Enterprise Resource Planning: Better On-Premise or Cloud-based?

December 5, 2013

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The majority of enterprise resource planning (ERP) systems are installed on-premises and maintained by in-house IT personnel. However, ERP solutions are increasingly being offered in the cloud, and manufacturers are finding multiple advantages from the software-as-a-service (SaaS) model.

There are few systems more complex than ERP, which companies use to store and manage data from every stage of business. Because it typically involves multiple departments and databases, it’s often installed on a wide array of hardware and network configurations.

This complexity often leads to headaches for companies. The average implementation time for ERP solutions is 18.4 months and the cost often ran much higher than estimated at the start, according to a 2010 study by Panorama Consulting Solutions, which specializes in ERP. The study also found that ERP installations often fall short of expectations: only 59 percent achieved even half of the expected benefits.

So it’s no wonder that many manufacturers spurned premise-based ERP installation and turned to the cloud. What companies need to determine before choosing a model -- premise-based versus SaaS -- are the pros and cons of both.

The benefits of cloud-based ERP systems are well known. They involve far less upfront investment, can be implemented in weeks instead of months (or even years), and can be treated as operating expenses rather than capital expenditures.

Furthermore, the operation of the system -- administration, troubleshooting, data storage, back-up, and updates -- essentially becomes someone else’s problem, reducing the need for in-house IT.

Scalability that comes with the SaaS model allows companies to make better use of their resources, and the extended feature sets are an asset to small to medium-sized businesses (SMBs) that could not afford similar features in a premise-based solution.

If cloud-based ERP is a magic bullet, however, premise-based solutions would have disappeared years ago. As this is demonstrably not the case, it’s worth examining the drawbacks of the SaaS model in ERP, which translate to the strengths of the premise-based model.

While the SaaS model requires little upfront capital expenditure, subscription costs over time can be considerable, and unlike capital investments, do not depreciate. In addition, cloud-based ERP systems can only be as robust as the network they use for delivery, and many companies find their networks are not up to snuff (and beefing up a network may involve considerable expense).  For companies that cannot tolerate downtime or slow data transfer speeds, the cloud-based model presents risk.

For organizations with a number of home-grown or older legacy systems, integration may be a bigger issue with cloud-based solutions than with premise-based systems. Cloud-based solutions also tend to allow for less customization for internal processes and needs.

However, security tends to be the biggest sticking point for companies when it comes to cloud-based ERP. Many organizations, particularly larger enterprises, are simply uncomfortable with putting their confidential data into a cloud they do not control. This fear is well justified, as the business cloud has become a target for hackers looking to disrupt operations or gain access to confidential customer or financial information.

Still, the benefits of the cloud, which include allowing easy access to the system from handheld devices such as smartphones and tablets, may outweigh the drawbacks, particularly as security protocols improve.

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