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The on-premises vs. cloud-based ERP debate may soon be moot

Despite migration and security fears among companies, the adoption of popular SaaS modules like accounting and human capital management is fueling interest in cloud-based ERP.

Just over a year ago, Jacobus Consulting reached a juncture common to many companies more than a decade old: It had outgrown the shoestring IT processes that supported its business.

The Rancho Santa Margarita, Calif.-based health care advisory firm, founded in the late 1990s, had grown to 120 consultants in four countries, yet it still relied on a combination of Microsoft Excel and QuickBooks to manage its billing and financials. The upshot was that a mountain of manual processes was holding the business back, and something needed to change.

"We weren't fast enough, and we couldn't identify what was going on in our own business, much less the market," said Alan Hall, the company's senior VP of IT. "We wanted to free our people up from the tedious, laborious stuff."

The answer, the company determined, was to adopt a full-fledged ERP system that would automate many of the manual processes that were bogging people down. And it had settled on technology from an established legacy vendor when it stumbled across FinancialForce, a company that provides cloud-based ERP specifically built to integrate with environments.

Given that Jacobus had been a customer for three years, the potential to easily enable data to flow freely between the company's various applications and a new FinanicalForce system was too good to turn down. The fact that the software is cloud-based has proven to be the icing on the cake.

Cloud adoption proved the right choice

Hall said Jacobus had been undecided on the cloud-versus-on-premises decision, but the move to the cloud has been a key part of the company's ongoing successful ERP implementation. Jacobus had a lot of ground to make up to prepare itself for growth, and Hall said choosing a cloud-based product sped up that process significantly.

"I don't think we could have accomplished what we've done so quickly if we had gone on-premises," he said. "It would have taken a lot longer to catch up."

One example of the quick improvements the company has made: Monthly financial closings had always been a challenge, but a two-week, largely manual process has been slashed in half. What's more, people have been freed up to focus on customer interactions instead of back-office tasks, enabling the company to sign a number of new and extended customer contracts it hadn't planned on addressing yet.

"It has just been that ability to spend more time with your customer," Hall said.

Although smaller enterprises like Jacobus that are looking to adopt ERP for the first time are a logical fit for the cloud, the fact that the company chose FinancialForce over a mature on-premises competitor is evidence that ERP built for the cloud is becoming a realistic alternative to the complex systems of yesteryear.

Not surprisingly, experts expect the growing availability of such cloud-based options to reshape the ERP market. For instance, IDC estimated that of the $43.7 billion in global sales of ERP software during 2012, just over 20% was delivered as cloud-based Software as a Service (SaaS). By 2018, IDC expects more than 39% of a $62.2 billion global ERP market to be SaaS-based.

SaaS modules fuel interest in cloud-based ERP

IDC analyst Christine Dover said the adoption of popular SaaS modules like accounting and human capital management is fueling interest in cloud-based ERP, while other applications such as supply chain, manufacturing and industry-specific tools are lagging behind.

Often, Dover said, it's a classic catch-22 that's keeping companies from migrating ERP systems to the cloud. "They have this messy back-office conglomeration of stuff, and they don't want that anymore," she said. "But they spend so much of their IT budget maintaining that messy pile of stuff that they can't make investments that will move their business forward."

Even so, Robert Kugel, senior VP and research director at Ventana Research, said he's not convinced that having the resources would spur many companies to make a move to cloud-based ERP. Most companies are in no rush to rethink their ERP, much less hand it off to a third party.

In the world of ERP, said Kugel, "things move at a very gentle pace."

Here's how gentle: According to Kugel's research, the average age of an ERP system today is one year older than it was 10 years ago. In other words, companies are replacing their ERP systems one year later than they were a decade ago. That inertia, he said, speaks to the stability of the ERP market and the daunting nature of an ERP transplant.

"It's a lot like a root canal -- it's expensive and painful," Kugel said. "People put it off as long as possible."

Decision delays put off the inevitable

But such delays only put off the inevitable: It won't be long before there won't be a cloud-versus-on-premises decision to make.

"I don't think it's remotely a question of if cloud ERP is the way people are going to buy ERP in the future," said Jim McGeever, COO of SaaS-based ERP provider NetSuite. "The way you know that is no one is building any non-cloud ERP systems. The vendors have made that decision for you."

In the meantime, cloud ERP vendors are still dealing with the pesky obstacle that has been their bugaboo all along, namely fear -- not only of ERP migrations, but also of the unknown that the cloud represents. Many executives remain reluctant to place what they consider to be their company's crown jewels in a vendor's hands.

But Hall said the tradeoffs justify taking a leap of faith.

"It's scary to put all of your business information up there and trust that your partner has got your back and will protect your information the way you would internally," he said. "I get that, but even though there are some risks that go with it, the rewards far outweigh the risks."

Tony Kontzer has been writing about technology and business for nearly 20 years and currently freelances from his home in the San Francisco Bay area.

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