Cloud ERP is a type of enterprise resource planning (ERP) software that runs on a provider's cloud computing platform, rather than on premises in an enterprise's own data center.
ERP is a modular software system designed to integrate an organization's business processes, such as accounting, HR, inventory management and purchasing, into a unified system. Before the popularization of modern cloud computing in the late 1990s, ERP systems ran inside the owner's facility, or "on premises." The cloud ERP era began in 1998 with the debut of the first ERP system to be delivered over the internet, NetLedger, later renamed NetSuite.
Components of cloud ERP software
Both on-premises and cloud ERP systems have a centralized database for storing information about business transactions so it can be easily accessed and shared among modules. Having one version of a purchase order, for example, helps ensure consistency of the information across modules and departments, minimizes errors and facilitates reporting.
The only "core" module that is common to all ERP systems, regardless of deployment model, is the one for basic accounting and finance functions, as well as related processes such as financial analytics, forecasting and reporting. Most ERP products also have modules for human capital management (HCM) and customer relationship management (CRM). In both on-premises and cloud ERP systems, modules for procurement, inventory management and order management are also used widely, since those functions are common to all types of industries and businesses regardless of whether their product is a tangible or intangible good or a service.
Companies that make or distribute physical goods need additional ERP modules, typically for supply chain management, a broad function that includes complex processes for distribution, warehousing, transportation and logistics, as well as planning functions, such as demand management and forecasting. Manufacturers also typically use a material requirements planning (MRP) module to plan, schedule and procure the raw materials and components needed for production.
Beyond these common business functions, ERP modules tend to be more specialized and narrowly focused depending on the particular industry or type of company. For example, companies with large amounts of capital equipment will usually have a module for enterprise (or fixed) asset management. A manufacturer might use a product lifecycle management (PLM) module to manage all the data and planning processes for a product, from conception to design, engineering, production, distribution and disposal. An organization with an urgent need to dig deeper into its financial and operational health might add enterprise performance management. A consultancy might need a sophisticated project management module.
While some ERP systems handle all these functions in a single integrated suite, it's common for organizations to add modules from other vendors who specialize in that function and whose products integrate with the main ERP. They often do this because they find the ERP module too limited for their needs. Companies with rapidly rising sales or a need to improve customer satisfaction, for example, will often buy a separate "best of breed" CRM system.
On-premises ERP vs. cloud ERP
The breadth and depth of available modules can differ significantly between on-premises and cloud ERP products.
In the early years of cloud ERP software, cloud versions usually had far fewer modules than their on-premises predecessors. The gap has narrowed as ERP vendors have shifted most of their development effort away from on-premises versions to the cloud, and today many cloud ERP systems include the broad range of functional modules that are available on premises. However, vendors still struggle to deliver comparable features in their cloud ERP offerings, and on-premises ERP outsells cloud by a wide margin.
One increasingly popular type of cloud ERP, multi-tenant software as a service, or SaaS ERP, is typically a streamlined version with fewer modules and features than the same vendor's on-premises ERP. In multi-tenant SaaS, multiple "tenants" use the same copy, or instance, of the software. This scheme tends to enforce standardization and simplification, since the same software must serve customers with varying needs. It is the biggest reason SaaS ERP tends to have fewer modules than on-premises ERP.
There are other important differences. SaaS ERP can't be customized, for the most part, which is a serious drawback for companies that spend years customizing on-premises ERP to meet their unique needs. (SaaS proponents claim this is a plus because it helps enforce industry best practices, reduces IT costs and makes the ERP system less prone to bugs and crashes.) On-premises ERP usually requires a large upfront payment for a multiyear license, while SaaS typically comes as a monthly, per-user subscription, though some vendors offer pricing that combines the two models. SaaS ERP generally requires less investment in IT staff and infrastructure.
Despite these differences, debates continue to rage about which deployment model is cheaper for ERP buyers in the long run. Vendors said SaaS is cheaper for them to maintain and has more growth potential from subscription revenue. Most are trying to wean customers off their aging on-premises ERPs but face resistance as companies question whether cloud ERP does what they need and is worth the money.
John Harris, CFO of CREDO Mobile, talks about his move to cloud-based ERP.
Security and reliability issues likewise cut both ways and can't be resolved without delving into specific products and technologies. Cloud ERP, because it's accessed remotely over the internet, may seem more vulnerable to public network outages, and some companies might be uncomfortable trusting software maintenance to an outsider. On the other hand, internal networks are also susceptible to outages, and companies may lack the expertise to keep their ERP software running. As for security, early fears about the safety of sensitive ERP data stored in the cloud have subsided as companies have come to realize their own data centers may be less secure than those of cloud providers.
Few companies have to choose between the two and can opt instead for a combination called hybrid ERP. A typical setup retains on-premises ERP -- perhaps a system that is highly customized and closely integrated with other on-premises systems for manufacturing and warehouse management -- and adds specialized SaaS ERP modules for HCM or CRM.
This tendency to mix and match not just ERP products and deployment models but vendors has led to a paradigm shift in how ERP is defined. Business applications are now often pieced together rather than acquired in a single, "monolithic" ERP suite. Such "postmodern ERP" provides flexibility but adds significant integration challenges.
