ERP in Cloud - Hype or Hope!!!
Gartner coined the acronym ERP in 1990, which traditionally has been a complex software consisting of multiple integrated applications to run complex business processes. ERPs need meticulous planning and significant resources to implement, thus associated cost and efforts are high.
ERPs support companies' critical business processes like production planning, sales, dispatch, invoicing, payroll processing etc. and also carry sensitive and confidential data like financials and sales, hence companies have been maintaining them with utmost planning, precision, control and security. ERPs are generally known for sizable license cost, maintenance cost and upgrade efforts. The ERP landscape being mammoth, involves significant efforts and money to keep it running. Cloud based ERP providers are trying to tap into this area to provide a cost effective solution. A cloud based ERP provider offers ERP as a service, in which ERP functionality is delivered over the internet, managed by a vendor, paid on subscription basis.
Though the cloud based offerings are achieving a high growth, ERP offerings are yet to gain that much acceptance due to issues related to data security, privacy and control in cloud. However, in order to reduce the ever increasing cost of ERP operations, companies have started considering cloud as an option to run their ERPs.
Benefits offered by Cloud ERP:
Cloud based offerings probably bring in "fear of unknown". Organizations do not want to lose control on physical servers. They still want to see it, touch it and feel it, and don't want to hand it over to "someone" who would deploy their critical and sensitive data "somewhere in cloud".
However, cloud based services offer many benefits in terms of cost advantage, visibility into cash outflow, quick turnaround, internal IT operations effectiveness etc.
ERPs might have reached maturity in terms of business features and functionalities, and hence companies might not be considering upgrades aggressively. This approach might be saving money for them, but cost of any future upgrades will be significantly higher, later on. Every software application has multiple pillars to support in terms of hardware, operating system, middleware, database, front end applications etc., and all of these have their life span in terms of scalability, usability and supportability. Hence upgrading software applications is necessary to remain supported and competitive in business. Delaying the upgrade actually adds to more cost. Cloud based offerings can take care of cost and upgrade issues to a large extent. Moving ERP to a cloud service provider enables companies to be current with latest technologies and more importantly takes away the pains of upgrades, hot-fixes, patches, bugs and support issues.
Low Entry Cost / Capital Cost Saving
With cloud based offerings, companies opt for a pay-per-use model, where they need not buy licenses in bulk, but migrate to a subscription based model. There is no capital expenditure required for servers, physical space, server racks, licenses and data storage etc. Hence, setting up a cloud based offering is much faster and cheaper than an on-premise setup.
Further with new technological innovations, the resources, especially hardware, become obsolete faster and need to be replaced or upgraded with latest technologies to achieve required efficiency. This requires cyclical capital investment. Cloud eliminates the need for such capital expenditure.
Further, in majority of cases, on-premise model is under-utilized as businesses maintains extra capacity to take care of future demand, spikes and month-end processing etc., which leads to lower utilization and thus increased cost. A cloud service provider uses economies of scale in shared resources mode, resulting in a win-win situation for both - cloud ERP providers and users.
Cloud based model would free up the bandwidth of internal IT functions helping in reduced IT staff and associated cost, thus keeping budgets predictable.
Pay as you use / Streamlined Cash Flow
Companies need not buy long term licenses, support and continuous upgrades. With cloud, companies pay based on number of users using the system. Subscription based model provides greater flexibility of adjusting the cost as per usage. A subscription based model can be opted which would be billed per month based on usage - number of users, duration, transactions etc. In essence, this moves a sizable capital expense to operating expense, providing greater flexibility and streamlines case flow.
Dynamism / Flexibility
Cloud offers flexibility, choice and control in choosing the services on-demand. Companies can pick the best software for the business, independent of platform without worrying about compatibility issues. This further allows them to stay invested, or move out, if situation changes.
During peak processing periods - like year closing activities, balance sheet preparation, inventory reconciliation etc. - companies can get more resources dynamically allocated to get extra computing for a faster processing.
Faster time to benefit
ERP systems are known for complexity and associated time taken for implementation and roll outs. This requires a right planning and effective program management. Typically, organizations have a very high lead time for procuring hardware and setting up networks. These issues compound in case of multi country/region roll outs. A cloud implementation saves the time here, and accelerates the implementation leading to faster time to benefit, as it reduces the setup lead time. Further, in case of multi region/country roll outs to new geographies and subsidiaries, implementation cycle would be much faster as there is no need to plan for any software, licenses and hardware.
Effective Internal IT operations / Improve Business performance
A cloud offering typically provides all the services which internal IT department offers to business in order to maintain the business continuity like - test/development instances, VPN access, single sign-on, emails, regular backup, disaster recovery plan, system admin activities, applying hotfix and patches, access to latest features, maintenance, 24X7 support, measured SLAs, security compliance and health checks.
With cloud, IT can now spend more time and energy and focus on more strategic tasks driving business benefits like innovations, monitoring KPIs, BI reporting etc. It becomes easier to plan further roll outs, implementing new features and functionality with a cloud based offerings as setup time is reduced. Cloud based offering expedites prototyping, testing, validation and training activities. Exploring new areas and development projects get benefited using cloud.
