Enterprise resource planning (ERP) is one of many applications that companies utilizes to enhance productivity. ERP is strategic to every manufacturer automating an organization’s workflow by connecting every department and ensuring increased profits through operational efficiency and cost control. In today’s modern world you have plenty of options when it comes to ERP – not only the vendor and product you choose but also how the application will be licensed and deployed. One of the key decisions is whether to leverage ERP hosted on the cloud or to install the application on-premise on your own servers (or third party hosted servers). Each of these options have their own unique advantages and disadvantages. Your choice on deployment may be financial, based on functionality, based on security considerations, personal preference, or a combination of these factors.
Cloud ERP vs. On-Premise ERP
The main difference between these ERP solutions is on the deployment method. Cloud ERP is based on the cloud (hosted online and typically accessed via a secure web browser or secured online login) and is typically provided directly from the ERP publisher or their recommended hosting partner.. Instead of installing the ERP on your servers and computers, it will be on the vendor’s servers while your company accesses it via a mobile app, web browser, or both. Also, the provider will be in charge of the costs of database and operating system licenses as well as system maintenance for the entire platform including servers and the ERP application itself. On-premise ERP, on the other hand, is deployed directly on your company hardware and your internal computer network environment. Also, the responsibility of managing the software and servers will fall on your in-house IT department or contracted IT service provider.
Before we compare these two Enterprise Resource Planning deployment options, let’s consider some of their advantages and disadvantages.
Pros of Cloud ERP systems
- Rapid Implementation: Cloud-based ERP is implemented faster due to where it is located. Your company won’t face the challenges of investing in new hardware or slow updates since the system utilizes the web and doesn’t require human intervention. Everything’s installed and initial configuration is provided streamlining the process.
- Increased Functionality: Cloud-based ERP system are typically updated automatically by the publisher ensuring that you have access to the absolute latest updates as soon as they are commercially available. With that said, some ERP publishers have some limitations when it comes to the cloud versions of their applications. You should ask the ERP vendors what features are not available on the cloud versus an on-premise deployment (and vice-versa as some features may only be available in the cloud).
- Reduced Infrastructure Costs: By deploying the ERP system in the cloud, your company won’t have to invest in any hardware for implementation – this includes not only expensive servers but also computers as most existing computers will be sufficient to access web applications. Further, you can expect to reduce IT administration costs as the database and operating systems are also hosted and managed by the vendor as part of the cloud deployment.
- Improved Data Management: Using an ERP solution in the cloud helps to improve data in many ways. First, the data is always backed-up ensuring you shouldn’t lose critical information. Second, the data is typically updated in real-time meaning the data should be accurate and current for reporting. Third, the data is much easier to share with external users such as ERP consultants, customers, vendors, and even remote employees.
Cons of Cloud ERP systems
- Security: Many people consider Cloud ERP deployments as less safe because they have a perceived lack of control over access. This may be true if you have a world-class IT department that is skilled in IT security. With that said, today’s cloud-based business applications are often more secure than any internally-hosted applications. Consider this for a moment – is your internal IT department going to provide a more secure system than a multi-billion dollar organization like Microsoft of Amazon (or other large hosting providers)? Probably not.
- Limited Customization: This depends heavily on the ERP vendor and their cloud offering but many cloud offerings have some limitations on customizations compared to installed applications. Check with your ERP provider to determine if there are customization limitations. You will need to dig deep to truly understand customization capabilities on the cloud and on-premise.
- Increased Cost: This is a tricky one. Some people see cloud applications as more expensive and they certainly seem like they are since the application costs for cloud applications are typically the same as purchasing a perpetual license for the software with maintenance and support equivalent to about 30 to 36 months. This means the break even on licensing alone is around the three year mark where the cloud application starts to look like it’s more expensive. What is difficult to ascertain is the cost for licensing the database and operating system and administering the application. The truth is that in today’s world there is probably little difference between cloud and on-premise ERP except who you pay and when you pay it. Cloud ERP tends to be less expensive up-front in the first few years but more expensive in future years. Companies planning to continue using their ERP system for a decade or longer may see potentially slight savings with an on-premise deployment but you should create your own detailed analysis to understand how much (if any) you will actually save.
Pros of On-premise ERP systems
- Controlled Implementation: Implementing an on-premise ERP system is the sole responsibility of your IT department and you will generally have more control in the process. This is changing rapidly and will not be the same across ERP vendors so make sure to ask questions to determine if this is in fact the case with the ERP application and provider you work with.
- Customization Options: Generally, an on-premise ERP deployment provides you with more options for customization and integration. Again, this varies widely from ERP publisher to publisher and from ERP product to ERP product. Further, there is a strong movement and viable reasons to avoid costly customizations that can code-lock you into your current version preventing you from easily moving to new versions with new features so consider carefully an customizations that require source code modifications. Instead, try to build out custom integrations that survive product updates.
