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On-premises pricing pushes Atlanta to Oracle ERP Cloud

Atlanta's Oracle ERP migration faced two paths: partial on premises or full cloud. Feature improvements helped to sell Oracle's cloud, but Oracle's pricing made it inevitable.

The city of Atlanta is moving to Oracle's full cloud for human resources, procurement and finance. To help win...

the deal, the city released eyebrow-raising cost estimates that show the city has little choice but to move to Oracle's ERP/HCM Cloud platform.

Atlanta is a longtime Oracle user. Its last big ERP upgrade was around 2007. This time, it was planning on a hybrid cloud adoption, keeping some systems on premises and others in Oracle ERP Cloud. The city didn't believe all of the Oracle ERP Cloud offerings were on par with the on-premises systems, hence the hybrid approach. This view changed as the planning progressed.

For Oracle, getting customers to migrate to its cloud platform is a top priority. But the financial incentives behind these deals are rarely disclosed, at least until Atlanta offered a glimpse at some of the cost estimates.

The Atlanta City Council finance committee was shown a series of slides that sketched out the financial case for a full cloud approach. Officials were told that the 10-year total cost of ownership difference between Oracle's E-Business Suite (EBS)/HCM Cloud and Oracle's full ERP/HCM Cloud was $26 million. That's how much more the city would spend over a 10-year period if it went with a hybrid approach.

Cloud ERP savings too good to pass up

Oracle's licensing terms between the two platforms were starkly different. Under the hybrid approach, the annual licensing would see a "4% increase per year for EBS/HCM Cloud hybrid (until year 10) vs. 0% increase until year 5" for the ERP Cloud. That full ERP Cloud saw a one-time 3% increase in year six over the 10-year agreement.

Analysts and consultants who have seen the slides say there's not enough information to tell, exactly, how these estimates were calculated. However, the differences in licensing costs between hybrid, on-premises and full cloud ERP delivers a clear message.

"I assumed that this was Oracle's way of financially motivating the decision they wanted," said Marc Tanowitz, a managing director at Pace Harmon, a management consultancy that advises firms making similar decisions.

The Atlanta mayor's office declined to make an official available for an interview or to answer written questions. A spokeswoman said the city would not comment. In addition, Oracle said it couldn't discuss a specific customer agreement.

At the start of this project, Oracle's HCM Cloud was described by Atlanta officials as mature and ready for full cloud deployment. The city initially concluded that there were functionality gaps in the finance system, and it intended to keep Oracle's R12 financials on premises. That changed.

"Over the last six to eight months, Oracle has released new functionality to where we feel like those gaps will be addressed," said John Gaffney, the city's deputy chief financial officer, according to a video -- discussion at the Oct. 25 meeting begins at about 2:17 in the video -- of a recent city council finance meeting. That meant recommending a full cloud option.

Atlanta City Council members at the meeting didn't probe the licensing difference. Gaffney, in presenting the savings, told them that "you've got lower costs that are primarily driven by your subscription cost being lower. You also don't have to pay any hosting fees."

Tanowitz said there were some things about Atlanta's Oracle ERP Cloud project that were clear; the apparent 10-year agreement with Atlanta, for instance. Vendors have generally been seeking longer terms.

"That piece of it didn't surprise us," he said.

The first-year implementation cost for hybrid and full Oracle ERP Cloud were roughly equal, at about $19 million. That figure also wasn't surprising to Tanowitz because there is a cost to migration. But Tanowitz said he struggles to understand why the on-premises deployment is escalating in cost faster than the full Oracle ERP Cloud deployment.

"If you think about the cloud cost, what are you paying for in a cloud subscription? You're paying for some intellectual property and you're paying for some hosting," said Tanowitz. "That's what's under that number, if you peel it apart."

"Why would an environment that I'm hosting on my own -- presumably with the EBS deal -- be going up at this rate?" he asked.

There has been a long-standing debate in IT about whether on premises is less costly than full cloud approaches. Frank Scavo, president of Computer Economics, a research firm, said the decision on these approaches can go either way.

"If the data center is underutilized, adding another application may not add much cost," he said. "But if I need to build a new data center or add significant capacity, it will be much more costly. There is no right answer."

Next Steps

Do you really have a choice about cloud ERP?

Undertake cloud ERP migrations slowly

How do you find cloud ROI?

Dig Deeper on ERP infrastructure

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