Cloud ERP or On-Premise ERP – What you Need to Know

Introduction

Cloud or On-Premise ERP?  In recent years, more options to acquire IT solutions including Enterprise Resource Planning or ERP are becoming available.  Various vendors aggressively market Cloud ERP as the next new big thing.

However, as ERP is a business-critical solution, the decision can have huge impact to a company’s well being.  This article attempts to provide some pointers for companies who are looking for ERP Solutions, and deciding whether to go for cloud or on-premise ERP.

Is Cloud ERP New?

The debate of Cloud or On-Premise ERP is not new.  As a matter of fact, the first cloud ERP started in Singapore in 1996.  It was a government sponsored scheme for Singapore SMEs called “MRP Online”.  Coincidentally, I was the user of this first in the world cloud ERP and that was how I started my years of ERP career.

Why is ERP Different from other Saas IT Solutions

It is important to understand what makes cloud ERP (Saas, Software as A Service) so different from other cloud or Saas IT solutions such as Office, CRM, Adobe Cloud, etc.:

Implementation

Whether it is Cloud or On-Premise, ERP Projects require more professional services to implement.  Besides the software functions and features, good ERP consultants need to understand about business processes and their impacts to the financial accounting of the company.  Furthermore, project management is more critical and challenging.  This is because many people from different department with differing concerns and even conflict of interests will be involved in the project implementation.

In fact, at least half of the success factors of ERP project depends on the quality of its implementation.  It is unusually for Office365 Project failure. But, how often you heard of ERP project challenges?  This is because projects are seldom standard, unlike other Saas solutions.

Customization

Most ERP projects, whether it is cloud or on-premise, involve some degree of customization through programming.  Other standard cloud IT solutions are usually not customizable or need extensive programming works.

Mission Critical

You can have your Office365 down for 2 hours.  But, it will have much lesser impact than if your ERP, especially if you are in retail business to be down for 2 hours.  Often this will result in lost of revenue or increase in costs.

Critical Company Operations Information

ERP keeps critical company and business operations historical information that has legal, operations and regulatory impact.  Some of the information need to be retained for number of years to comply with government regulations.

Why ERP Vendors Push for Cloud

ERP Vendors promote cloud for various reasons.  It is naive to believe that vendors offer Saas ERP just because they are helping their customers.

Market Demand

The hype and increasing popularity in Saas or Cloud IT solutions has driven demand for such solutions and vendors are just catering for this demand by extending this trend to ERP.

Good for Share Price

As it is the trend now to go on cloud, selling cloud version of ERP induces positive impact on ERP companies’ share price.

Predictable Revenue Stream

One of the major advantages of cloud revenue to the vendor is its predictability and  recurring nature.  Some on-premise customers may not pay for annual license maintenance and they can continue to use the ERP that they purchased.  But if they stop paying for Saas subscription, their access to ERP may be cut-off.

Lock-down Effect

Cloud ERP has lock-down effect on its customers.  This increased”Stickiness” makes it more difficult for customers to change to another solution.

Options for Cloud or On-Premise ERP: Cloud, Hybrid and On-Premise

Depending on the ERP, there are various options for delivery of the ERP solution as the software and hardware may be treated separately:

Type

Software

Server

Public Cloud (Saas)SubscriptionHost on Public Cloud where multiple tenants share same server
HybridPerpetual LicenseHost on Public or Private Cloud
HybridSubscriptionOn-Premise Server or Hosted
On-PremisePerpetual LicenseOn-Premise Server

Not all ERPs provide all these options, but it will be good to explore the pros and cons of each options when the options are available.

What should Company Considers when Deciding on Cloud ERP

There are various considerations when company is evaluating whether they want their ERP on Cloud (Saas), On-Premise or even Hybrid.

Cash Flow

The costs of ERP project include software, implementation professional services, hardware and hosting.

Analyzing the options impacts on the cash flow will provide a better overview of the pros and cons. Cloud ERP will only lighten the cash flow impact of the software and hardware costs but usually not the professional services, as they are usually charged accordance to project milestones.

Companies may also consider ERP project financing scheme from financing companies who will finance the cost of IT projects.