Concerns with Cloud Offerings:
While there are many benefits which can be obtained from a cloud based offering, there are many concerns as well - especially for ERP services. ERPs have traditionally been implemented on-premise and cloud brings in many fears in terms of security, control, data privacy and business continuity. While cloud offerings are getting matured and service providers are addressing concerns, but there concerns still remains and not every benefit seems so lucrative.
Data Security Issues
The biggest fear coming that is associated with a cloud offering is about data privacy and security. As data resides outside companies' boundaries and control, it brings in a fear of data security and privacy. This is true to some extent but security measures have improved a lot in recent times and are in continuous improvement mode.
With multiple levels of security - Operating System levels (Host and Guest), firewalls, virtualization, instance isolation, multifactor authentication, federate identity management, traffic screening, network access control etc. - coupled with regulation and compliances like ISO 27001, HIPPA-HITECH, in place, cloud offering providers are making the access fool-proof.
While the provisions on data security would vary based on service provider, care must be taken to ensure that legal provisions for data security are not violated. There are several security standards that cloud service providers must certify for before offering the cloud based service.
In many countries, as an extension to data security issues, data privacy is governed by local government policies. Cloud service providers need to address those country specific regulations.
As many business critical functions run on ERPs, business continuity and disaster recovery becomes very important. Outsourcing that work or relying on third parties may not be acceptable to the businesses in the first instance. But the fact is that reliable and reputable cloud providers have addressed these concerns to a large extent. In fact, now these days, they are deploying robust practices in terms of using expert's services, redundancy and segregation to address this concerns. In some cases, the services offered by cloud providers are actually more reliable than the in-house systems provided by local IT departments. Additionally, cloud service providers take care of many other issues which businesses have to do on their own like anti-viruses, unauthorized software and physical access.
Increased Opex in Long Run
While it may look lucrative in the beginning, costs can become prohibitive in long run, due to continuous subscription based model. Most of the cloud subscriptions are based on number of users, hence for companies having very large user base - typically unlimited or enterprise wide user license in traditional on-premise setup - subscription based model may not be very cost effective. Companies should look for model which provides them some immunity for a large user base.
Also, in subscription based model, companies continue to pay money to cloud service provider year-after-year. While in an on-premise model, initial investment would be high, but subsequent cost be lower compared to cloud. Below chart depicts a cost comparison between these two models and arrives on a cost break-even point, which is in 5th year of operation. This means cost of original ERP license and hardware will be recovered after 4 years of operations, while in cloud based model, one continues to need to pay the money every year. Assumptions taken are:
On-premise - 100 Users. Per user cost 4000 USD. Total license cost = 400K. Annual Support cost = 20% of license cost = 80K per year. H/W = 50K. Cost for 1st Year = 400+80+50 = 530 K.
Cloud - 100 Users. Subscription fee: 150 USD per month per user. Annual cost = 100*15*12= 180KUSD per Year.
A cloud based offering may not provide the customization options and flexibility as provided by an on-premise implementation. Generally applications on the cloud would have a limit on customization. Generally large organizations have significant customization requirements in ERPs. This could be a deterrent, where tailoring the application to suit processes is mostly required. This may not impact the small organizations too much as many times they are able to tailor their processes to suit to best practices offered by ERPs.
Integration with Legacy systems
Especially in large organizations, ERP systems are integrated with many homegrown, bespoke and legacy systems. These systems are unique to organizations, and in many cases, these are obsolete and don't follow latest standards. Majority of these integrations are point-to-point and not through middleware. Integration of ERP with these systems bring technical challenges and also data security issues, as organizations have to open their firewall and ports to be accessed by cloud service providers.
On Premise Vs Cloud - Comparison Summary
Cloud market is taking shape, with every ERP vendor offering cloud based service. ERPs support critical business functions and are backbone for companies, hence they would continue to exist and companies would continue to spend money on them in using, maintaining and enhancing. Considering these complexities, to make a decision to move to a cloud based ERP is not going to be easy. It will require a detailed comparison study and feasibility analysis. Below mentioned comparison table would help organizations in making the right choice while exploring the cloud option for their ERPs:
Cloud offers benefits as well as brings concerns. Large organizations would have more concerns compared to small and mid-size organizations, in adopting a cloud based ERP offering. Further moving from an already implemented on-premise model to cloud based offering will be more painful and expensive as already committed cost on hardware and software cannot be reinvested.
Hence, small companies and new implementations should definitely consider cloud as an option. Cloud ERP applications provide lower TCO and are adaptable for any future change - especially for small and mid-size organizations. These organizations should work with their IT service providers and explore the feasibility of opting cloud based ERPs for them.
Companies should also look for the providers who can offer them a need based move back to on-premise from cloud, to mitigate risks. Hybrid Model could be an ideal model to start with, where they can have a combination of both cloud and on-premise. Confidential data or corporate functions can be hosted on-premise, while not-so-confidential data and branch operations are on cloud.
Also, just having a cloud ERP is not enough. Companies should think strategically and visualize their long term needs in terms of scalability, impact of business expansion, need for a hybrid solution, option of moving between private, and public or hybrid cloud.
Last but not the least, while companies should check cloud service providers credentials thoroughly for security concerns, they should also look for providers who can provide all the services in a trusted partnership mode.