ERP (enterprise resource planning) software is a must for medium to enterprise level business who want to hone their execution and deploy resources with optimal efficiency and effectiveness. But which model of implementation is best for your business?

If you are considering a new ERP platform, or your existing application or the infrastructure (hardware, operating systems, networking) it sits in needs replacing, you’ll be faced with a choice between possibly moving to a ‘cloud-based’ deployment model or the more traditional ‘on-premise’ based implementation. They can be quite different options not just in terms of where the software sits but also how you pay for it, and how you and when you receive updates to the ERP solution.
Each approach comes with its pluses and minuses, so to help you better understand what may be the best fit for your business let’s compare the key advantages and limitations for both on-premise and cloud ERP solutions.

image demonstrating a cloud-based erp solution

Cloud ERP: Key advantages and limitations

Advantages

Less capital investment required upfront

Cloud ERP solutions are typically licenses on a ‘subscription’ basis. Like buying online access to your favourite magazine or specialist information source, your Cloud ERP solution provider will likely license their product on a lower cost, on-going periodic basis – essentially a rental of the software rather than a purchase to use perpetually. In addition to not having to pay a larger ‘one-off’ support costs, each year, you will not need to purchase updated or additional server hardware capacity or storage space. As a result, Cloud ERP subscription costs are usually considered an OpEx cost, not as CapEx.

A hands-free approach to security and platform maintenance

Since your subscription fees usually include the provision of your software instance on virtual (public cloud) or dedicated hardware that the solution provider owns or rents in a hosting centre, they would typically be responsible for ensuring the physical and cyber-security of where your data is residing. Provided they (in concert with their hosting provider, if that is the model) adhere to well-defined international standards and quality measures for data and application security, it can remove a substantial burden from your side. Managing this in-house, especially if you are in a highly sensitive industry, can be both expensive and seriously stressful, so effectively outsourcing this risk with respect to the ERP application and data could be a major plus point.
Similarly, your IT people (be they in-house or outsourced already) won’t have to carry the burden of keeping your server hardware, operating system versions and other overhead components up to date. They don’t have to maintain backups, develop, test and (in the worst case) execute disaster recovery plans for the ERP application and data. So not only do you save on the cost of the “tin” as it’s called, but the cost of people to run that tin and all the supporting pieces of software that go with it, the maintenance of the databases, and the DR (disaster recovery) planning that is needed to ensure on-going operation of your system.

Robust, tried-and-tested processes built for the Cloud

Your business is unique, but there are many fundamental operations and procedures you share in common with other businesses. A cloud ERP solution may have some of these ’business foundation’ processes already or at least partly configured, which can reduce some of the implementation risk, effort and hence cost.
Cloud-based implementations will often be shaped even more to this ’business foundations’ approach and therefore involve less customisation; reducing the time to value for that initial deployment.

Limitations

Long-term total licensing costs

As we’ve noted, the upfront perpetual license costs are replaced by cloud ERP on-going subscription costs. Now, that’s great in terms of reducing the CapEx commitment related to first acquiring the software, but just like a rental you will be paying the ERP vendor for as long as you keep using the solution. Depending on what else you might be saving in IT people/resourcing and hardware maintenance, at some point the cost of a perpetual license and annual support fee may actually become lower than the cumulative subscription fees.

Business continuity, security and data safety is handled by a third party

Not everyone likes the idea of handing over something as important as security and data privacy to a third party. The airwaves are constantly carrying news of large and small scale hacking attempts, ransomware and the like. Your business may prefer to take care of your own data and applications in an environment you know you control, and not yet be ready to trust these mission-critical aspects to a third-party provider ‘somewhere’ in the cloud.

Less customisable

You may want to be able to customise your ERP solution directly to your specific needs. This may be of particular importance if you operate in a niche industry, in which a more standardised solution of others may not be suitable or reduces your competitive advantage. Oftentimes cloud ERP platforms are less customisable than their perpetually-licensed, on-premise deployed counterparts. If a vendor wants to leverage a broad customer base to spread costs as far as possible, customisation capabilities may be more limited or priced more prohibitively to encourage more ‘staying with the pack’ and making life easier for themselves.

Less control over implementation but with more resource burden

You may have less control over the implementation of the ERP solution. If you have the technical nous and the resources required to implement the solution yourself, you may decide an approach where you retain and maintain all or part of the solution on-premise is worth the effort. This is the flipside of the ‘directed’ or ‘templated’ approach some cloud offerings entail, where there is less flexibility in how and at what pace you deploy the system, and more emphasis on your people doing a lot of self-education. Some vendors follow this model as it appears to reduce the initial implementation cost but may end up costing you one way or another anyway.

