There are many questions that have to be asked when deciding on an ERP system for your company. One of the bigger ones is whether to go for an on-premise or a cloud-based solution. On-premise, as the name suggests is installed on your company servers and computers whereas a cloud-based solution is ERP or Software as a service (SaaS) that is installed and managed off-site and accessed via an internet connection.
There is no right or wrong answer. A lot will depend on your company structure, existing IT infrastructure, internal IT staff, company growth expectations, and a number of other considerations.
Here are some of the important factors to consider when weighing the two options:
Price, Cost and Total Cost of Ownership
There are a number of ways to look at the cost of an ERP system and it’s important that you look at it from all angles.
An on-premise system will generally have one perpetual license fee depending on the number of users and features required.
Training, support and updates are extras that are charged for separately. Investment in additional hardware is generally required to run the system. Other expenses include the internal costs of your IT staff to maintain the system. There is even a possibility you would have to employ additional IT staff to deal with the extra workload.
On-premise ERP is normally a significant upfront investment of capital expenditure (Capex).
Cloud-based systems require no additional hardware and you pay a monthly fee for the service which includes maintenance and backup. It is seen as an operating cost (Opex).
This often makes cloud-based options more attractive especially to a growing business that might not have/want the capital expenditure or the desire to employ additional IT staff.
It’s important to calculate the full cost of the system over the expected lifespan of the ERP solution. Internal costs for IT staff must also be included. The total cost of ownership (TCO) of a cloud-based system could, but not always, work out a lot more expensive in the long run.
One also has to factor in the costs of growth. If the company is expanding rapidly, a cloud-based solution is easier and less expensive to expand across multiple locations. They’re also more flexible and often offer a pay-as-you-use option which is easier to budget for.
Essentially, expenses will only increase if turnover and revenue increase.
Deployment and Implementation Time
Deployment time can be a major concern for all departments, particularly IT. You want minimal disruption to the business and daily processes have to continue during deployment. Either way, it can take some time. Careful planning and execution are required.
Cloud-based ERP installations tend to be faster, especially when deployed across multiple locations.
The in-house deployment will be slower. The first delay is the procurement and installation of new hardware along with network configuration. It does, however, give you greater control and generally, more customization.
Upgrades and Expansion
Upgrades are much faster and easier with a cloud solution. Again, this is especially true across multiple locations. They can be seamlessly upgraded and updated as new software is available.
This task is a lot more time-consuming with on-premise installations. The cloud-based solution also allows you to upgrade with little to no downtime, something that is more challenging with on-premise installations.
Expanding the system or scaling it is infinitely easier with cloud-based ERP. The addition of a new branch, for example, can be done remotely without the need for additional hardware or on-site installation and setup. By the same token, a cloud-based system can also be scaled down quite easily when necessary.
System Performance and Accessibility
Either system can be vulnerable to performance issues. If you have the necessary skills in-house, you have more control over the system and can provide a quick solution. Cloud-based systems do, however, offer increased redundancy and most provide good support.
Due to the very nature of cloud-based ERP systems, they are generally easier to access remotely, for example from a mobile device. The workforce is becoming increasingly mobile and remote access is now an essential element of a good ERP system.
That’s not to say you can’t access an in-house system remotely, it just needs to be configured correctly and the right protocols need to be put in place.
Security is always an important consideration. With a SaaS or cloud solution, the vendor is responsible for security. Some vendors provide better security features than others.
Generally, on-premise solutions with locally installed hardware deliver better security. There is more control over access to the system.
Having said that, many cloud-based solutions provide exceptional security, often better than the client has on their on-premise system.
If considering a cloud-based ERP system, pay very careful attention to the level of security provided.
While on-premise ERP is generally more customizable, this doesn’t mean that it’s fast or inexpensive. It often requires quite a bit of time and IT resources, and sometimes, additional hardware. It most likely will involve some system downtime.
Cloud-based systems are becoming easier to customize and they are faster and less expensive to customize. Despite this, if you believe you will need significant customization, on-premise might be the better option.
Features and Applications
Following on from the above, on-premise solutions are often more practical and tailored to your business. Cloud-based systems are flexible to a degree but tend to be more limited to the environment for which they were designed. On-premises systems may give you more options in terms of features and applications.
Cloud-based systems generally offer remote support and the vendor will handle the majority of issues from their side. On-premises systems will require more involvement from the IT department.
- Operating cost
- Lower upfront costs
- Lower maintenance costs
- Faster deployment
- Generally good security
- Less pressure on IT department
- Easily to scale
- Mobile user-friendly
- Customization for specific requirements more of a challenge
- Less security control
- No offline access if the internet connection goes down (some cloud-based systems have a way around this)
- Little control over software updates (mostly automatic)
- TCO should be lower over the (very) long-term.
- Greater potential for customization according to business needs
- Greater security control
- Generally able to run without an internet connection when necessary.
- Increased control over updates
- Initial cost is higher
- Good internal IT staff required to maintain and backup
- Slower and more difficult to scale
- Updates require internal IT staff time and may lead to system downtime
While on-premise ERP has been around for decades, the trend is leaning towards cloud-based solutions. That’s not to say they’re always the best option. There are many factors to consider and further investigation will be required. On-premises ERP is far from dead and there are many situations where it would prove to be the better option.
Much depends on the structure of your company, the specific business requirements and the nature and design of the ERP system itself. There is no one-size-fits-all solution to your ERP requirements. It is important to investigate both options in order to establish which one would be more suitable for your business and your needs.