Types of cloud ERP software
Cloud ERP vendors often apply the cloud label to software that has few of the positive qualities associated with the cloud, especially multi-tenant SaaS' economies of scale, frequent and fast updates that carry the latest technology, and web-based UIs that offer ease of use and access on mobile devices. Some deployment models simply shift the location of the underlying IT infrastructure without changing the program code of the on-premises ERP software. Calling such hosted ERP "cloud" may at times be misleading, but vendors are increasingly offering such services to customers who remain cautious about entirely new SaaS ERP products but want some of the benefits of cloud infrastructure.
Buyers therefore need to ask their cloud ERP provider for details about the cloud platform. Multi-tenant SaaS is the purest form of cloud, followed by single-tenant SaaS, in which each customer gets its own slice of the ERP software running on the provider's platform. With single-tenant SaaS, the customer still gets the flexible compute power and subscription pricing of cloud, but its data and ERP system are cordoned from those of other customers. Some companies choose single-tenant SaaS for their own privacy and security reasons or the legal requirements of countries where they do business.
Both types of SaaS ERP are usually hosted on a public cloud -- cloud computing infrastructure and services from a provider other than the ERP vendor itself. Since the late 2010s, most cloud ERP vendors have outsourced their cloud platform responsibilities to public cloud providers such as Amazon Web Services, Google Cloud and Microsoft Azure.
A third major type of cloud platform for ERP is private cloud. Single-tenant SaaS is one type, but other types of ERP private clouds are hosted on platforms that only merit the cloud moniker by dint of being accessed over the internet on data center hardware and software dedicated to each customer's ERP. In some cases, the ERP owner exerts some control over the IT decisions instead of delegating all of them to the hosting provider. A private ERP cloud can even run entirely on premises in organizations that build their own cloud infrastructure.
In practice, the thick black lines between public and private cloud have all but disappeared, and most cloud ERP offerings exist on a continuum that combines features of both. In addition, multi-tenancy can be fine-tuned as vendors and their cloud-provider partners add it to lower layers of the cloud "stack." Customers can get multi-tenancy benefits at the database, operating system and hardware levels, while running the ERP application in a single tenant at the top layer.
Benefits of cloud ERP software
Cloud ERP can be easier and cheaper to maintain than on-premises ERP, since the cloud ERP provider handles maintenance of hardware and software. Cloud-based ERP also comes with availability, backup and disaster recovery guarantees that reduce interruptions to the software. It can also have a lower total cost of ownership, especially if per-user subscription costs stay under on-premises license fees as the user base grows.
The cheap, easy connectivity of the internet makes it possible to extend the ERP system to outside suppliers, partners and customers. This enables a whole new level of collaboration in critical processes like sales forecasting, supply chain management and talent acquisition.
Like other cloud-based service models, cloud ERP lets enterprises pay only for the resources used while providing the flexibility to add or subtract cloud resources as needs fluctuate.
The cloud also allows delivery of new technologies faster than on-premises ERP in updates that usually occur every quarter. Cloud ERP vendors have been the most adept at improving the ERP user experience. It is easier to deliver new UX technologies, such as tiled GUIs, voice user interfaces and smartphone access via SaaS than through on-premises ERP, where update cycles are measured in years.
Challenges with cloud ERP
Cloud ERP provides many benefits, but it also creates some management challenges. Administrators lose some control when the software moves off site. While limited customization is possible by changing the software configuration and settings and adding extensions, on-premises ERP is much more customizable. Cloud ERP, especially SaaS, often requires substantial training and change management to get employees accustomed to new workflows and business processes.
Companies also need to adapt to the cloud ERP provider's security, which may not be as secure as on-premises ERP. They must pay special attention to different countries' data residency requirements and follow local privacy and security regulations if their ERP data resides in multiple data centers.
Cloud subscription costs can begin to exceed on-premises licensing costs at companies that grow rapidly, making cloud ERP more expensive overall. The financial risk requires ERP buyers to educate themselves about the most common SaaS ERP subscription models and carefully scrutinize each vendor's plans, which can be quite complicated.
Cloud ERP vendors
The Gartner research firm reported that the global ERP software market for both on-premises and cloud ERP reached $35 billion in revenue in 2018. SAP topped the list of vendors, with 22% market share, followed by Oracle (11%), Workday (7%), Sage (6%), Infor (5%) and Microsoft (4%). With the exception of Workday, the market leaders have a long history that started with on-premises ERP (now often referred to as "legacy" ERP) and since the early 2000s have introduced numerous cloud ERP offerings.
Smaller but equally long-standing vendors with a similar mix of deployment models include Acumatica, Deltek, Epicor, IFS, IQMS, QAD, Ramco and Unit4.
Besides Workday, prominent SaaS-only (or "pure play") vendors include FinancialForce, Intacct (which Sage acquired in 2017), Kenandy, NetSuite (acquired by Oracle in 2016), Plex and Rootstock Software.
Gartner doesn't publicize a breakout of cloud ERP revenue or vendor shares, but in a separate 2019 report on global public cloud revenue, it predicted spending on all SaaS applications would nearly double from $80 billion in 2018 to $143.7 billion in 2022.