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SaaS ERP systems can include hidden costs

Cloud hype tells us that SaaS ERP systems are less expensive to run than on-premises systems, but experts warn of hidden costs that you have to account for before moving to the cloud.

Conventional wisdom purports that the cloud is an easier and less expensive deployment option for ERP. While there are certainly advantages to the approach, SaaS ERP systems have their own share of pitfalls and hidden costs, especially those related to integration, data migration and customization.

In the short term, SaaS ERP systems are typically less expensive than on-premises ERP implementations since they eliminate the need for significant capital expenditures on network, server and storage infrastructure. In addition, with SaaS ERP systems, the vendor handles ongoing maintenance and deployment, enabling companies to get away with fewer resources for daily administration and management tasks.

"You can save on infrastructure costs, and depending [on] how you procure service, you can save on technical support by reducing internal staff," said Brian Potts, COO at Third Stage Consulting, an independent consulting company specializing in ERP. "However, the biggest error companies make is that cloud ERP is somehow easier or that it takes less time. That's really not the case."

Not a magic bullet

While many consider the cloud to be a magic elixir for long-standing ERP woes, the reality is that there are still many of the same issues, particularly surrounding customizations and integration. Most SaaS ERP systems deliver a standard set of functionality out of the box, but unlike traditional ERP, they are not easily customizable, if at all. While that's often pitched as a benefit -- particularly as it relates to keeping the platform up to date with the latest ERP upgrades -- it can open the door to unexpected challenges and costs as the business is forced to redesign its processes to fit what the software supports.

The biggest error companies make is that cloud ERP is somehow easier or that it takes less time. That's really not the case.
Brian PottsThird Stage Consulting

"To the extent an organization can adopt the system as is, out of the box, it's not a problem, but that's the rare case," explained Andrew Boliver, head of the Center of Excellence for Ultra Consultants, a consultancy specializing in ERP selection and implementation. "If you're not configuring the system to meet the needs of the business, then you're left changing business processes to match the software. That's a lot of process redesign, training and change management to mold the company to the software … and it's typically underestimated."

What's also frequently underestimated are any costs associated with losing control of the upgrade cycle. Dalsin Industries learned this lesson the hard way when it moved off an on-premises legacy Epicor ERP platform to Plex Systems' cloud-based offering. The frequency of the upgrade cycle -- initially viewed as a benefit -- caught the company off guard as it was often unprepared to deal with changes. This resulted in occasional downtime, according to Jeff Dalsin, IT business analyst for the sheet metal manufacturer.

"We spent a lot of time putting out fires because someone couldn't do something [as a result of the upgrade]," he explained. "There was lost productivity because people couldn't do their jobs." Eventually, Dalsin ended up scrapping its cloud ERP implementation and going back to an on-premises version of Epicor.

Don't let the SaaS price tag fool you

While the initial price tag on SaaS ERP systems is lower, those costs multiply over time. SaaS ERP cost is typically 20% to 30% cheaper in year one, and those costs remain static in the subsequent years. But things change heading into years four, five and beyond.

"Many people don't realize how expensive SaaS becomes when you go beyond four or five years," Jeff Carr, CEO of Ultra Consultants, said. "When you look at on-premises ERP, you amortize that license over five years, but when you look at cloud solutions, anything beyond that means you end up paying substantially more for a cloud solution than on premises."

Companies considering SaaS ERP systems also often overlook the fact that support and service costs are also still a reality.

"Whether it's done on premises or in the cloud, [service and support] still need to be done," Potts said. "It doesn't mean you no longer have to take care of the software -- either you do it, or you pay someone else."

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