Cloud ERP: Only Cheaper at the Start

April 25, 2013 by Sebastian Nikoloff 0

Foto: iStockphoto

Photo: iStockphoto

The cloud has long been more than just a “hot topic” for IT decision-makers. Much has been said about its benefits and its pitfalls. Indeed, many enterprises are already dabbling in the cloud, shifting smaller “fringe” systems into it so that they can observe it in action. When it comes to ERP, however, huge question marks often remain about the viability of adopting the cloud. The risks involved in making the wrong decision are simply too great. After all, a company’s ERP system is its backbone: It contains critical functions and processes mission-critical data.  Often, it contains a wealth of in-house expertise. In short, you don’t mess with it unless you really have to.

Consequently, enterprises are passing up the chance to benefit from vast improvements in efficiency: Over a ten-year period, the total cost of ownership for cloud-based ERP systems can be 50-60% lower than for a traditional, on-site solution. This was the figure that analysts from Booz & Company came up with in a recent study. However, when contemplating a jump to the cloud, you need to ask a few crucial questions if you don’t want to end up pouring money down the drain. Does it make sense to move your ERP system to the cloud? When is the best time to migrate? What will it cost?

Cloud ERP: Quicker to Adopt

Many of the benefits of cloud adoption are obvious. For starters, cloud solutions are quick to implement. And that’s a factor you can easily quantify: While the process of implementing a traditional, on-premise ERP solution can take up to three years, cloud solutions are generally up and running in four to eight months, say the analysts from Booz & Company. Cloud-based solutions also make enterprises more agile, because they often offer additional functions that can be activated on the fly – to match a sudden surge in business growth, for example.

Next page: Operating costs are higher in the cloud

Cost comparison of on-premise and cloud-based solutions
(Graphic: Booz & Company, “ERP in the Cloud”)

One of the aspects that will be of key interest to CIOs is security. Security standards are evolving rapidly – and we can safely assume that most vendors of business software are attaching high priority to making their cloud systems secure. Small and midsize enterprises, in particular, may have doubts as to whether they can comply with the new security standards and might therefore consider the cloud to be the more secure option.

Cloud solutions also have the edge over on-site solutions in terms of implementation costs. According to Booz & Company, the difference is substantial: While the costs of personnel, hardware, and software for cloud solutions amount to around seven million dollars, on-premise solutions soak up a whopping 80 million dollars. That said, the operating costs for cloud solutions are slightly higher – because you have to factor in the expense of licenses and maintenance.

Cloud operation more costly than on-premise operation

This brings us to the question of when to adopt. Two factors are decisive in choosing the right moment: the scope of the implementation (larger companies often face a tougher challenge than smaller ones) and the complexity of the system involved. Enterprises with standard processes and limited adjustment requirements will have an easier ride than those with complex, highly customized processes.

So, while large corporations may well struggle to adopt a standard solution from the cloud, small and midsize enterprises stand to reap significant benefits.

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