Cloud-based software has become increasingly popular in the last several years. Companies have discovered that when they move their important applications to the cloud, capital expenditures on infrastructure are lowered and their IT staffs can focus on high-value activities.
While the cloud revolution has affected many categories of business software, including email, file-sharing, CRM and human resources, ERP systems have lagged behind. Traditional, on-premise ERP vendors have been slow to move their software to the cloud because they want to preserve their old, revenue models and large investments in legacy systems. The rise of cloud computing has created market pressure that has led these vendors to offer legacy ERP software hosted on their own servers under the label “cloud.” We call this cloud-washing.
In addition to offering hosted legacy ERP software, vendors often add cloud-based point solutions, modifications and workarounds to their on-premise software as an attractive alternative to replacing an entire legacy system and call that “Cloud ERP.” Others simply add a few cloud applications to their legacy ERP or have tried to build cloud applications that don’t offer the same business benefits as true cloud ERP.
As a result, many manufacturing firms are still running legacy systems. The firms that have bought cloud-washed ERP are finding that these systems are no better than their old systems.
The Definition of True Cloud ERP
What is true cloud ERP? The U.S. National Institute of Standards and Technology (NIST) defines cloud computing as follows:
- Resource pooling. The system must pool computing resources to serve multiple customers using a multitenant model. Multitenancy may be provided at the infrastructure (IaaS) layer or application (SaaS) layer. Generally, the customer does not have knowledge of the exact physical location of the computing resources.
- On-demand self-service. The system must allow the customer to self-provision computing resources. This allows customers to directly provision many features and functions of their system without having to go through the provider’s support organization.
- Rapid elasticity. The system must be able to rapidly increase or decrease computing resources as required to accommodate sudden changes in the customer’s demand. The system can instantaneously respond to sudden surges in transaction volume without the customer needing to request in advance that additional resources be provisioned.
- Broad network access. The system must be available over a network using standard protocols that promote use by a variety of end-user devices. The system can be accessed anywhere, anytime, by any authorized user with any authorized device.
- Measured service. The system must automatically control, optimize, and report the usage of computing resources to the customer. The customer can always know how many system resources it is consuming and what the associated charges will be. Measured service implies usage-based pricing.
Comparing Hosted ERP and Cloud ERP
With so many ERP vendors calling their products “cloud,” how can you tell the difference between Hosted ERP and Cloud ERP? Start by comparing the key characteristics and benefits of each type of system.
Comparing Key Characteristics of ERP Systems
After completing a detailed study of ERP system characteristics as defined by NIST, Frank Scavo, President of Computer Economics, compared Hosted and Cloud ERP:
|Characteristic||Cloud ERP||Hosted ERP|
|On-demand Self Service||Generally, Yes.||
|Rapid Elasticity||Generally, but some limit.||
|Broad Network Access||Yes.||
|Measured Service||Most do not exhibit.||
As you can see, Cloud ERP has clear advantages over Hosted ERP when comparing key characteristics.
Comparing Key Benefits of ERP Systems
What about the benefits to your business? Computer Economics asked ERP buyers to rank the most important benefits of ERP systems:
- Reduced Infrastructure
- Rapid Implementation
- Availability/Disaster Recovery
- Ease of Upgrades
- Lower Costs
- Subscription Pricing
- Reduced IT Staff
- Improved Security
When it comes real-world benefits, Cloud ERP delivers much more than Hosted ERP:
|Benefit||Cloud ERP||Hosted ERP|
|1. Reduced IT Infrastructure||Yes||Yes|
|2. Rapid Implementation||Yes||For initial installation only|
|6. Ease of Upgrades||Yes||Not to same extent|
|7. Lower Cost||Yes||No|
|8. Subscription Pricing||Yes||Yes|
|9. Reduced IT Staff||Yes||Somewhat|
|lO. Improved Security||Yes||Yes|
Why It’s Important to Know the Difference
The importance of knowing the difference between Cloud ERP and Hosted ERP systems becomes clear when you start evaluating ERP systems. Your decision should take into account real-world considerations, including:
- Functionality – Traditional, on-premise ERP systems do offer a lot of functionality, having had decades to develop them for every industry. While Hosted ERP will have the functionality of its legacy ERP lineage, Cloud ERP now serves many industries as well, and many Cloud ERP vendors have already caught up.
- Ease of Upgrades – This is an area where Cloud ERP has a clear advantage over Hosted ERP. Ask vendors how to upgrade and install maintenance releases. With Cloud ERP, the answer may well be “nothing” because the software vendor handles upgrades automatically. Hosted ERP systems do not automatically receive new features, updates or capabilities. You need to schedule upgrades and test them, just like you would with on-premise ERP systems.
- Customization and Integration – Many Cloud ERP vendors leverage the multitenant capabilities of their cloud platform to allow customers to easily add applications that integrate out of the box and add their own customer-specific business logic. With a Hosted ERP system, complex customizations and integration with legacy systems or third-party services require the vendor’s source code to be modified directly or integration logic to be programmed. Source code modifications make it difficult to upgrade to new versions of the ERP system. Be aware, however, that hosted ERP providers may not provide this kind of support without charging for it.
- Compliance Requirements – Highly regulated industries, such as medical device manufacturing, face compliance requirements that are not present in other environments. If you operate in one of these industries, compare compliance and quality support of Cloud and Hosted ERP systems.
Total Cost of Ownership
For executives, the decision to choose Cloud or Hosted ERP often comes down to the total cost of ownership. Always estimate your total costs for several years, including all costs such as upgrade, labor and support staff, especially for Hosted ERP. Ask vendors if the selection of their system will really result in reduced internal IT staff requirements. Cloud ERP vendors have economies of scale, leading to a structural cost advantage over Hosted ERP providers.
Just because an ERP vendor calls its product “cloud” does not make it so. Be wary of Hosted ERP systems posing as true cloud solutions; often they are just legacy ERP systems hosted on the vendor’s servers and lack the advantages of a true Cloud ERP solution. Do your homework, and look for the signs that the “cloud” ERP solution being sold to you hasn’t just been cloud-washed.