Businesses often rely on enterprise resource planning (ERP) systems to consolidate and organize information across the organization. Historically, companies installed ERP software on local servers and other infrastructure they owned, now commonly referred to as on-premises.
While these on-premises solutions helped businesses run smarter and led to major benefits, there are some areas where they fall short, most notably when it comes to cost, agility and maintenance. Cloud-based ERP systems resolve many of the issues that come with on-premises solutions and offer a number of advantages over their on-site counterparts.
But what, exactly, is cloud-based ERP, and why would an organization want to move this crucial business system to the cloud?
What Is Cloud ERP?
Generally speaking, ERP systems integrate operations across finance, inventory and order management, supply chain management, human resources and more, leading to business process improvements for 95% of the businesses that use them.
Unlike on-premises systems, however, cloud-based ERP runs on cloud vendor servers accessed over the internet. There are multiple versions of cloud ERP. Some cloud vendors merely manage the same on-premises software in their own data center and deliver it to customers via the internet, known as hosting. Another more popular model is Software-as-a-Service (SaaS). SaaS operates with a multi-tenant architecture, meaning all customers are running on the same version of the software, separated at the database level. This creates economies of scale because the vendor only has to maintain one code base and all customizations and integrations carry forward automatically with each upgrade. Upgrades also require little effort on the part of customers and are more frequent in the SaaS model.
Why Move From On-Prem to the Cloud?
On-premises systems require customers to maintain the servers and other hardware within their own data center. These on-site systems often require a significant investment of hardware, software, space and personnel to implement and keep them running. Upgrades are also problematic because many businesses heavily customize the software to their unique needs.
When the vendor releases enhancements in the form of an upgrade, customizations and integrations need to be tested and users may need to be retrained, which can result in significant disruptions to the business, sometimes as much a new implementation. As a result, many businesses forgo upgrades and find themselves stuck on older versions of the software, sometimes known as "version lock."
Generally, cloud ERP solutions offer a more efficient approach, letting companies take advantage of tremendous computing power. Shifting from on-premises to cloud ERP generally offers lower upfront costs, faster implementation and reduced physical and staff resource usage. Companies can become more agile with cloud-based systems because they are highly adaptable and scalable. It also allows leaders to focus on running their business and finding ways to grow since it offloads all work related to bug fixes, patches and upgrades to the vendor.
12 Reasons to Move to Cloud ERP
There are many reasons why a company might move from on-premises to cloud ERP, but here are some of the biggest ones:
The initial costs of implementing cloud ERP software are significantly lower than on-premises systems, and ongoing costs can be lower. After deployment, the subscription costs can still be lower when you factor in maintenance and support, which is typically 20% of the initial license costs and the costs to maintain and upgrade hardware and the IT staff required to maintain it all. Eliminating these costs can be vital to smaller organizations that can't justify the high upfront cost of on-premises ERP, even if the technology would benefit the company.
Upgrades and maintenance
Since the vendor hosts and maintains all the system infrastructure, businesses don't have to worry about upgrades or upkeep of their ERP software. The provider maintains the database, servers and other infrastructure and automatically pushes out new updates or patches to all customers, ensuring the software is secure and in compliance with all applicable rules and regulations. A single vendor handles any issues that might arise, increasing accountability. And as a subscription-based service, cloud ERP vendors often provide 24/7 support to handle problems immediately. Because their business is dependent on the availability of their service, cloud ERP providers can typically provide greater uptime and security than a business can provide with in-house IT staff.
Access to emerging technology
Today's technology evolves at a blinding pace. It’s not enough for companies to simply keep up with their competitors, they must surpass them. Advanced analytics, artificial intelligence, machine learning, and other technical innovations offer the ability to harness immense amounts of data to make more accurate forecasts, discover hidden insights, enhance operations, and develop groundbreaking new offerings.
However, implementing these emerging technologies has also required significant investments in data infrastructure and processing as well as personnel with specific tech expertise, all of which have historically put this revolutionary technology out of reach for most companies.
Cloud ERP provides a faster, more economical way to take advantage of these preeminent technologies eliminates many of the cost- and resource-related obstacles with AI, ML, sophisticated analytics and other business intelligence tools already integrated into the service. This means that companies can take advantage of the myriad of benefits this new tech provides without the physical infrastructure, costs or tech talent that’s required for on premises systems.
For example, due to the cost savings, auto-upgrades, scalability and adaptability that General Electric realized after moving from an on-premises to cloud ERP system, its 3D printing division was able to take advantage of innovations in that space to develop and launch ideas faster and become a growth engine within the 3D manufacturing world.