- Managed Security: Issues such as data breach may not come up since your IT department will have complete control of the system and when they do come up – you’ll know the blame is all your own. Again, many cloud-based based ERP platforms are more secure than self-hosted on-premise applications but you feel more out of control because you don’t see all the behind-the-scenes work the ERP publisher and their hosting partner(s) provide. It is important to do a lot of research to understand if your internal team can actually provide a more secure platform than the ERP publisher. In same cases, you may but in most cases, it is unlikely.
Cons of On-premise ERP systems
- Increased Implementation Costs: To deploy an ERP system on-site, you must invest in hardware, install and configure the operating system and database, and you must train your IT department on these platforms. Further, unlike cloud applications, the software must be installed and configured which takes time (could be weeks or longer in some cases). Moreover, the capital expenditure on hardware servers and supporting technologies and the establishment and training of an in-house IT department is not to be overlooked.
- Data Security: Unless your organization establishes proper protocols for data security, your systems may also experience data breach not minding the presence of the IT department. Data breeches can come from both external attacks as well as internal data breeches from your own employees when data is not locked down and security is not configured properly.
- Delayed Updates: On-premise deployments mean your company dictates when updates are applied and when you migrate or move to new versions. This itself has pros and cons. Pro – you move to new versions when you are comfortable and you ensure you are not on the “bleeding edge” of the publisher’s new version that may be more prone to bugs. Con – you have to wait for the new features in the update or version that could solve a major issue in your organizational workflow or a previous bug or issue that has been addressed in the latest release.
- Delayed Implementation: The processes involved in deploying an on-premise ERP might defeat the target or plans of the organization, especially the time-sensitive goals. On-premise implementations will almost always take longer than cloud deployments. This can range from days to weeks or months of additional work required for on-premise implementaitons.
Factors to consider before implementing a Cloud ERP or On-Premise ERP
- Total Cost: The cost of implementing a cloud ERP is usually lower in the short run. We’ve seen that a company might spend more as it continues to use the system. But every cost associated with system maintenance falls on the vendor. On-premise ERP requires a huge capital expenditure on hardware servers. Also, there will be ongoing costs on maintaining the IT staff, updates, training, and support. As mentioned previously, there is probably little difference in cost between cloud and on-premise ERP except when the money is paid with cloud being less expensive up-front and on-premise being less expensive in the long-run.
- Project Time: On-premise ERP usually requires more time to acquire the relevant infrastructure and to complete the implementation processes. But on-cloud ERP implementation is almost always faster because the vendor has all the infrastructure in place and the system is often deployed in a preconfigured manner which saves time on the implementation.
- Updates: With a cloud-based ERP, both updates and upgrades are usually faster. The upgrades are automatic and fall on your vendor who’ll handle it after business hours. On-premise ERP will necessitate the presence of your partner in your office(s), which might lead to some hours of downtime. As for expansion, it can be done remotely on a cloud ERP system, but on-premise ERP will require on-site installation or additional hardware.
- Features: Cloud ERP systems are usually limited to a specific environment and also designed to meet the requirements of the larger users. Often (but not always) – there are functional limitations – things the application simply cannot do in the cloud compared to on-premise. It’s critical that you understand the functional pros and cons of each deployment option. After all, you may not care about specific features if they do not apply to your industry or your particular business needs.
- Support: It is usually the responsibility of your IT department to provide vital support to the system and also handle every issue that may arise. But cloud-based solutions are supported remotely, and the vendor handles most of these issues.
- Accessibility and Performance: With cloud ERP systems, vendors usually preach high-quality support and service, you may have to find out during use. Further, most cloud ERP platforms provide scalability meaning that more server power is provided during peak usage so your system continues to process without a lag or deprecation of processing speed. On the contrary, most internally-hosted ERP systems cannot scale automatically due to limitations in your internal hardware and infrastructure. One caveat to this is accessibility – some manufacturers are still limited on Internet bandwidth at certain remote locations and cloud-based applications could be difficult to access consistently. This is decreasingly the case but should still be a careful consideration for manufacturers weighing cloud against premise installations.
Cloud is better than on-premise ERP (for some manufacturers). And on-premise ERP is better (for other manufacturers). The truth is that there is no clear cut winner. The devil is in the details and often it’s left to personal preference. The good news is that you have options.
Do the research to pick the right deployment method for you and understand that in most cases you can always change your mind later. It’s not uncommon for on-premise ERP users to move to the cloud and we’ve seen situations where manufacturers deployed ERP in the cloud to get off the ground faster and then later moved some or all of the ERP back to an on-premise server.
Need help determine which deployment option is best for you? Contact SolutionsX and we’d be happy to help you understand the pros and cons of deploying Infor CloudSuite Industrial on the cloud or on-premise and we also offer consulting services to help you make these critical decisions for other ERP packages.