SaaS vs. On Premise ERP Software: Understanding Fact and Fiction
There is much hype in the ERP marketplace regarding the strengths of SaaS (Software as a Service) relative to traditional on premise ERP software solutions. To be sure, several SaaS and cloud computing vendors are growing quickly and giving traditional ERP vendors a run for their money. Salesforce, Workday, and Netsuite are some of the SaaS vendors receiving much attention and business success in recent years.
However, as with any enterprise software option, SaaS has its pros, cons, and tradeoffs. While software as a service vendors would have you believe that their offerings are superior to traditional ERP in all instances, there are also distinct disadvantages and challenges to consider.
For example, choosing between SaaS and traditional ERP solutions often depends on the following variables:
- Complexity of your business
- Size of company and number of employees
- Stability of your business model and processes
- Your business growth level
- Scope of your enterprise software needs
- Need or desire for flexibility to change software to accommodate your business needs
- Level of integration required with third-party enterprise software applications
- Sophistication of your internal IT skills and infrastructure
- Your need or want to control your IT systems in-house
- Sensitivity to initial capital outlays vs. ongoing operational costs
We often find that SaaS solutions are very viable for our smaller to mid-size clients (SMBs). On the other hand, our larger clients generally find that SaaS does not adequately accommodate their enterprise software needs. Moreover, the SaaS delivery model is often more suited for vanilla and narrowly defined business functions, such as customer relationship management (CRM), human resource management (HRM), or supply chain management (SCM); broader or more differentiated functions can be more difficult to accommodate.
Choosing between SaaS and traditional ERP isn’t always cut and dry. Many of the traditional software vendors are providing hybrid options that combine the best of both worlds by offering customers a single instance with the flexibility of traditional ERP, but hosting those solutions externally to accommodate the desire to outsource their ERP infrastructure.
Finally, any ERP implementation is challenging. Whether it is SaaS, on premise, or something in between, implementing the software is the easy part. The hard part is defining your new business processes, ensuring the system is aligned with your operations, training employees, and defining roles and responsibilities in the new system. Even the simplest technology won’t eliminate the need to address these areas.
In short, software as a service can provide a very compelling solution for many organizations. In fact, our 2010 ERP study (to be published later this month) shows that 13% of companies under $100M in revenue are choosing SaaS options, which is a marked increase over previous years.
However, SaaS or cloud ERP software isn’t for everyone. It is important to carefully consider your spectrum of ERP software options, as there are countless possibilities. View our YouTube presentation below to better understand the tradeoffs of SaaS vs. on premise ERP software solutions.
About Eric Kimberling
After 15 years of ERP consulting at large firms including PricewaterhouseCoopers and SchlumbergerSema, Eric realized the need for an independent consulting firm that really understands ERP. He began his career as an ERP organizational change management consultant and eventually broadened his background to include implementation project management and software selection. Eric’s background includes extensive ERP software selection, ERP organizational change, and ERP implementation project management experience. Throughout his career, Eric has helped dozens of high-profile and global companies with their ERP initiatives, including Kodak, Samsonite, Coors, Duke Energy, and Lucent Technologies to name a few. In addition to extensive ERP experience, Eric has also helped clients with business process re-engineering, merger and acquisition integration, strategic planning, and six sigma. Eric holds an MBA from Daniels College of Business at the University of Denver.
Dear Eric,
Thanks for sharing your experience. I completely agree that implementation challenges are the greatest.
Recently though we have launched an online (SAAS) ERP and we find that there are two things that are very critical:
1. The cost of online ERPs is much lower than on-premise ones from traditional vendors. For example our own product is priced at $7 /user/month. The online ERPs may still be maturing, and we agree that it will take sometime till these products mature but they are on a completely different pricing point.
2. Due to the low cost – we see that the pressure to drive ROI is reduced. Instead of considering ERP as a “discontinuous” change, SMBs now consider a “gradual” adoption of ERP. Though the long term effect of this is debatable, but the low upfront cost gives companies more breathing room to enable the behavioral change that is needed.
Also I agree, online ERPs need to build credibility and as adoption grows and the number of satisfied customers increase, online ERPs will pose a new alternative for companies!
cheers!