Some businesses are still wary of placing their financial data in the cloud, most often citing security concerns. While some often see this as a disadvantage of cloud-based ERP systems, the security of cloud-based software is often superior to that of on-premises ERP systems. Today's cloud technology is highly secure with cutting-edge encryption, multi-factor authentication and other critical security measures built into every piece of the system. Also, cloud ERP servers are located in secure, centralized facilities, decreasing the risk of physical theft. Again, thanks to economies of scale, cloud ERP providers can generally devote more resources to application, database and physical security than an individual business can.
Cloud solutions can be configured and deployed significantly faster than on-premises systems, with most taking fewer than 100 days. This is because the vendor is responsible for activating the hardware and software. That reduces downtime while the switch is made and allows businesses to move quickly to meet growing demand or adapt to a rapidly changing market.
Cloud ERP delivers real-time data better than older systems because of ERP software. Since the applications and information are hosted in a central cloud location, the information provided is always up to date. Removing the bottlenecks of various software integration points reduces the chances of inaccurate data for reporting and forecasts.
Configuring on-premises systems to meet specific business objectives is more costly and requires a higher investment of time and IT personnel resources than cloud-based ERP since everything has to be done in-house by the company itself. This includes combining the right combination of ERP functionalities and third-party applications and making any necessary software and hardware upgrades. All of this is compounded in companies lacking an IT staff with expertise in developing enterprise resource solutions. Combined, these can make full customization of on-premises systems untenable, hindering business objectives.
By comparison, tailoring cloud ERP solutions is a simplified, less expensive process as customizations are handled on the vendor's side. There are no additional hardware or software expenditures and no ERP expertise needed so companies can design the system that works for their unique circumstances with minimal investment.
For businesses in the finance, healthcare, defense and other highly-regulated industries, manually updating on-premises ERP systems to adhere to regulations is a frequent, onerous occurrence. Companies are expected to maintain near-omniscient knowledge of ever-changing federal, state and international rules updates to remain compliant and avoid costly fees and other legal consequences. They must then integrate changes into their current system, making upgrades to software and hardware as necessary.
On the other hand, cloud ERP vendors are proactive about complying with state, federal and international provisions such as HIPPA, GDPR and GAAP. These and other regulations are already incorporated into cloud ERP software and are updated automatically to ensure that businesses always meet or exceed compliance criteria. Many cloud ERP systems also have localization functionality that allows companies to switch between various countries' regulations to facilitate compliance across global operations.
Cloud ERP systems are accessible from any device — laptops, smartphones, tablets — with an internet connection and a browser, making it possible to input, compile and collaborate on data from anywhere. That allows different departments or business units to work across company campuses or countries accessing a single instance of the software without needing a dedicated VPN as with on-premises systems. Importantly, cloud ERP costs less to access — no need to buy and support a VPN or emulation software.
A cloud ERP also allows key decision-makers to stay connected when traveling or outside of regular work hours and gives businesses a larger talent pool to tap into since they can more easily hire remote workers.
The rapid and near-limitless scalability provided by cloud ERP systems is unfeasible with on-premises ERP. Scaling on-site systems require upgrading or reworking multiple pieces of hardware to meet increasing needs, a costly and complicated task. The flexible design of cloud solutions makes it possible to increase or decrease resource usage as needed, allowing the ERP to grow with the business. It can easily expand to accommodate a rush of new hires, the acquisition of another business, or the addition of new product lines or business units.
Cloud ERP is also less expensive to implement across multiple locations because configuration can be done remotely. This means that hardware investments are minimal and there’s no need to send an implementation team to every location.
In the event of hardware failure, fire, flood, or theft, being able to recover lost data and continue operations with as little downtime as possible is crucial. Although disaster prevention and recovery are linchpins of a company technology infrastructure and systems, most companies are lax in this area and take on quite a bit of risk if their on premises ERP is affected by catastrophic data loss.
Cloud ERP services are designed with disaster recovery in mind and offer built-in disaster prevention and recovery solutions such as having copies of data stored in multiple geographic locations to avoid single points-of-failure and automatically shifting to backup data when a failure is detected.
Peace of mind
On premises ERP systems usually face an end-of-life support date where vendors of the various components eventually discontinue software updates and patches, hardware upgrades and repairs, and even stop taking tech-support calls for those products.
Make the Case to Move to the Cloud
Despite these benefits, many decision-makers may still question the need to move to a cloud ERP platform.
Making the business case for cloud ERP starts with recognizing what this type of system can do for the company, such as cutting costs, increasing revenue, optimizing resources and processes, or solving specific issues.
After identifying these items, decision-makers need to establish the value that addresses the organization's issues. This value can be in the form of tangible quantitative benefits (e.g., revenue increases or costs savings) or indirect qualitative benefits (e.g., increased productivity). The proposition must consider several crucial factors, including:
- How do the subscription fees of a cloud ERP solution compare to the existing on-premises system's upfront licensing costs?