However, for companies who are already facing cash flow challenges, implementing ERP may not be an appropriate solution.  It is important to know that ERP is a mid to long-termed solution and it will not solve company short-term problem or poor company management fundamentals.

OPEX vs CAPEX

Often, the argument from cloud vendors is that it is better to have OPEX than CAPEX.  However, companies need to consider the impact of the relatively lower Singapore corporate tax that may make this advantage less significant as compared to countries with high corporate tax.

Easier to Justify to Management

In some companies, it may be easier to convince their management to budget for recurring subscription than to budget for one-time capital expenses.

Lack of Internal IT

Unlike the tier-one ERPs that are designed for large enterprise with large IT Team, mid to small-sized ERP solutions typically require very little IT involvement.

Hosting on the cloud may be favorable for companies with limited IT resources, although, some companies may choose to outsource their IT services.

Variable Subscription Price vs Fixed Perpetual Price

One of the least predictable part of cloud ERP is the future subscription pricing as it may increase over a period of time or become expensive  when you start to subscribe to more advanced modules.  Perpetual license refers to company purchases ERP license instead of subscription, which tends to be fixed even for its yearly license maintenance in the future.

Lock-Down Effect (Stickiness)

Companies in Singapore need to keep accounting records for 5 years.  This means that even if they change to another ERP or stop using the Cloud ERP, they will need to keep ERP data for at least 5 years to access to historical accounting records.  For cloud ERP, this usually means that they will need to subscribe to minimum number of users for 5 years to obtain access after stopping the use of the ERP for daily operations.

Switching Cost of ERP

Unlike other Saas IT Solutions, switching of ERP is costly and time consuming.  So, it is important to determine that the ERP that you will be selecting, whether cloud or on-premise, will be able to meet your existing and long term requirement.

Limit the cost of Project Failure

As ERP Project failure is not uncommon, some companies consider to go for cloud subscription and only purchase the perpetual license once the project is successful.  In other words, the ability of your selected vendor to implement a successful ERP project is often more important than the ERP software.

Easy to Scale Up and Down

One of the advantages of Cloud is its ability to scale up and down, varying the software user counts and the hosting facilities.  This may be useful for some industries such as retail when the demand for the ERP varies over time.

Limitation of Public Cloud

If your ERP is hosted on public cloud, it usually limits the customization (programming) that you can perform during your implementation.  This is similar to staying in public housing; you can’t just change the design of your home without approval.  So, if your ERP solution require higher degree of customization or integration to other external systems, you will have to check if there is any restriction on public cloud hosted ERP or private cloud may be more appropriate.

Quality of Internet

Cloud or Saas ERP run on Internet.  If the quality and reliability of Internet is not good in the area that you will be access the ERP, do you have a plan B?  For example, running on mobile (3G/4G) router?

What is the impact if the Internet is down for 2 hours?

Conclusion

Whether it is cloud or on-premise, companies must take a long term prospective when making decision on ERP.  With so much of marketing hype and sales talk going around, it is very tough for users with limited ERP exposure to understand the implications of various ERP solutions and options.

Sometime, finding the right ERP is more of an art, luck, trust than science.

You may like to contact us for further discussion.

About the Author

Raymond Yap is a veteran in ERP.  Raymond came from Engineering and Manufacturing background when he implementing the world first Cloud Enterprise Resource Planning (ERP) for his manufacturing company in 1996. It was a Singapore government sponsored ERP programme called “MRP Online” to help Singapore SME towards digitization.

Since then, he spent his career in the ERP industry as consultant, sales and management of ERP companies.

Raymond also taught in Nanyang Polytechnics, Temasek Polytechnics and other Universities on topics related to manufacturing, ERP and IT. He also conducted public ERP seminars in Singapore and Mauritius about evaluation and implementation of ERP Solutions.

Raymond accumulated a wealth of knowledge and experience about topics on ERP and its application to business operations both as end user and vendor. After experiencing ERP projects with hundreds of companies in Singapore and in the region, Raymond’s unique experience allows him to share on the practical approach to ERP selection, implementation and maximizing the ROI of ERP Projects.