Enterprise resource planning (ERP) systems continue to serve a critical role in streamlining business processes and providing more accurate reporting. As technology continues to advance, the capabilities, functionality and user experience of these systems have also evolved. Where companies were once limited to on-premises (or on-prem) ERP systems, they now have access to cloud-based and hybrid cloud solutions.
The global ERP software market has exploded in recent years and is expected to grow to nearly $300 billion by 2027. The rise of advanced technology, data analytics, AI and the IoT, coupled with increased global competition, has driven a need for more transparency across business processes and more robust data collection. Companies have responded by either investing in new ERP software that meets those needs or by upgrading current systems to leverage advanced functionality and capabilities.
The recent rise in remote and hybrid work models has further complicated the ERP picture – especially for companies with on-prem IT infrastructure. As employees and stakeholders perform more of their job duties away from a central office, companies with on-prem systems may face challenges completing vital tasks and addressing time-sensitive problems.
At the same time, the flexibility of cloud-based ERP may not outweigh some companies’ concerns about the security and privacy of their data. This makes it difficult to confidently deploy cloud-based ERP systems, even if business needs have outgrown the capabilities of legacy on-prem systems.
Ultimately, the conversation around cloud-based vs. on-prem ERP should cover a host of factors, from upfront and ongoing costs to security concerns, business goals and staff bandwidth. In this article, we’ll review on-prem and cloud-based ERP systems and provide pros and cons for each deployment method.
On-prem ERP systems
An on-prem ERP is installed locally, either on a business’s own in-house servers or on third-party servers, and is controlled by the business. Because the system is installed and housed on-site, it is highly customizable to the company’s unique needs.
Typically, on-prem ERP requires companies to purchase a perpetual software license with a single, upfront payment. This license allows users to access and use the software indefinitely, so long as they comply with the vendor’s terms and conditions.
Crucially, on-prem ERP requires an existing IT infrastructure – a data center, computers, hardware, software, servers and so on. If a company doesn’t have an existing infrastructure, it needs to be built, and that’s an additional upfront cost.
On-prem ERP systems also require a dedicated IT team (either internal or external) for management and maintenance. These teams handle everything from deploying updates and fixes to managing backups, addressing outages and maintaining system security.
On-prem ERP is usually treated as a capital expenditure, while cloud ERP solutions are treated as operational expenditures. However, this is not a hard-and-fast rule for every company.
Benefits of on-prem ERP
Depending on a company’s structure, processes, needs and goals, an on-prem system may provide benefits that outweigh its limitations. It’s important for every organization to focus on their own critical processes and needs when selecting a system and hosting method.
Benefits and features of on-prem systems that many businesses prefer include:
- The ability to customize: On-prem ERP systems are typically highly customizable unless the vendor imposes restrictions. Extensive customizations may be essential to companies in niche industries with highly specialized operations and processes.
- Owning software vs. renting it: An on-prem ERP system requires a larger upfront investment than a cloud-based solution. However, many businesses value owning their ERP software outright versus paying monthly fees to maintain access.
- Greater control over system security: While cloud ERP offers an array of security measures to protect client data and information, businesses with on-prem systems are responsible for their own data protection and security. Because the system is housed on a business’s own servers, security measures are implemented and controlled by an internal IT team.
Limitations of on-prem ERP
On-prem systems can be attractive to companies seeking control over their ERP data, infrastructure and functionality. However, on-prem deployment can also present financial and logistical challenges, especially as technology and customer expectations evolve over time.
On-prem system features that may be benefits for some companies can be drawbacks for others.
Challenges associated with on-prem ERP include:
The ability to extensively customize an on-prem system is a plus for many companies. Over time, however, highly tailored systems can become essentially “locked” into their current version. Why? Because when a system has been heavily customized, it can become impractical or even impossible for a company to deploy updates. The more customizations a system has, the harder it is to migrate those applications to newer versions without the system breaking, malfunctioning or causing outages.
Some companies consider the risks of updating ERP software to be greater than the potential benefits. However, their systems can become outdated, and they may struggle to meet the changing needs of their customers, industry, regulations or workforce. An outdated financial application, for instance, can introduce significant challenges when adhering to new accounting standards (e.g., revenue recognition).
On-prem ERP solutions require a significant upfront financial investment that cloud-based systems do not. According to one study, an on-prem system for a small-to-medium sized business has a 50% higher total cost of ownership 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 often increase if a system is particularly outdated. Often, systems are retired (which can take several years) or moved to the cloud, at which time the vendors no longer offer training, maintenance or support. During the sunsetting, a vendor will often eliminate technical support and no longer provide implementation services. The only support offered may be related to simple bug fixes.
Companies also need to invest in recruiting, hiring and training an IT team on the specifics of their on-prem ERP system. As an organization grows, it may need to add additional IT staff, especially as the system and its customizations become 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. If an organization’s needs change or its teams grow, additional capabilities or seats may need to be purchased.
Inability to meet the needs of a flexible workforce
Today’s workforce seeks flexibility. The ability to work remotely (at least some of the time) is a top priority for most candidates.
As telecommuting options become standard for competitive businesses, an on-prem ERP system can limit the level of flexibility a business can offer. If a company’s legacy system is inaccessible on mobile devices, for example, at least a portion of its employees must be on-site to perform their job duties. With such restrictions, a company is unable to offer full flexibility, and that may be a deal-breaker for top candidates and existing employees.
