Why SaaS and Cloud Enterprise Applications Are Ensuring a Bright Future For Big ERP Systems

All Articles From Eric Kimberling October 1, 2010 5

The general consensus in today’s enterprise software space is that Software as a Service (SaaS) and cloud computing are the waves of the future. Industry analysts and vendor sales reps are proclaiming that SaaS ERP systems are cheaper, faster, and easier, while traditional ERP vendors are doing what they can to not be perceived as “Big ERP” solution providers.

But perhaps the biggest impact of the SaaS movement is that it is enabling the next wave of big ERP deployments.

There, I said it. Yes, SaaS and cloud software vendors are doing very well in this economic environment and the movement is here to stay. Indeed, SaaS ERP vendors such as Salesforce, Workday, and NetSuite are growing at a much faster pace than the overall ERP industry. However, I’m not ready to pronounce the “other” side of ERP dead just yet.

For years, ERP industry trends have swung like a pendulum back and forth between SaaS/ASP/best-of-breed and on-premise/big/complex ERP, and for good reason. As outlined in the table below, the reason big ERP didn’t die 20 years ago is because of the cyclical and perpetual nature of these competing trends. Just as companies grew tired of issues resulting from a complex, cumbersome, and costly ERP implementation, companies will eventually tire of SaaS issues related to less flexibility, less control, and more complex integration.

Perpetual Cycle of SaaS and On-Premise Software

It’s helpful to first understand how we got here in the first place, starting at the top of the graphic and moving clockwise:

“Big” ERP’s crisis of flexibility, cost, and overhead. Many journalists and analysts have covered in great detail the troubles with large, on-premise ERP systems: they can be cumbersome, cost too much, and create an IT overhead burden on the organization. Especially in this economy, companies are risk adverse and are less likely to bite off more than they can chew. Therefore, many companies are addressing this crisis by looking at smaller SaaS and cloud point solutions that they can implement in smaller chunks as their IT budgets and risk appetites allow. This leads us to the bottom of the graphic: the movement toward SaaS, cloud, and best of breed solutions.

The SaaS crisis of control, standardization, and integration. Moving clockwise from the bottom of the graphic, you see that eventually organizations using SaaS point solutions will face a crisis of flexibility, standardization, and integration. Companies grow, acquire other companies, expand into new territories, and globalize their supply chains, which strains their disparate enterprise systems’ environments. Having separate SaaS solutions to address various business functions and locations becomes less efficient as companies grow and change, forcing the second crisis. Suddenly, CIOs look for ways to standardize and consolidate their global systems to gain consistent business processes, IT efficiencies, and better visibility into their diverse operations.

Then the cycle repeats itself, just as it has multiple times since I’ve been in the ERP consulting space. It is important to note that not all companies go through the various stages of the cycle at the same time – smaller firms will often stay in the SaaS stage until they have grown to the point where their complexities are no longer supported by cloud solutions, while larger firms often engage in M&A activities and expand internationally, causing them to more naturally hover in the on-premise space for longer periods.

Of course, there are a few potential game changers that could break this cycle. First, if SaaS solutions evolve into true fully integrated enterprise-wide applications rather than primarily point solutions as they are now, then this would disrupt or hinder the arrival of the next crisis. Second, more robust development and integration tools within SaaS solutions could mitigate some of the current flexibility advantages of on premise ERP. Third, if the economy continues to languish as it has in recent years, it may be a bit longer before the next shift in the cycle. And finally, developing and emerging economies will provide a robust global SaaS market, even as some economies begin to mature and face the first crisis resulting from SaaS offerings.

Eventually, companies will move beyond CRM, payroll, and financials in their adoption of SaaS ERP. And the cloud is definitely here to stay. However, at least for the foreseeable future, there will also be a need for ERP systems built to automate large, complex, and diversified organizations.

What do you think? Take our poll and find out how your thoughts compare to others in the industry.

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5 Comments »

  1. James Norwood October 1, 2010 at 5:57 pm -

    Eric, great read and very thought provoking as usual. I’m in agreement with you about the potential of SaaS solutions as they evolve into full enterprise wide suites and also the need for a constant focus on integration, combined with MDM and middleware complexity mitigation as SaaS becomes more pervasive in the enterprise. IMO SaaS is here to stay but will co-exist for a lot longer than 5 years with on-premise ERP. For most of my company’s customers SaaS is seen as just another deployment choice. I just bloged on this at http://blogs.epicor.com/erp/2010/09/cloud-computing-delivering-greater-choice-and-flexibility-for-business.html Best, James

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  2. R "Ray" Wang October 1, 2010 at 8:22 pm -

    Eric,

    Good post! Apps strategies tend to move in cycles and waves. I believe that the era of best of breed SaaS will lead to suites. After we go through best of breed hell, we’ll consolidate. whether they go to on-premises or SaaS, there will be another round of consolidation of apps strategies.

