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Establish requirements before choosing between cloud and on-premises ERP

A consultant outlines criteria for midmarket manufacturers to consider before deciding whether to stick with on-site ERP or venture out to the cloud.

Your ERP systems are coming to the end of their useful lifecycle, and some functionality has lost its luster. You’ve heard that tier 1 ERP vendors offer midmarket manufacturers affordable systems, while tier 2 vendors are getting stronger in their capabilities. Both tiers offer Software as a Service (SaaS) ERP options. How to separate contenders from pretenders? It helps to decide on the company’s requirements before choosing between cloud and on-premises ERP.

Perhaps an on-premises ERP vendor is sowing seeds of doubt about the viability of SaaS. But comparing SaaS ERP with other options is worth the time, as enhanced ERP capabilities can contribute significantly to a competitive edge, especially for streamlining business processes. A company’s best fit may be found in traditional on-premises software, SaaS ERP applications or a mix of both.  

I attended the 2012 Cloud Fair in Seattle and was impressed by the versatility of many of the new cloud ERP offerings. One cloud hosting provider offers robust security and protection through private cloud configurations. Another provider has a management tool that allows scaling cloud resources up or down for specific applications. The list of options for SaaS Infrastructure as a Service (IaaS) and Platform as a Service (PaaS) are expanding, and enhanced cloud security and management tools are making the cloud even more viable and worthy of consideration.  

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Consider sticking with legacy ERP

Before assessing specific on-premises ERP or cloud ERP products, it is helpful to first know which financial model best fits with the company’s strategic plans: investing in capital or allocating an expense budget. Cloud ERP is generally counted as an expense, while on-premises ERP deployments primarily use capital outlays along with some expenses. If a facility or line of business is targeted for a sale or merger in the near future, an expense-based solution may be financially advantageous. When organizations are merged, owning ERP software can become more of a liability than an asset. Cloud ERP solutions also generally provide a quicker return on investment, but over the long term can be more expensive. Take time to also look at the availability of in-house IT resources. The cost of a full in-house ERP system, especially if there are multiple locations, may not justify the staffing resources when compared with outsourcing to the cloud.

ERP requirements for midmarket manufacturers

Here are some important issues for midmarket manufacturers to consider when establishing the requirements that can help them devise a short list of ERP software vendors and choose between cloud and on-premises ERP.

  1. Hybrid or hosted ERP systems. Manufacturers need no longer be locked into one type of system, especially when it comes to on-premises software. The best vendors offer a mix of options, including hybrid systems that provide services that can connect hosted applications with on-premises ERP, all configured based on the manufacturer’s needs. 
  2. Traditional software hosted in the cloud. At the same time that  tier 1 and 2 ERP vendors with on-premises backgrounds are catching up by adding more modular and configurable options, SaaS ERP vendors are adding breadth and robustness to their features. One option is taking licensed on-premises software and hosting it in the cloud, thus leveraging the cloud’s hardware and IT infrastructure. Some cloud providers can effectively copy your entire ERP environment with its underlying software and operating systems.
  3.  Mobility access. Test and examine an ERP vendor’s software agility by looking at its mobile device capability. Mobile devices can provide employees with quick access to manufacturing, inventory and customer data and reports, and that information may help to gain a competitive edge. Mobile ERP applications may also be a means of  streamlining and accelerating certain business processes.
  4. Customization versus configuration. Today’s well-designed applications are modular and configurable, which helps to minimize customization and the associated cost. SaaS ERP still tends to be more configurable than traditional ERP software, but traditional vendors are catching up. Identify the areas where customization may be needed, including workflow, user access and privileges, data integration, reporting and security. Customization can be costly. The alternative is deciding where current business practices can be modified to fit with existing software’s off-the-shelf functionality.
  5. Cloud operational practices and capabilities. The best cloud ERP providers can easily articulate and disclose their practices and certifications for data governance, compliance and security. Operational procedures should include automatic security surveillance and the ability to respond dynamically to changes in network, user and storage resources, all with customer visibility into such changes.
  6. Calculating costs of SaaS and on-premises ERP. A cloud ERP system should have simple and predictable monthly subscription fees. Some SaaS ERP vendors may initially sound less expensive, but with a full count of users, functions, storage and access all added together may be more expensive than originally thought. The comparable on-premises software costs include ERP application licensing, hardware and software infrastructure, software maintenance and update fees, IT staff allocations, rent, utilities and network costs. Both SaaS and on-premises ERP can include customization fees.
  7. ERP vendor’s understanding of the business. Understanding your manufacturing processes and needs is important for determining how well you can trust the vendor to eventually match its solution to the company’s environment. 

Knowing your company’s strategic direction, then identifying its ERP functional requirements are important steps before determining the ERP short list. It is also important to determine what you want before delving into how it might be implemented. The SaaS ERP market for midmarket manufacturers has not yet taken off, but it is getting lots of attention. Given cloud computing’s bright future, aligning with a vendor that offers solid cloud ERP options will provide access to a range of ERP options that can help a company remain competitive.

Liz Garnand is a principal at Newport Consulting Group where she works in the strategy and operations practice, focusing on marketing and business growth. Email her at or follow her on Twitter (LizGarnand).

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