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ERP hosting providers respond to SaaS with cheaper, more flexible options

ERP hosting providers are adding new cloud computing and subscription options to provide alternatives to Software as a Service (SaaS) ERP.

While Software as a Service (SaaS) and cloud computing continue to grab headlines as potentially faster, cheaper alternatives to on-premise deployment of ERP, for many companies, managed hosting remains the only viable choice.

Like SaaS, ERP hosting can save money on IT labor and infrastructure while still providing the reassuring levels of privacy, security and service that some experts say has been lacking in SaaS. That proposition appeals to cash-strapped IT managers who can more easily budget ERP as an operational rather than a capital expense, according to vendors and analysts.

Managed hosting providers maintain all the server hardware, software infrastructure and networking needed to run a manufacturer’s regular ERP system. Some also manage the ERP software itself. Typically, the customer essentially owns the server and software, but the provider manages it. With SaaS, the provider owns the software and charges a monthly usage fee.

Facing competition from SaaS, many ERP hosting providers are adding comparable pricing while co-opting cloud technology to bolster their infrastructures. Meanwhile, some ERP vendors have begun to relax licensing policies that had required large, up-front commitments, making hosted ERP even more affordable.

For small companies, monthly ERP hosting can still provide some of the savings promised by SaaS ERP. To Guy Paproski, CEO of Nuestro Queso, a maker of Mexican and Caribbean cheeses in Elk Grove Village, Ill., it means having an ERP system in his startup year without having to hire a single IT person.

“Coming to a hosted solution decision was relatively easy as a greenfield startup that has a serious growth curve ahead of it,” Paproski said.

When a major vendor made one of its ERP suites available last year on a subscription basis, Nuestro Queso minimized up-front costs by having its entire ERP system, plus email and file servers, managed by one of the ERP vendor’s hosting partners. With manufacturing in Illinois and three distribution centers across the United States, the company uses the ERP suite’s general ledger, manufacturing, and distribution components.

“It would have been six figures,” Paproski said, referring to the up-front cost of a traditional license. But with a monthly fee of $32,000 under a five-year contract, “we can pay as we grow.” His advice? To avoid surprises, be sure to understand all the costs of hosting and find a provider whose trustworthiness you know from personal experience.

Clouded future makes SaaS ERP too risky for some

Analysts say SaaS ERP appeals to small to medium-sized companies that can’t afford the licensing and installation costs of on-premise ERP. But for larger companies and others that can’t do without the performance and functions of their existing, customized ERP, the only realistic choices are to keep it in house or outsource it to a hosting provider.

“The whole ERP sector on SaaS is pretty immature,” said Liz Herbert, principal analyst at Cambridge, Mass.-based Forrester Research. “There’s still a lot of time for managed hosting.”

Herbert predicts that because of the intense management demands of enterprise applications, the major system integrators that are often called in to implement on-premise ERP will form partnerships with cloud computing providers to deliver true SaaS versions of full-fledged ERP.

Further muddying the water around the SaaS vs. hosting dilemma is the emergence of cloud providers that sell shared computing infrastructure under similar, pay-as-you-go terms. With traditional hosting, IT has the authority to move its infrastructure off site, and the ERP vendor usually doesn’t have to get involved. So why not move that same infrastructure to a public cloud instead?

Cost is one big reason. To move its ERP system into a public cloud, a manufacturer must pay ERP license and maintenance costs, plus the cloud provider’s fees, as it would do with an ERP hosting provider. With SaaS, there’s one subscription price and one negotiation, Herbert said.The lack of security and compliance standards in cloud computing and SaaS is another reason IT departments are nervous about moving their ERP systems, she said. And a spokesman for one hosting provider said he doesn’t recommend his cloud option to ERP customers because it lacks the necessary high-speed storage.

Licensing rules bring further impediments to subscription-based pricing. Some ERP vendors only allow their customers to hold licenses rather than letting hosting providers buy them to share among their customers.

“This is a very lively area of discussion in the industry,” said Amy Wohl, president of Wohl Associates in Cherry Hill, N.J., and a longtime industry analyst and consultant. “There’s a lot of pressure on the software providers to [offer] a more flexible business model.” She predicts ERP vendors will eventually relent or be pushed out of the market by competitors offering more flexible hosting arrangements.

Private clouds: Best of both worlds?

Wohl said manufacturing executives are reluctant to move their ERP completely onto public clouds until the security, privacy and reliability problems are solved. The market is in its early stages, and people are confused about choices. “Getting it all sorted out will take a while,” she said.

In the meantime, some companies are installing so-called private clouds internally to gain some of the cost and scalability benefits of the cloud model with fewer of its risks.

“I’m very bullish on the notion of private cloud and what it can do,” said George Goodall, senior research analyst at Info-Tech Research Group in London, Ontario. “People have had tremendous success with [it] because of its flexibility, scalability and recoverability.”

Meanwhile, some hosting providers are using their expertise to help customers set up private clouds, according to Goodall. It may not be managed hosting, strictly speaking, but it is another alternative to hosted and SaaS ERP, with some of the benefits of each.

Private clouds can help IT departments increase mean CPU use and run computing resources like a metered service, Goodall said. They can also serve as stepping stones to give IT the confidence to eventually move ERP -- or at least some modules -- to a public cloud. But a key selling point of public clouds is their multi-tenancy, which allows multiple users on a single resource, bringing economies of scale that can lower costs. By choosing private clouds, analysts say, manufacturers might have to trade some of those savings for the reassurance of having more control over the cloud resource.

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