrid ERP requires a solid integration strategy, clear data ownership and strict adherence to system-of-record rules. Companies that choose this approach should do so for strategic reasons, not because leaders are avoiding committing to one path.

Two-tier ERP

Two-tier ERP is chosen by large or midsize enterprises that operate multiple subsidiaries, plants or lines of business. Typically, corporate headquarters runs a comprehensive ERP suite and subdivisions of the organization run smaller, more focused ERPs which they must use because of certain functional or legal requirements. Focused ERPs may include manufacturing modules, customizations and country-specific features. Corporate headquarters receives financial data and operating metrics from each reporting unit, and it maintains intercompany rules and consolidation processes.

Two-tier ERP is common for companies that have recently made acquisitions and can be a good fit for international organizations in which business units have different legal and functional requirements. Using smaller, dedicated ERP systems enables the lower-tier organizations to remain agile and somewhat independent as well as reducing their operating costs.

While the two-tier model is designed to enable some degree of autonomy, companies must apply some degree of standardization as well. For example, each subsidiary possessing its own unique chart of accounts can make it cumbersome to produce meaningful consolidated financial statements. The CIO and CFO should work together to define common elements, such as GL accounts and item codes, while accounting for some variation with other elements.

How to select a cloud ERP deployment model

Selecting the right cloud ERP deployment model begins with defining a company’s high-level requirements and constraints. For example, many companies can rule out two-tier based on their organizational structure. Many companies will find their most important factors to be cost, flexibility and ease of use.

The CIO and CFO should work together to identify key constraints. For example, does the company rely on custom business logic or will configuration of an off-the-shelf ERP product be sufficient? Will ERP add-ons run alongside the core system? Do plant operations or other critical processes require near-zero latency? Do employees work from company offices, or are workers widely distributed? Do any industry regulations or data sovereignty laws require the company to rule out certain ERP options?

Leaders should run a five-year cost analysis for each option, with the costs including subscription fees, maintenance and support, hosting, upgrades and integration. Consider how integrations and data governance will be managed.

The right cloud ERP deployment model is the one that fits a company’s processes, regulations and operating cadence.

James Kofalt spent 16 years at SAP working with SME business applications and was a product manager for integration technology at Microsoft's Business Solutions division. He is currently the president of DX4 Research, a technology advisory practice specializing in ERP and digital transformation.