Cloud 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 maintenance. But with its increasing list of benefits, some drawbacks have been introduced.
What is cloud ERP?
Cloud ERP systems are hosted on a software vendor’s servers rather than a business’s private servers. Cloud-based ERP is developed specifically for and in the cloud. Applications are accessed through a web browser or mobile app rather than an on-site network. When a company chooses a cloud-based system, they rely on the vendor’s hardware, databases, network and infrastructure for deployment and utilization.
Unlike on-prem systems, cloud ERP is considered software-as-a-service (SaaS), meaning companies pay an ongoing subscription fee to maintain access to the system. Because the software is housed on the vendor’s cloud servers, organizations operating with cloud-based ERP systems do not need on-site IT maintenance teams. The monthly or annual subscription fee typically includes support, maintenance and upgrades.
Cloud-based ERP systems are 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. Said another way, multitenancy – wherein multiple independent instances of one or multiple applications operate in a shared environment, and the instances (tenants) are logically isolated but physically integrated – is a key component of cloud-based ERP.
In single-tenant architecture, one version of the software is used by a single customer. That customer has its own database and is financially responsible for a large portion of the system’s maintenance and management.
Cloud ERP benefits
As technology advances, the options for ERP software expands, including cloud-based solutions that offer unique benefits.
Cloud ERP benefits include:
- Lower upfront costs: Companies do not need to maintain their own servers or on-site IT infrastructure to use a cloud-based ERP system. Also, because these systems are maintained by the vendor, a company’s own IT staff is not burdened.
- 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 functioning properly, is secure and has updated features.
- Quick implementation and deployment: On-prem systems can require several months to implement, customize and deploy. Cloud-based systems are hosted, implemented, maintained and updated by the vendor, shortening the time to go-live.
- Remote availability: For companies that support remote work, it is vital that employees have access to the necessary systems outside a main office space. Cloud-based ERP is accessed through web browsers and mobile apps, allowing distributed teams to work wherever permitted by the organization.
- Agility: Technology, industry trends and customer expectations are constantly changing. Cloud-based ERP systems are typically less complex and feature far fewer customizations than on-prem systems. This means updates are typically easier and faster to implement, with a lower risk of system outages or functionality issues.
- Growing customization options: As cloud-based systems have evolved, the options for customization have expanded. While on-prem systems were once the primary path to customization, many types of cloud software (e.g., Microsoft Dynamics, NetSuite, SAP) offer modules that can be completely tailored to a business’s requirements.
Just like on-prem systems, there are pros and cons to cloud-based ERP, and it’s important for companies to carefully assess their unique needs and concerns before choosing one type of system over another.
Limitations of cloud-based ERP systems
Even with a growing list of benefits, there are some features of cloud ERP systems that give some companies pause. These include:
Many businesses want ultimate control over the features and functionality of their ERP system. Since cloud-based solutions are hosted and managed by the vendor, clients cannot change the software’s code.
It is important to note, however, that cloud ERP systems do offer customization of integration points. Most out-of-the-box cloud ERP software offer various native integrations, but many organizations need more control over the types of applications they can integrate with their system. iPaaS (integration-platform-as-a-service) allows companies to further customize the applications integrated with their overall system, regardless of the deployment environment.
For many companies, a SaaS-based system (which includes cloud ERP software) represents a never-ending monthly expense. 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.
While many organizations are transitioning to a cloud-based ERP system, others may not be ready to incur the cost, transformation or level of commitment such a transition requires. This can lead them to consider a “hybrid” approach instead.
So, what does hybrid ERP look like in practice? It varies from organization to organization, but hybrid ERP involves any combination of on-prem and cloud ERP systems. Usually, hybrid ERP is used as a steppingstone to a full cloud environment.
Some organizations may use a hybrid approach to “test” cloud-based systems without committing fully to the cost of the transition, while others may benefit from adding specific functionalities on cloud – like a customer relationship management (CRM) system – that solve an immediate need in a faster, more
– cost effective way.
This approach is also particularly useful in situations where a company’s legacy ERP exists on premises. With a hybrid ERP solution, the organization can begin taking advantage of certain modules for specific advanced functionality that may only exist in the cloud while retaining other systems in an on-prem environment.
It is important for every business to understand the functional and cost differences in ERP software, deployment types, and hosting methods.
ERP is a vital part of building streamlined, resilient business processes for today’s ever-changing global economy. Companies that examine and improve their current systems and processes can gain a competitive advantage and become more agile as their industries and businesses shift.
Are you considering an ERP implementation or making a change to your existing system? If so, consider partnering with MorganFranklin Consulting, a Vaco company. For information on their enterprise application integration services, go to www.morganfranklin.com/services/business-and-technology-transformation/enterprise-cloud-applications/erp-integrations.
Or, if you are looking for on-prem or cloud-based ERP IT resources, whether on a full-time or contract basis, consider conducting your candidate search through Vaco. We maintain an extensive network of IT professionals and would love to partner with you to find you the right person or team for your ERP needs. Explore our technology and digital solutions for more information and contact us if you’re ready to get started on a search.