On-Premise ERP: Key advantages and limitations

Advantages

Possibly cheaper to operate in the long run

As we’ve said, the actual software licensing cost – even after the initial capital outlay for a perpetual (versus subscription) license and annual support fees – may well end up being less over the longer term if choose an on-premise model. This is much like buying a house or apartment versus renting one.Rent for long enough, and depending on what your other costs are to live in it, you will eventually end up paying more than if you’d bought in the first place.

Complete control over security, compliance and data safety

If you have the resources required to handle security and data safety yourself, you may prefer to do so for peace of mind. It’s a big decision, but this may be the best bet for you if you think you can take on the responsibility and have particularly sensitive data or other IP. Having complete access to the system and all you build in it, including the raw data, may be more beneficial and less limiting than outsourcing to a cloud solution provider. Your business will retain the agility and flexibility that comes from complete control, for example, you will be able to modify your system and your data use policies based on changes to your organisational structure and your operations, rather than having to rely on a third party to do this for you.
Cloud ERP solutions’ are typically updated to the latest version of the software on a periodic basis, and effectively you have to take that upgrade when it happens – you don’t get a say in the timing of that. Now that can be a real positive in terms of keeping you updated, but if you are subject to very stringent compliance demands due to the unique nature of your industry then a new software version every few month may mean having to re-certify your systems each time. That could mean taking time and people away from your actual operations every few months just to maintain your compliance levels. In an on-premise environment though, you determine the frequency of your upgrades and can therefore plan your compliance investment accordingly.

Plenty of customisation options

If your ERP platform offers great tools to tailor screens, workflows and reports, then your implementation partner – or your business if you have the technical knowledge and capability in-house – have a world of different customisation options at your disposal. Some cloud-based ERP products may place limits on just what tools you can get access to but modern on-premise software may offer more options. Again, depending on how easily customisations are upgraded along with a new software version, it make take significant effort to do so and controlling the timing of your upgrade would likely be much more cost-effective.

Disadvantages

Higher initial capital costs

With an on-premise implementation your business pays an ‘up-front’ license fee to be able to use the software basically as long as you want, or “perpetually”, along with an annually payable charge for the vendor to provide support and software maintenance updates. If you have to replace or update your server hardware to be able to properly run the system for your users and deliver the sought-after efficiencies, then that’s additional capital you need to find. That can all quickly add up to a substantial amount, and even if ultimately this may end up being less over an extended period than paying monthly or yearly subscription fees, it’s capital that can’t be otherwise used in the business.

Security, data safety and business continuity are all your responsibility

If you are not 100 per cent sure if you have the skilled resources within your business to handle the security of your data in-house, this option might not be for you. You and your team will be responsible for application and data security and continuity at all times and will not have the safety net of a managed services provider.

Customisation can go awry

Customisation is not always easy to get right, and it can be difficult if you do not have the requisite skills and experience, or if changes to the system are not properly thought through. Given the potentially greater scope for customisation on-premise, it’s wise to only pursue this path if you are confident that you can handle doing so in the right way, and if you are sure you have mapped out any potential problems or points of friction.

Which business solution is best for you?

Choosing the right ERP deployment model all comes down to your company’s individual situation.

In summary, a cloud ERP solution is likely the right fit for you if:

  • Preserving capital and utilising OpEx funds is an important consideration, -perhaps more important than the likelihood that ultimately the total cost of owning the system is going to be greater in the cloud model.
  • You want the additional safety net of having a managed services provider (MSP) take care of the infrastructure needed to support the ERP, and the related data and application security.
  • You don’t want to have to take care of ongoing maintenance and updates, leaving your resources free to concentrate on your core business.

An on-premise ERP solution will be best for you if:

  • Total cost of system ownership and related return on investment (ROI) are important.
  • You already have, or need to replace anyway; hardware infrastructure, capacity and the means to support it, along with system security levels appropriate to your risk.
  • Completeness of the solution is more valuable to your business than a fast, lower cost implementation.
  • You want to ‘own’ the system – you determine when you upgrade between versions, you control the data, you manage the user access.
  • You have the resources necessary to manage the ERP solution on an ongoing basis, and are confident that you can execute changes more effectively than a managed services provider.
  • You want more control over the ongoing costs of the system, implementing your own efficiency-boosting measures, rather than paying a monthly flat rate.

Still lost, or want to dive deeper? We really have only scratched the surface here, but Precise can help you to evaluate your business needs and examine the pros and cons of both options in helping you make the right choice. Or, perhaps a hybrid solution combining the best of both worlds is what you need?

Let us help you to understand all of your options – book an obligation free 15 minute informal discussion with one of our ERP solution specialists.