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Cloud ERP vs. on-premises ERP: 10 key differences

Understanding the differences between on-premises ERP and cloud ERP, especially multi-tenant SaaS, is critical in buying decisions. Here's how they compare in 10 important areas.

It's been 25 years since the commercial internet arrived, yet the longstanding debate over whether companies should...

choose software that runs on premises or in the cloud rages on for a number of reasons.

Every time a company comes to a crossroads with an on-premises application, it faces a decision on whether to migrate that application to the cloud. For some applications, including CRM and human capital management, cloud has been the clear choice for years. But things have been a lot messier for the ERP category, where the software is intertwined with pretty much everything a business does operationally.

Despite the added complexity ERP presents, industry watchers have long lost interest in the cloud-versus-on-premises conundrum, wondering why it's even a topic of discussion.

"This is an ancient tribal dispute," said Robert Kugel, senior vice president at Ventana Research. "I don't really care what flavor of cloud we're talking about. If I'm an end user, I don't care if it's hosted or if I'm hosting it."

The way Kugel sees it, there's no debate left. Cloud software in its various forms -- SaaS, private cloud, hosted, etc. -- has won. Yes, there are many companies still running on-premises ERP systems that are only a few years old, and he's certainly not recommending that those companies abandon their investments today. But, when the time comes to make a move, he suggested there is little reason to waffle about cloud versus on premises -- especially when the hangups about cloud-based ERP often spring from outdated fears about security.

"Ten year ago, you might have said, 'I'm not going to take a chance on this; I'm going to wait to see how it works on everyone else,'" Kugel said. "Today, it's pretty clear that your systems are at greater risk within your four walls than with a cloud vendor."

That said, there remain compelling reasons companies opt to keep their ERP in-house. The two most obvious: a desire to take full advantage of a sizable investment that's already been made in the existing system and a reluctance to cause stress to an employee population that is resistant to change. Eventually, however, every organization will face a decision to replace its ERP system, and each day, it becomes more likely that the cloud wins out.

Still, sizable companies that see cracks in their on-premises ERP systems are going to consider all options. And they will rightly see the move to a cloud-based alternative as a huge decision because, once that migration occurs, there's no going back. To put the on-premises-versus-cloud debate in context, it's important to remember just how much ERP systems have become a bedrock in companies. They were complex enough in an earlier era when they mostly did what their name implies: manage resources. But today's ERP systems have become much more than resource planning tools; they are the connective tissue that links pretty much every core business function. The resulting complexity makes it more critical than ever that, when choosing a flavor of ERP system, a company focuses on its particular strategic requirements and resists being swayed by marketing hype.

In other words, don't decide that you want a certain flavor of ERP. Instead, determine what flavor your business needs.

"Every company has different functional needs they need to think about," said Craig Zampa, principal in the business technology advisory services practice at accounting firm Plante Moran. "It shouldn't be deployment model first."

Comparison of cloud ERP vs. on-premises ERP deployment models
Cloud ERP is quicker and easier to deploy than on-premises ERP but allows less control and customizability.

Cloud ERP vs. on-premises ERP

ERP has three main deployment models: on premises, cloud-based and hybrid, a combination of the two. Hybrid clouds have always been somewhat of a mushy area. For that reason, this article focuses on comparing on-premises systems with the most popular cloud computing option, SaaS, in which an organization subscribes to a service delivered over the internet.

There are two main types of SaaS. In the multi-tenant model, each customer's data is segregated, but the same application and database serve multiple customers. With single-tenant SaaS, each customer gets its own instance of the application and database.

While there are many flavors of cloud -- including hosted, public, managed and hybrid -- SaaS is an increasingly popular option to replace on-premises systems. This article mostly compares the multi-tenant style of SaaS ERP with on-premises ERP. While single-tenant SaaS has much of the scalability, convenience and ease of use of all SaaS applications, it usually adds costs and maintenance responsibilities that are mostly absent from multi-tenant SaaS.

With that backdrop, what follows are 10 key differences between SaaS and on-premises ERP systems that any organization should consider when choosing between the two.

1. Deployment speed

Right out of the gate, SaaS offers a significant advantage: Whereas on-premises ERP systems typically take more than a year to fully deploy and years to get right, SaaS ERP systems are often ready to go live in three to six months. SaaS applications also tend to be easier for employees to learn to use than on-premises applications, easing the change management and adoption processes.

2. Changes and adaptability

While on-premises systems can be more customizable than their SaaS counterparts, the customizations can be quite complex and expensive, and then they need to be accounted for when making any substantive changes to the system. SaaS ERP products tend to be more cookie-cutter at their core, but they are also relatively easy to manipulate and configure. Plus, because of their constant connectivity, SaaS ERP systems update changes everywhere automatically, while on-premises systems are much more likely to run into issues with data consistency.

3. System and data control

In a SaaS scenario, the ERP vendor or a third-party cloud provider manages the software and data, which reduces a number of costs associated with on-premises systems, most notably the staff required to maintain it. However, the on-premises model offers a higher degree of control over systems and data.

