Organizations tend to realize they need ERP when they begin outgrowing their business systems, whether those systems are homegrown or disparate collections of applications. Over time, pain points begin to emerge as the gap widens between software capabilities and business process needs.
Stymied by a lack of system integration and low visibility into real-time data, business goals for growth in the company can lead to necessary change. The desire for increased functionality often leads to the search for new ERP software.
In the past, traditional on-premises ERP systems were the norm; however, cloud ERP -- and more specifically, SaaS models -- have cropped up and continue to grow. The expanded use of the cloud has prompted organizations around the globe to ponder whether cloud ERP is right for them. It is crucial for enterprises to assess several potential factors to determine when a cloud ERP system may be a better fit.
Size, resources and mobility determine the need for cloud ERP
The size of a business can play a role in whether or not cloud ERP fits. Cloud ERP can work well for small and midsize businesses because their operations are not as complex as those of their larger counterparts.
Fewer users and fewer transactions may translate into lower subscription pricing for cloud-based services. However, larger businesses will undoubtedly have more users and more transactions. Companies with less data and lower transaction volumes may see cloud ERP software as viable and cost-effective.
Organizations with scalability needs that require agility for growth may recognize opportunities with SaaS, as well as other cloud models that allow for rapid deployment in competitive, ever-evolving environments.
While a cloud ERP system can also be useful for established businesses, it's especially enticing for companies in high-growth mode. Businesses on the fast track for expansion into multiple locations may benefit from a relatively quick cloud ERP implementation, assuming they have adequate internet access.
A common challenge when implementing and maintaining traditional ERP systems is the increased need for IT staff. If the organization has constraints that prevent it from augmenting its IT staffing, then a cloud ERP model, such as SaaS, may be advantageous. Similarly, if the business is looking to reduce hardware or is unable to upgrade its infrastructure, then SaaS ERP could prove to be even more beneficial.
If a team requires remote functionality on mobile devices to access data, view and edit comments, and create approvals, then the company may have critical business needs for mobility. Cloud ERP can help.
Because SaaS ERP is web-based, users can access it via their smartphones, tablets, laptops and other mobile devices. Again, there's the caveat that users need sufficient access to the internet to run the applications on mobile devices.
Think about money, time and data
Budgeting is one of the biggest considerations when starting an ERP project.
Executive leadership teams must often approve funding for selection, implementation and ongoing support, such as system maintenance. In the past, traditional ERP systems generally required a higher initial investment. The smaller, regular payments of SaaS and other cloud systems may appear attractive, but organizations should be aware of the potential total accumulated costs for the extended use of these subscription-based services.
Budgeting variances can occur when a business plans to keep a system up to a certain point but fails to anticipate going beyond its expected lifetime. When this occurs, the subscription costs could easily begin to outweigh the price of a traditional ERP. Given that some companies have kept their ERP systems for over 20 years, it is possible that those fees will eventually exceed on-premises investments.
Budgeting money is a vital factor for companies implementing ERP software, but budgeting time is just as important. Implementation times can be difficult to estimate, especially given variables such as the level of customization, access to resources and integration. Arguably, the perception is that SaaS-based models deploy quicker due to the reduced need for infrastructure and a more limited ability to customize, thereby reducing implementation variables and timeframes.
SaaS ERP offers features that do tend to offer distinct advantages, as well as more rapid deployment for services. The providers remotely host the applications and make them available to customers on demand over the internet. In addition, the providers completely manage SaaS deployments, so customers don't have to deal with staffing and performance issues.
In addition to time and money, data is another area to consider when looking at a cloud ERP system. Some organizations looking for an ERP system may need to control their data or system. If that's the goal, then on-premises ERP software may be the right route to take.
For companies that have the flexibility to relinquish control, cloud ERP is a viable option. However, it does require a good amount of trust in the third party and good faith in the provider's data security, protection and management functions.
Customization can be a challenge, especially for large, complex businesses or groups with special requirements. Companies with unique processes may require more control over their ERP systems to develop specific results. Some businesses may find that SaaS ERP systems, especially those in a public cloud, are less than optimal for coding tailored ERP customizations.
What else to consider when evaluating cloud ERP systems
There are several other factors that organizations may need to consider when deciding whether cloud ERP systems are the best option. Enterprises with SaaS ERP systems may be required to frequently implement updated versions, which could potentially result in more training costs or other operational disruptions, such as kinks in new code.
Along with being at the mercy of updates, another potential hang-up with newer or niche cloud platforms is the risk of limited vendor viability. Sudden software end of life could turn into an unexpected loss of access to company data and software. The adverse operational and financial consequences could seriously jeopardize the organization.
Another challenge that may come with cloud ERP is migrating big data files over the internet, which can be time-consuming and increase the risk of potential data loss. Consequently, moving data to the cloud requires careful planning and data evaluation.
Performance is another consideration. Businesses with operations that require immediate transactional results may be reluctant to employ cloud systems because of slightly longer latencies.
The two-tier ERP approach
If the drawbacks of a cloud ERP system are cause for concern or the company's needs don't completely match up with the functions of cloud ERP, there is always the two-tier ERP approach. A two-tier ERP deployment generally involves keeping an ERP system at a corporate level -- tier 1 -- while allowing each business unit to select a second ERP system -- tier 2. However, this approach may pose integration challenges.
Alternatively, an enterprise could decide on a limited number of choices from which smaller locations can choose. The tier 2 choices can be options from the same enterprise-class vendor or other vendors. Either of these options can limit integration challenges.
The tier 1, or corporate, ERP acts as the main system for most administrative functions, such as financials and human capital management. The tier 2 ERP system supports the individual business needs of the divisions at the operational level, such as manufacturing, sales and warehousing. With this strategy, an organization could run a hybrid ERP combination of on-premises and cloud ERP software to meet specific business requirements, but also maintain increased flexibility and agility at a comparable cost.
Is cloud ERP the right answer?
Today, cloud ERP systems are increasingly common. In fact, just about every ERP vendor offers some kind of cloud deployment option. When it comes to deciding whether to implement an on-premises system or cloud ERP, organizations must evaluate their needs, determine the total cost of ownership and decide which is best for them.
Cloud ERP software could be a great fit for smaller firms with minimal IT infrastructures and business complexity. Small to midsize companies with frequent mobile access needs that are looking to lower their initial investments and drive standardization should consider cloud ERP as a legitimate option.
Larger businesses may also want to consider cloud ERP for hybrid or two-tier ERP configurations that help reduce costs and provide agility between business units. As the capabilities of a cloud ERP system expands, companies should continue looking to resources that help them diligently evaluate this software for its ability to support their enterprise strategies.
Linda Rosencrance contributed to this report.