The benefits of an effective ERP system are known (and appreciated) by companies all over the world. In fact, the global ERP market is expected to grow to $60.23 billion by 2026. The rise of advanced technology, data analytics, AI and the IoT, coupled with increased global competition, have driven a need for more transparency in business processes and more robust data collection. Companies have responded by investing in new ERP software that meets those needs or by upgrading their current systems to incorporate new features and capabilities.
The COVID-19 pandemic further complicated the ERP picture—especially for companies that rely on on-premises systems. As employees and stakeholders moved to a remote work model, companies with on-premises systems experienced challenges in completing vital business processes.
For companies without an ERP system, the pandemic emphasized the need for streamlined and technology-enabled business processes, integrated functions, secure environments and efficient data collection and management.
These challenges magnified a conversation that’s been buzzing in the business community for a while: is cloud-based ERP better than on-premises ERP?
It’s clear that switching from an on-premises legacy system to a cloud-based ERP is a huge undertaking. It takes time, professional expertise, and significant organizational and process changes. It can also cause concerns over loss of control and data security.
For companies feeling curious about the potential benefits of switching from one system to the other—or making the leap to investing in a new ERP system—it’s important to start with vital information.
To help with that, Vaco has compiled some key features of both on-premises and cloud-based ERP, as well as some pros and cons of each.
On-premises ERP systems
An on-premises ERP is installed locally, either on a business’ on-site servers, or on third-party servers that are controlled by the business. Because the systems are housed on-site, extensive customizations can be undertaken to meet a business’ unique needs and processes.
Typically, on-premises systems require companies to purchase a perpetual software license in a lump sum, upfront payment. This perpetual license allows users to access and use the software indefinitely, as long as they comply with the vendor’s terms and conditions.
On-premises systems also generally require a one-time capital investment for hardware, software, databases, networks, and the hardware infrastructure required to deploy the system. Once the system is running on-site, the company will need a dedicated IT team (either internal or external) to manage it, address any issues or outages, handle security, manage backups, and deploy updates or changes.
On-premises systems are usually treated as capital expenditures, while cloud-based ERP solutions are treated as operational expenditures. However, this is not a hard-and-fast rule for every company.
Pros of on-premises systems
The unique features of an ERP system can benefit different companies and industries in different ways. So it’s important for every business to focus on individual critical processes and needs when selecting a system and hosting method.
With that being said, there are a few potential benefits of choosing an on-premises system:
- Ability to customize – On-premises systems are highly customizable because they’re housed and deployed on a business’ servers and are maintained by their own IT staff. System customizations may be essential to companies in niche industries that have highly specialized needs.
- Owning software vs. renting it – An on-premises system requires a larger upfront investment than a cloud-based system, but many businesses value owning the software outright over paying monthly fees to maintain access.
- Greater control over system security – While cloud-based ERP systems offer an array of security measures to protect clients’ information and data, on-premises systems offer businesses ultimate control over their data and security. Because the system is housed on a business’ servers, security measures are implemented and controlled by the business’s IT team.
On-premises systems can be attractive options for companies who want ultimate control over the data, infrastructure and functionality of their ERP. However, on-premises deployment can also present challenges, especially as technology and customer expectations evolve over time.
Cons of on-premises systems
Many features of on-premises systems that are huge benefits for certain companies are big drawbacks for others.
What are some of the challenges associated with on-premises ERP?
Version lock (over-customization)
The ability to customize an on-premises system can be a plus for many companies. Over time, however, customizations can pile up, and the way a company uses their system can become so specific that updates are nearly impossible. When a new version of a company’s on-premises ERP software is released, customized applications can’t be easily migrated to the new versions. In fact, these updates usually require costly, complex coding—another reason why on-premises ERP systems require an on-site IT team.
Even when upgrades are manually coded, they are often unstable and can cause system or application outages. Many companies choose to avoid updates entirely to prevent the expensive, time-consuming process of re-coding customized solutions. Over time, a business’ on-premises system can become so outdated that it no longer meets the changing needs of its customers or industry.
An outdated financial application, for instance, can cause serious issues when revenue recognition regulations change.
Version-lock is one of the key issues in maintaining an on-premises system as technology continues to evolve.
On-premises ERP solutions require a significant upfront financial investment that cloud-based systems do not. According to one study, an on-premises system for a small-to-medium sized business has a 50% higher total cost of ownership (TCO) over a four-year period than a cloud ERP for a company of the same size.
Many vendors also charge ongoing fees for training, maintenance and support, and these may increase if a system is particularly outdated.
Companies also need to invest in recruiting, hiring and training an IT team on the specifics of their ERP system. As an organization grows, it may need to add additional IT staff, especially if its system gets more complex.
Finally, the upfront cost for a perpetual ERP license is based on the number of users in a company’s network and the level of customizations they require. If a company’s needs change or its teams grow, the company may need to purchase additional capabilities for its systems.
