In today’s ERP market, we face many decisions that will affect our overall organizations. Technology today is a key driver that helps us chart a new course. One of the big topics in ERP is cloud-based Software as a Service, or SaaS. We will try to help you make an informed decision on what works best for your company, and will help you to separate out the marketing hype from the reality of what you can expect of a system.
Twenty years ago, everyone in IT was talking about a true client/server model with Windows-based applications in ERP. Companies had been moving away from centralized mainframe and time sharing dumb terminals to smart PC devices across a network. Today, the discussion has shifted to whether you should deploy your ERP application with an on-premise solution on an in-house server, or go to an off-premise hosted delivery method.
Software as a Service, otherwise known as SaaS, is a subscription-based software licensing business model. In this instance, the software is hosted by the software vendor or an independent third party provider. It is a cloud-based solution in which users are granted access via a thin client or web browser to access the ERP program, applications, and their customer data files. The cloud-based solution prices the applications via a subscription, usually a monthly or annual fee. This can be accomplished through a simple hosting model or a multi-tenant model. In the hosting model, a company pays a monthly fee to have another company maintain the hardware and licenses. In a multi-tenant environment, many companies are being serviced in hardware, software, support, upgrades, etc., and it is typically conducted through the software application provider. Even though SaaS offerings are becoming more popular from specific application providers, let’s list the top 4 considerations for choosing one deployment method over another.
Lower Initial Capital Investment v. Total Cost of Ownership
One of the benefits of SaaS is the lack of a large up-front capital investment in IT infrastructure and personnel to manage and maintain the day-to-day system and applications. The key to a good investment is how quickly it takes to achieve an expected ROI/payback and to support your growth over time. ERP systems are considered longer-term investments, and even though your initial out-of-pocket costs seem to be lower in a SaaS environment, in the end, with an on-premise environment, your total cost of ownership (TCO) is often times less. Considering that small to midsize companies have typical life cycles of about ten years from an ERP system, when comparing the two technology deployment models, the typical breakeven point for TCO is about 5 years. Several companies are weighing the upfront non-recurring licensing cost vs. a monthly operating expense cost.
Installation/Implementation, Upgrades, Training and Adding More Users
Many SaaS software providers claim a faster time to benefit because it takes less time to install and configure the system. You can run the risk of a poor installation if not conducted by an experienced IT professional. However, many (if not all) ERP vendors provide installation guides with their software systems. So even though the initial install and setup may take a little longer, you will still need to do the implementation process, which can be far more time consuming (and costly) for both the traditional and the SaaS models.
Adding users and installing upgrades of the software are also marketed as much easier to do. This may or may not be true, as well, depending on how the system was initially set-up, the user and application training required, and any customizations that you would need to complete. In most cases, SaaS monthly costs are tiered, and are based on sales revenue of your business, and not on the number of active users on the system. So the monthly cost can increase, as you grow larger as a firm.
SaaS providers will also say that because the applications are web-based, the familiar interface helps drive user adoption and lessens the steep learning curve of ERP systems. Ease of use is definitely a priority when it comes to selecting an ERP system for your business, but we have yet to come across an embedded system that isn’t complex to some degree. The reason is because the nature of the software in a multi-tenant SaaS model is typically less flexible, leaving little, if any room for customization and modification. In a SaaS environment you do not own the software or have access to the code in order to make the changes your business may require. The gaps in the software are not always fulfilled with newer releases or upgrades, and you may need to search outside of the core application for a solution to fill these gaps.
Software Maturity and SaaS Adoption Learning Curve Over Legacy Applications
An ERP system is meant to augment your business, mirror your business processes, and help you make better decisions by leveraging a powerful technology data flow solution. SaaS is a scalable solution for companies that fit the specific mold because it is a single version of a product offering.
One of the reasons why companies continue to buy the more proven on-premise software solutions is the years of development, extensive testing, multiple releases, operating platforms, and a more robust installed base of clients in multiple industries.
In the product life cycle, SaaS is considered to be an emerging category model. Thousands of man-years and millions of dollars in development have been invested into more mature on-premise based systems. Over numerous ERP product generations, vendors have refined their systems to have less inherent errors (bugs) and can now deploy cleaner major releases of their business software. Many SaaS models have been rushed to the market to capture market share, and are not always as mature in their functional capability. Many technical trade-offs are made also, to meet this demand. A few have built the SaaS applications from scratch, but today this is the exception.
Overall Culture, Data Security and IT Overhead
SaaS solutions require less IT oversight, and hardware maintenance. It is also true that training IT staff and upgrading IT infrastructure can be costly at first, but the initial investment is offset through the value of retained skills, knowledge, and capabilities of your personnel. In addition, a robust on-premise system is not subject to latency issues with servers half-way around the world, with poor or inconsistent Internet connections. Data security and integrity over any Internet web-based connection is always a concern. With sophisticated hackers and viruses, data can be stolen or corrupted easily with an off-premise model. Cloud-based back-ups can help ease that concern, for data restoration.
In conclusion, I do think there are opportunities for SaaS software and applications, but as an overall ERP solution, you may find that your business is more unique and thus requires a system that is more flexible to meet your needs. The market needs to mature, as well, with more competitive offerings. Five years from now, SaaS will be a mainstream technology, and we’ll be talking about the next wave of technology. How about 3-D holograms and virtual reality, anyone?
This post was written by Kevin Goergen. Kevin works in our M&M Business Solutions Group. He has over 5 years of experience in business analysis and consulting and primarily works with clients in the manufacturing industry, assisting them with business process evaluation, and providing application training and implementation services of Enterprise Resource Planning Software Systems.
Read another ERP post by Kevin: What Star Trek Has Taught Me About Team Dynamics in ERP Implementation