    In the meantime, large financial systems will most likely stay frozen or be replaced. Most will probably stay with on-premises, but over time more and more will go with options b/c functionality or flexibility may not be in the on-premises world but in SaaS. At that point, we will face another shift.

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  3. Patrick Fetterman October 6, 2010 at 9:30 am -

    Eric, great article, as usual.

    In my opinion, thinking about SaaS as just another deployment model is a serious mistake. Software developers who make the commitment to the SaaS model find themselves (and their customers) freed from the endless implement/customize/upgrade cycle that adds little value and consumes enormous resources. New software development methodologies (e.g., agile software development, or rapid application development) are enabled by single-source, multi-tenant SaaS solutions,a nd radically change the way companies utilize software. The end result for users is that they get a highly “customized” solution to fit their unique requirements, yet the software keeps getting better and better every day – without ever having to go through an upgrade project again.

    This increased flexibility is just starting to be recognized as companies have been on SaaS ERP solutions for a few years. What we’re seeing is that they reach the point where they would normally be faced with an upgrade project, realize that they are ALREADY on the most up to date version of the software (and that none of their “customizations” have been obsoleted) and the big realization hits them: never again.

    Companies that offer only limited versions of their software via the SaaS model, who use the same development process for their SaaS solutions and their on-premises solution, or those who choose single-tenant or virtualized servers as their so-called “SaaS” model are missing out on these benefits, and so are their customers.

    Best regards,
    Patrick
    http://www.plex.com

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  4. Patrick Fetterman October 6, 2010 at 11:35 am -

    In my opinion, thinking of SaaS as “just one more delivery option” is dead wrong. In contrast to the “ASP” or “hosted” model, where a client/server app was simply hosted off-site, the true software-as-a-service model delivers some quiet advantages that prove enormously beneficial over the long haul. For example, new software development methodologies (i.e. agile software development) enables fast delivery of highly customized applications – but those “customizations” become part of the core application, and are supported for the long haul, rather than be obsoleted with the next major upgrade. Getting access to these new features quickly, with turn-arounds as fast as a few hours in many cases, completely changes the way people think about enterprise software. They get addicted to changing their software as rapidly as they change their business operations – which is the way it should be.

    Additionally, we’re now several years into the delivery of our SaaS ERP solution for manufacturers (Plex Online), and we see many customers coming back to us at the point where they would normally be faced with a major upgrade project and a hardware refresh. When they realize they don’t have to suffer through this, that they are ALREADY on the most up-to-date version of their software, you can almost see a light bulb go on over their heads: “I never have to suffer through an upgrade again?! Wow, that’s awesome!”

    These benefits, and many more, only become apparent after companies have been utilizing a SaaS ERP solution for a few years. Once users get a taste of this, it’s going to be very, very difficult to get them to go back to the old, locked-in, never-changing on-premises software that many companies are still trying to sell. (And by the way, companies that are selling only limited versions of their functionality via the SaaS model, those who are selling single-tenant hosted models and calling it SaaS, and those who have the same development cycle for on-premises and SaaS versions of their software will never be able to deliver these benefits.)

    I strongly believe that even the largest companies are going to be embracing SaaS ERP in the coming years – we already have several multi-BILLION dollar companies running all of their plants and offices on our software, and the interest we get from others would surprise most readers. So get ready, the next few years are going to be explosive for SaaS ERP. Happily, my company is on the right side of this growth curve, and our customers are well ahead of their competition.

    Regards,
    Patrick
    http://www.plex.com

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  5. Dimitris Athanasiadis February 14, 2012 at 3:13 pm -

    Thanks for the post – I like the cyclic approach and how the industry moves in circles that repeat themselves only with more advanced technology each time.

    However, I think there’s another way for the cycle to break. Companies or at least small and medium businesses might stop needing the richness of features and the accuracy or elaborateness of packaged ERP. Instead, this lack of formality may also play an important role in SMBs that want a simple and less than complete solution to their basic problems and want to just bootstrap the rest. SaaS ERP solutions will definitely come handy then with their quick (but not necessarily dirty), cost-effective and easy answers.

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