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hybrid ERP

What is hybrid ERP?

Hybrid ERP is a combination of on-premises enterprise resource planning systems for managing essential business processes, such as financials and manufacturing, and cloud software for more specific functions.

The term hybrid ERP can encompass two types of architectures.

In two-tier ERP, an organization runs a core on-premises ERP system for most of its corporate functions, but adds secondary, cloud-based ERP systems for different business units or geographic regions.

In the other typical hybrid ERP configuration, an organization adds cloud-based applications to its on-premises ERP systems to support functions such as customer experience management or field service management.

ERP is software that includes modules for common business functions such as accounting, human resources, inventory management and procurement. The idea is to have one system of record for all major business processes. Before cloud computing became popular in the late 1990s, ERP systems ran strictly on premises, on servers owned by the organization. As companies began requiring more storage space or new functionality, they often turned to specialized software, often delivered as cloud software as a service (SaaS) that could be started up faster and integrated with their existing on-premises ERP.

How does hybrid ERP work?

Hybrid ERP brings together traditional on-premises ERP and cloud-based applications. Here's how it works:

  1. A core ERP system is installed on servers located inside the organization. Typically, the system stores proprietary or sensitive data that the organization wants to maintain complete control over or important processes it wants to keep on site.
  2. Data that is not considered sensitive or other applications are hosted in the cloud. They might include SaaS modules for field service teams or other specialized functions that need to be deployed quickly or are not already part of the core ERP.
  3. Application programming interfaces (APIs) -- or less commonly, middleware, which sits between applications -- are used to integrate the core ERP system with the cloud components to ensure data flows smoothly between them.

Benefits of hybrid ERP

Many companies have invested heavily in their on-premises ERP software. Choosing a hybrid ERP system allows them to reap the benefits of cloud software while still accessing and maximizing their previous IT investments. Hybrid ERP can provide the best of both worlds for companies, including the following benefits:

  • Optimized infrastructure costs. Organizations can use hybrid ERP to take advantage of their existing on-premises ERP while adding new capabilities at little to no upfront expense.
  • Lower total cost of ownership. Organizations can also save money by using a hybrid ERP approach. For example, if they need a different ERP for another geographic region or business group, it is often less expensive to deploy cloud ERP software and integrate it with the on-premises ERP.
  • Flexibility and scalability. Adding new features to an on-premises system to meet the needs of a specific group can be time-consuming and costly. However, some organizations allow groups to add cloud applications that provide the features they need without requiring IT to undergo a lengthy, companywide implementation process. Businesses can also quickly add more users to cloud systems by buying more licenses instead of adding hardware.
  • Control over proprietary data and processes. While cloud servers are often as secure as on-premises ones, some companies prefer keeping their sensitive data and processes in house to retain complete control. Hybrid ERP lets them keep specific data and systems on premises and apply security controls to meet government regulations.
  • Customization. Companies running legacy on-premises ERP systems might have developed extensive customizations over the years that have become critical to running the business. Keeping these systems in a hybrid ERP setup lets them avoid giving up the customizations, which typically aren't well supported in SaaS ERP, especially in the multi-tenant type shared by different customers.
  • Business continuity. A hybrid ERP deployment can use the cloud to provide redundancy and disaster recovery.

Drawbacks of hybrid ERP

Hybrid ERP is not suited to every organization. It comes with its own set of challenges, which include the following:

  • Integration. Theoretically, APIs and middleware should seamlessly connect on-premises and cloud ERP. In practice, these integrations are often complex and require data mapping and cleanup. Customizations to the on-premises system and updates to the cloud ERP system can cause the integration to malfunction.
  • Increased maintenance. With hybrid ERP, both the on-premises and cloud systems will need to be maintained, which requires additional effort and resources. Although cloud providers will push out updates, the organization must make sure they don't cause integration problems or other issues with the on-premises system.
  • Potential latency. Data transfers between the on-premises and cloud systems can affect processing times and real-time data access.
  • Skill gaps. Hybrid ERP deployments require IT teams to be well versed in both on-premises and cloud technologies and integrations. Given the ongoing IT talent shortage, companies might have difficulty hiring employees with the necessary skills.
  • Upgrade conflicts. Companies will need to coordinate upgrades of their on-premises and cloud ERP systems. Depending on upgrade cycles, the changes could introduce compatibility or integration issues.

Key use cases for hybrid ERP

Regardless of its challenges, hybrid ERP has its place, and there are plenty of use cases. Here are some common ones:

  • Large companies with smaller subsidiaries. With a hybrid ERP approach, a large company can run its on-premises system at headquarters and use cloud ERP systems for subsidiaries. Cloud ERP systems take fewer resources, but still extend ERP functions and data to the subsidiaries.
  • Physically separated workloads. Regulatory and other requirements might stipulate that workloads must be physically separated. A hybrid ERP system can separate workloads, allowing organizations to host their sensitive data on premises and try out new applications in the cloud.
  • Phased implementations. Organizations might deploy hybrid ERP as a steppingstone toward a completely cloud-based ERP system. This lets them test and deploy new features while still having the on-premises system as a fallback.
  • Vendor collaboration. For organizations that need to collaborate with external vendors and partners, rolling out cloud ERP systems on top of their on-premises system can protect their sensitive data while allowing for efficient communication in the cloud.
  • Mobile access. Cloud-based ERP systems can enable organizations to extend their on-premises ERP to support mobile and remote work. The cloud services let remote employees access information and perform their jobs. At the same time, the on-premises ERP continues to run critical, back-office business functions in a controlled environment.
  • Rapid innovation. Organizations that want to quickly adopt new technology or capabilities might deploy hybrid ERP to take advantage of cloud-based ERP systems or specialized applications to get the new features without disrupting business as usual.
This was last updated in December 2023

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