Inability to meet the needs of a flexible workforce
Employees are more likely than ever before to prefer—and openly seek—jobs that offer flexible work policies. The ability to work remotely (at least some of the time) is a top priority for many people seeking new positions following the COVID-19 pandemic.
As telecommuting options become standard for competitive companies, on-premises ERP software can hold a business back. In addition, if a company’s legacy system requires employees to be on-site to gain access, a company can’t truly claim or promise flexible work opportunities—to current or potential employees.
Cloud-based ERP Systems
Cloud-based ERP solutions have become increasingly popular over the past several years due to their flexibility, lower cost of entry, and ease of implementation and updates. However, this doesn’t mean a cloud-based system is right for every company.
What is a cloud-based ERP system?
Cloud ERP systems are hosted on the software vendor’s servers rather than a business’s private servers, and the applications are accessed through a web browser or mobile app rather than an on-site network. When a company chooses cloud-based ERP software, they rely on the vendor’s hardware, databases, network and infrastructure to deploy and use the system.
Unlike on-premises systems, cloud-based ERP is considered software-as-a-service (SaaS) and companies pay an ongoing subscription fee to maintain access to the system. Because the software is housed on the vendor’s servers, companies with cloud-based ERP don’t need an on-site IT team for maintenance. The monthly or annual subscription fee typically includes support, maintenance and upgrades.
Finally, cloud-based ERP is hosted on single tenant or multi-tenant architectures. In a multi-tenant architecture, a single version of the software serves multiple customers, but each customer’s data remains private and inaccessible to all other customers.
In single-tenant architecture, one version of the software is used by a single customer. That customer has their own database, and is financially responsible for a large portion of the system’s maintenance and management. This can mean hiring an on-site IT team or outsourcing the maintenance to someone else.
Just like on-premises systems, there are pros and cons of a cloud-based ERP, and it’s important for companies to carefully assess their unique needs and concerns before choosing one system over the other.
Pros of cloud-based ERPs
As technology has advanced, the options for ERP software have expanded rapidly, and cloud solutions offer benefits that earlier software and deployment options couldn’t.
- Lower upfront costs – Companies don’t need to establish their own servers or on-site infrastructure to use a cloud-based ERP system. Also, because these systems are maintained by the vendor, a company’s IT staff is not burdened with maintaining the system.
- Regular updates – Cloud ERP software updates and patches are handled by the vendor, and updates are rolled out regularly to ensure that the software is functions properly, remains secure and has updated features.
- Quick implementation and deployment – On-premises systems can take months to set up, customize and deploy. Cloud-based systems are hosted, implemented, maintained and updated by the vendor, shortening the time to go-live.
- Available remotely – For companies that have a large remote workforce, it’s vital that teams be able to access systems outside the main office space. Cloud-based ERP is accessed through web browsers and mobile apps.
- Higher level of agility – Technology, industry and customer expectations are constantly changing. Cloud-based ERPs are typically less complex and feature far fewer customizations than on-premises systems. This means updates and upgrades are easier and faster to implement.
- Growing customization options – As cloud-based systems have evolved, software has become easier to customize to a business’s needs. While on-premises systems were once the only highly customizable options for ERP, many types of cloud software (like Microsoft Dynamics ERP) have modules that can be entirely customized for a business’s requirements.
Cons of cloud-based ERPs
Even with all of the benefits, there are some features of cloud systems that could be drawbacks for companies with certain needs and expectations.
Many companies want ultimate control over the features and customizations of ERP systems. Cloud-based solutions are hosted and managed by the vendor, and customers can’t change the actual code of the software.
It’s important to note, however, that companies with cloud-based software can customize their integration points. Most out-of-the-box cloud ERP software offers a number of native integrations, but many companies need more control over the types of applications they can integrate with their system. iPaaS (integration-platform-as-a-service) is a relatively new service that allows companies to further customize the applications it integrates with its overall system.
For many companies, software-as-a-service (like cloud-based ERP software) represents a never-ending expense, since monthly or annual fees are required to maintain access to the system. Many business owners prefer to make a single, upfront investment or pay a one-time fee to use a specific version of a given software program.
It’s important for every business to understand the functional differences in ERP software, deployment types, and hosting methods—no matter where they are in the upgrade or migration process.
ERP is a vital part of building streamlined, resilient business processes for today’s global and ever-changing economy. Companies that examine and improve their current systems and processes can gain a competitive advantage and become more agile their industries and businesses shift.
Need ERP solutions? Vaco is with you all the way.
Choosing a new ERP system, or migrating from an old one, is a huge undertaking for any business. It requires time, expertise, and resources—and a deep understanding of a company’s unique needs and goals.
Vaco specializes in ERP solutions for companies who want to simplify their processes and get back to revenue-generating activities. Our consultants are experienced in a multitude of industries and software platforms, including Oracle, SAP, Microsoft, Infor, and more.
Interested in learning more about Vaco’s ERP solutions and services?
Fill out our form to receive more information.