Most cloud-based ERP systems enable some degree of personalization, enabling companies to configure the software to match their look and feel, but the ability to make consistent use of custom coding is much more limited with multi-tenant SaaS than with on-premises systems or single-tenant SaaS. Being forced to limit customization brings numerous benefits, such as improved agility, reduced ERP expenses and fewer implementation delays, but it can also limit competitive advantage if IT can't fully accommodate unique features.

4. Integration

The high degree to which data is now transferred between applications has necessitated most ERP providers to offer integration tools. SaaS ERP systems tend to use APIs to ease the integration process. But, in the absence of APIs, using standard protocols or similar business ecosystems could be cheaper than developing ad hoc integration software. This underscores the importance of looking at the different integration factors when considering SaaS versus on-premises ERP.

With SaaS ERP, integrations automatically carry forward when an application updates without additional investment. However, to upgrade on-premises ERP systems, IT often has to reimplement the integrations from the previous software. In such cases, on-premises vendors might develop specialized integration modules for companies to suit their specific data flow needs or existing infrastructures. SaaS vendors simply do not provide that level of personalization.

5. Updates

SaaS-based ERP software generally is updated more frequently than traditional systems, sometimes even monthly or weekly. This frees companies from having to schedule and manage updates or fret over out-of-date application modules. It also has the added benefit of easing compliance with changing industry and government regulations. However, it's important to note that the multi-tenant SaaS model also prevents organizations from having input into what upgrades they receive and when.

6. Mobile access

Few areas of the ERP deployment conundrum are as clear-cut as this one. While just about every ERP vendor offers some way to provide mobile access for approvals, notifications and visibility into business operations, setting this up on an on-premises system can mean numerous complications, especially if a third-party mobile platform is needed to serve as the link to the ERP system. Conversely, SaaS ERP products largely offer native mobility supported by a standard mobile application.

7. Performance

For the most part, solidly deployed ERP systems perform well whether they are on-premises or SaaS-based, but there are distinctions. For instance, when internet connectivity is an issue, organizations can temporarily lose access to SaaS applications, while that is highly unlikely to occur with an on-premises system. However, when the internet connection is strong, SaaS applications perform admirably and are immune to the performance issues that bottlenecks on corporate networks can create for on-premises ERP systems.

8. Security and reliability

The need to protect critical data, such as corporate financials, employee information, customer account information and trade secrets, means that data security remains an essential ERP requirement. And many organizations have cited a perceived lack of security in SaaS to justify choosing an on-premises system.

But, on this topic, one thing has become perfectly clear: SaaS providers have staffs committed to doing nothing else but protecting their applications, mindful of the compliance needs of hundreds or even thousands of companies.

"That requires an adherence to standards that would outweigh what you'd have in your own data center," Zampa said.

Another common concern with any ERP system is its inability to operate due to software, hardware and infrastructure malfunctions. Operational disruption can translate into hefty losses, and cloud vendors' reliance on internet access can be of particular concern to businesses with remote locations or in areas with less reliable network connectivity. However, because of their mandate to support many customers, cloud vendors generally have multiple redundancies and disaster recovery protocols in place to protect data and ensure reliability.

Zampa sees that as a serious advantage.

"If you're a $100 million manufacturer and managing your own ERP environment and you have one server blow, you're down," he said. "That's not the case with a multi-tenant cloud provider."

9. Payment models

On-premises ERP software is usually priced with a one-time, perpetual license and ongoing support fees, some of which may be negotiable. SaaS ERP systems follow a subscription model with fees that are usually payable by the month or year. SaaS vendors can price their cloud applications based on multiple usage factors, such as the number of users, transaction volume or data quantity.

In general, on-premises systems have a higher upfront cost, while SaaS ERP is likely to cost more over time.

10. Total cost of ownership

There are costs associated with any ERP system, whether it's in the cloud or on premises. However, SaaS ERP software has certain kinds of cost flexibility and longer-term costs to consider. The differences are important when looking at SaaS-versus-on-premises ERP, so here are a few areas where understanding these contrasts can be helpful:

  • Setup. Organizations typically don't have to pay for setup or installation of a cloud system, whereas on-premises deployment of ERP software requires a considerable investment of time and money. Throw in the costs related to buying hardware and servers, paying for facilities, and hiring staff to run and maintain the system, and it's clear on-premises ERP can bring hefty upfront costs. Plus, down the line, an organization will absorb the costs of updates. In contrast, updates are automatically included with SaaS ERP software.
  • Customization. On-premises ERP is generally more customizable but requires additional hardware and possible downtime. Although SaaS ERP systems are less expensive and faster to customize, on-premises ERP systems work best for companies that need extensive or unique customizations.
  • Support. SaaS ERP support is less expensive than on-premises support, with support typically delivered online and included in the subscription price. Additionally, with on-premises software, organizations might have to pay for additional on-site IT to ensure that the software is functioning properly.

Ultimately, choosing an ERP system is a costly decision that will impact a company for years, so no one wants to get it wrong.

"The process of selecting an ERP software platform is absolutely critical to the business, and it's usually an investment of close to or more than a million dollars," Zampa said. "No one's got a million dollars to throw away."

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