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Look at business size, budget when choosing between SaaS and hosted ERP

Manufacturers that don’t want in-house ERP systems can choose between SaaS ERP and hosted ERP -- but there are many business factors to consider.

Manufacturers have more ERP options than ever before. Innovations in business technology -- including Software as a Service (SaaS), server virtualization and cloud computing -- have freed users from traditional, on-premise ERP. But more options also mean a more complicated selection process. For manufacturers that can’t -- or don’t want to -- maintain an in-house ERP system, an important decision is choosing between SaaS and hosted ERP.

Each delivery model approaches ERP differently.

For hosted ERP, a customer buys a traditional ERP package and then pays a third party, such as Verizon or AT&T, to install the software on its servers, according to Chris Carter,  CEO and CTO of HiLn Solutions, a provider of both SaaS and hosted ERP. “[The application host] runs the ERP on server hardware that the client has purchased,” Carter said. Through this method, the software still exists on a physical server, but the customer doesn’t have to store or maintain that server in its own facility.

With SaaS, the ERP application is stored on a virtual server -- also known as "in the cloud," according to Carter. “You’re not charged for hardware, because you’re renting virtual space,” he said. “You’re purchasing bandwidth, not physical hardware, and paying for the amount of time and users needed.”

“SaaS is [also] usually built from the ground up to be multi-tenant at all layers of the stack: database, server and application,” said Liz Herbert, principal analyst at Forrester Research. “All users run the same code, with customizations and configurations stored as metadata parameters.” Unlike hosted ERP, which is typically provided by a third party, SaaS is delivered by the software creator, Herbert said.

SaaS ERP and hosted ERP on the front and back ends

On the front end, SaaS ERP -- especially ERP designed specifically for a SaaS environment – tends to be more user-friendly than hosted ERP, according to Herbert. “Many SaaS ERP vendors grew up in a thin client, browser-based model with a strong focus on selling to the business and leveraging an easy-to-use look and feel,” she said. “They are often perceived as more user-friendly, sometimes simpler, user interfaces, versus traditional on-premise apps exposed as SaaS.”

Users interested in interface customization are less likely to face additional fees with SaaS ERP, according to Carter. “If the client wants something different, something customized, they can do that with SaaS under contract,” he said. “In a hosted environment, clients are usually charged extra for customizations.”

For smaller manufacturers with a limited or nonexistent IT staff, outsourcing the back end work of maintaining an ERP system makes sense. “You may not have an ERP-savvy staff,” Carter said. “You probably do have folks who know hardware and networking, but because of the size of ERP implementation, you’re going to have to increase your staff. Why do that when you can send it to a hosted company and they’ll take care of it?”

On the back end, ERP designed for SaaS environments can be less customizable for users, according to Herbert. “SaaS applications are typically more standardized,” she said. “This helps SaaS stay profitable as well as manageable across multiple upgrades per year. But in many cases, it means that SaaS users have less flexibility to customize. They must conform to certain standards around the data model and certain approaches to integration.”

Warren Wilson, research director for Ovum Summit, recommends that potential SaaS ERP customers review their must-have business processes before buying. “[SaaS ERP] needs to be considered in the context of whether it’s better to customize to your business processes or whether the built-in best practices of the SaaS are better for your business to adopt,” he said.

Cost and support options differ for SaaS and hosted ERP

When it comes to cost, SaaS ERP looks to be the better option for cash-strapped manufacturers, those with small IT budgets or those that can’t afford large, upfront implementation bills. “SaaS is usually pay-as-you-go, subscription-based pricing,” Herbert said. “Hosted models are more likely to require upfront setup fees or long-term commitments that ultimately cover the setup costs to the hosting provider.”

Hosted ERP may work better for larger businesses that are looking for more options, both in the implementation stage and in extended support. “Larger hosted firms have tiered pricing models based on space, backup support, whether it’s a junior or senior admin helping or whether there’s late-night support offered,” Carter said. “SaaS tends to have one fee per user, though, and fewer additional fees.”

For software support, SaaS ERP providers often bundle their services, according to Herbert. “This can be a benefit but can also create challenges, particularly as firms are increasingly faced with a multi-SaaS environment,” she said, adding that support across multiple applications tends to be more viable with hosted services.

Wilson stresses the importance of a SaaS ERP provider having a reliable support staff. Unlike hosted ERP providers, whose physical servers are less affected by network downtime, SaaS ERP providers and users cannot access their programs while the network, and the cloud, are down. “SaaS ERP is a different animal,” he said. “The consequences of an outage could be huge. You need to look very closely at a provider’s track record.”

Benefits and risks of SaaS ERP and hosted ERP

With so many factors to consider, what are the most important elements to keep in mind when choosing between SaaS and hosted ERP?

Business needs should be evaluated closely, according to Herbert. “Hosting often gives the buyer more control, more customization and more ability to specify his own parameters across the application as well as physical infrastructure, including decisions that could impact performance,” she said. “SaaS is typically more standardized and multi-tenant, lending [itself] to faster deployment, and is typically easier to use and more accessible.”

Carter points to business size as another important factor. “Hosted ERP can alleviate your existing network and hardware staff and is typically better for a bigger company,” he said. “With SaaS ERP, you don’t need new hardware or new staff, and its cost is better for a smaller company.”

Herbert warns that hosted ERP often faces the same challenges as on-premise ERP, including upgrades. “Hosting providers are almost never the authors of the software, so they are more susceptible to software company decisions and price points,” she added.

SaaS comes with its share of risks as well, Herbert said, including security -- physical, logical, access rights and identity management -- customization and integration. Long-term lock-in and the financial viability of smaller, startup vendors are also concerns.

A potential risk for both hosted and SaaS ERP is loss of user access to the software if the provider’s servers fail. “If you lose Internet connectivity, you’re down. You may not be able to access your servers or ERP if you can’t talk to them,” Carter said. 

Wilson stressed the importance of taking the time to find the right ERP service for your business. “ERP encompasses a lot of things, to the extent that it involves your mission-critical operational processes,” he said. “You need to be very careful about any decision, because any loss of service is going to be much more disruptive for ERP than it would be for other systems.”

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