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The differences between on-premises and cloud ERP software

With businesses more mobile and agile, on-premises ERP systems may no longer cut it. Cloud ERP software allows for customization and flexibility, but still has drawbacks.

ERP is a term used to reference software that, at its core, helps businesses and organizations operate. While the benefits have proven to be fruitful, due to its importance to organizations and its complex nature, ERP has been one of the most high-stakes, difficult software systems to implement in organizations.

Today there are a few different ways enterprise resource planning systems are set up. Modern ERPs have expanded from their predecessors with capabilities encompassing more than just resource planning. In the past, ERP was viewed as a monolithic system that assisted with a limited set of business operations. But now, an ERP system can also be built "Best of Breed" as a collection of standalone or integrated applications -- or a combination thereof -- that help manage specific aspects of the enterprise.  

ERP systems are generally hosted in three ways: the traditional, on-premises; in the cloud; or a combination of the two. For clarification, cloud ERP has been a term used to define when fully licensed, ERP software was hosted within a cloud infrastructure. Today cloud ERP software is often used synonymously to describe software-as-a-service (SaaS) ERP; however, this is not entirely accurate. SaaS ERP is software that is owned and hosted off-site in the cloud by the provider, but paid for "on demand," as it is used. Basically, SaaS ERP is a type of cloud computing model, but not all cloud ERPs are necessarily SaaS. While the goals of ERP software essentially remain the same no matter where it's hosted, there are some core differences to on-premises and SaaS or cloud ERP software systems that organizations should consider before implementing.

Differences of SaaS or cloud ERP software vs. traditional on-premises ERP

As with most things, cloud and SaaS ERP systems tend to have their own benefits and drawbacks. Here are some facets of cloud ERP software -- more specifically, SaaS models -- that may help when selecting the right software for your organization.

System & data control: In a SaaS scenario, a third-party typically manages software and data as opposed to an on-site ERP system. This additional support of traditional ERP tends to require more IT staff, which can result in more associated costs. On the other hand, there can be a higher degree of control over the systems and data for on-premises systems.

Most cloud ERP systems allow for some personalization, letting you configure the system to match your organization's look and feel, such as including use of company logos. However, controlling true customization in terms of rewriting code can be much more limited, especially in multi-tenant systems. Minimizing customization can be beneficial to reducing ERP expenses and implementation delays, but may also impact your competitive advantage if unique functionality is not accommodated.

Integration: At some level, most traditional and cloud ERP software systems offer integration due to the increasing needs of transferring data between applications. Cloud ERP systems tend to use APIs that are tools to help ease integration. If standard protocols or similar business ecosystems are used, the costs could be lower when compared to developing ad-hoc integration software.

That said, cloud doesn't always mean savings.

Updates: Cloud ERP software generally receives more frequent updates than traditional systems. In some instances, updates occur as often as monthly or even weekly. This can carry the benefit of remaining compliant to changing regulations. When deployed, cloud ERP systems can bring scalability to businesses with high growth and rapid expansion. While it is beneficial for any ERP to keep pace, repeated updates are not without their drawbacks, especially for systems with higher degrees of customization.

Mobile access: It has become more common to see traditional ERP products offering users mobile access that can assist with remote approvals, notifications and operational visibility. There can sometimes be added complications for on-premises ERP software if a third-party client is required to act as the link between mobile devices and the ERP system. Many cloud ERP systems, because of their Web-based nature, are natively mobile and come with standard mobile applications.

Security & reliability: When factoring critical data such as corporate financials, employee details, customer account information and trade secrets, it is no wonder why security remains an essential requirement when considering ERP software. In the past, cloud ERP often carried the perception of being widely susceptible to breaches, hacks and exploitation, especially when compared to its traditional on-premises counterparts. To give peace of mind, many cloud ERP vendors are touting encryption and use of additional safeguards built on platforms like Amazon Web Services, which have enhanced security protocols.

Another common concern with any ERP is the inability to operate due to software, hardware and infrastructure malfunctions. Operational disruption can translate into hefty losses. Additional thought should be put into a cloud ERP product's need for Internet access, especially for businesses with remote locations or areas with less reliable network connectivity. Equally as important is the overall performance dependability of the cloud ERP vendor who may have multiple redundancies and disaster recovery protocols in place to protect data.

Payment: On-premises ERP software is generally priced with a one-time perpetual license and ongoing support fees, some of which may be negotiable. Cloud ERP systems take on subscription-based pricing models that are usually monthly or yearly. SaaS vendors can price their applications based on a choice of multiple usage factors such as the number of users, transactions, amount of data or other units of measure.

General costs: An ERP system will have costs associated with it no matter how it's hosted. However, cloud or SaaS ERP software have unique costing situations like implementation costs, initial costs and ongoing costs that one wouldn't necessarily find with an on-premises system.

Arguably, cloud ERP systems can have relatively shorter implementation times, but again this can vary depending on multiple factors such as customization, number of end users and IT architecture, to name a few. Shorter implementation times can equate to a reduction in spending on project expenses including, but not limited to, professional services and backfilling staff.

There is usually a higher, upfront investment with traditional on-premises ERP software. Cloud ERP leverages economies of scale and reduced need for customer infrastructure to quickly deploy their product and services, which in turn allows for attractive pricing.

Some organizations who select cloud ERPs may generate savings with a reduced need to upgrade hardware and infrastructure. There could also be savings by transitioning IT support functions that can be managed by the cloud ERP provider. That said, cloud doesn't always mean savings. Depending on considerations such as pricing structure and service subscription duration, overall investment of cloud products may eventually incur similar or even higher long-term costs.

When deciding on an ERP system, there is an assortment of aspects to consider. While cloud/SaaS and on-premises systems may both offer their own business advantages there truly is no one size fits all ERP. Organizations should look to the resources and insights that can help them make an optimal selection when investing in an ERP system.

Next Steps

Tips on how to select an ERP integration partner

Implementing ERP systems in a government or public agency is an entirely different ballgame

An ERP system that is too complex can stunt business growth

This was last published in April 2016

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