- How much will a cloud-based ERP system expected to save in terms of maintenance and support, hardware, data center, staff and other IT costs?
- How will each business unit benefit?
- How will it make operations such as inventory management, revenue recognition, analytics and organization-wide forecasting smoother and more straightforward?
Another critical aspect to consider is that many on-premises ERP providers are making the shift to cloud ERP themselves. In many cases, vendors are deprioritizing the development and support of customers' legacy on-premises systems, making it difficult to maintain and upgrade the software and infrastructure. Even when businesses choose to move to a cloud ERP system, the upgrade is basically a new implementation all over, so it makes sense to shop around to ensure costs, functionalities, and other needs are fully met rather than sticking with the same provider because they're familiar.
In addition to the common benefits of cloud ERP mentioned above, the expected return on investment (ROI) is often critical to decision-makers. The ERP ROI formula is:
ROI = ERP financial benefits/Total cost of ownership
It's calculated by dividing the expected amount that the ERP system has contributed to the bottom line by the total cost of ownership of the system and then multiplying the resulting figure by 100 to get a percentage. For these purposes, the financial benefits include direct benefits such as increased sales and indirect benefits such as cost savings. The TOC includes implementation, subscription fees, personnel, training and maintenance. So, for example, a cloud ERP system that has a total expected benefit of $100,000 and a total cost of implementation of $75,000 sees an ROI of 133%.
The return on investment is of particular interest to CFOs and other financial decision-makers who want to minimize capital expenditures while reducing operating costs. The most prominent ERP solution champions are often the finance and accounting staff — a survey of 255 companies found that 89% of respondents identified accounting as the most critical ERP function.
A significant driver of this sentiment from CFOs is the desire to control the unplanned costs of running an on premises ERP system, such as servers going down, network switches breaking, hardware failure, data loss, etc. In short, each component of an on premises system represents a possible unexpected expenditure. Cloud ERP technology eliminates most of those moving parts and mitigates many unplanned spends by significantly reducing capital expenditures on hardware and software, implementation, and IT staff. The subscription model also provides more predictable costs.
Essentially, making the business case to move to cloud ERP means developing a narrative for change and supporting that narrative with concrete figures.
Success Stories in the Cloud
For many businesses shifting from on-premises to cloud ERP has been a rewarding move. These businesses typically cite the speed at which cloud ERP can be implemented, the substantial cost savings, and how cloud ERP supports growth.
Companies that choose a cloud ERP solution can benefit from its faster and simpler implementation. It allows companies to hit the ground running with scalable functionality that enables quick adjustments and can support new initiatives.
For example, after separating from its former parent company Intuit, Quicken needed to make a quick switch from Intuit's ERP system to NetSuite as a condition of its reorganization. NetSuite's cloud-based ERP system made the migration easy and minimized issues during a tumultuous time.
Likewise, cloud-based ERP enabled office supply distributor Sourcingpartner to replace its inventory and logistics technology to meet the rapidly increasing demand of an expanded customer base and new product lines. Sourcingpartner implemented NetSuite in just 95 days — just in time for the busiest season of the year.
Cloud ERP can offer significant cost savings, both in its functionality and TCO. After splitting with its parent company, the commercial construction manufacturer RedBuilt needed to replace its on-premises SAP system within six months — a daunting task. The company switched to NetSuite in less than three months and spent about half as much in the first year with the new system as it would've to keep the old system running.
In the same vein, the world's largest carpet manufacturer, Shaw Industries, adopted NetSuite to run subsidiaries in China — where it launched a 210,000-square-foot plant with 250 workers — and other countries as part of a two-tier ERP approach. Shaw finished this ambitious undertaking ahead of schedule and at a fraction of the cost of on-premises systems.
Move to the Cloud With NetSuite
Selecting the right cloud ERP provider and implementation partner can ensure that the shift from on-premises to cloud ERP is successful. With more than 27,000 customers, NetSuite has helped many businesses move to the cloud and realize the advantages of this deployment model. NetSuite's unified ERP platform allows businesses to get a complete view of their organization in one place and drive operational improvements across finance, supply chain management, human resources and customer management.
The result is more efficient businesses that can often reduce costs and increase profitability, as the previous section illustrates.
Cloud ERP unifies siloed business departments and allows organizations to solve challenges, improve processes and meet objectives. Ultimately, cloud ERP has four main benefits:
- It provides businesses with the agility to meet rapidly evolving market demands.
- It facilitates greater productivity, revenue and growth at a minimal cost.
- It allows businesses to expand and reduce technology infrastructure and applications as needed.
- It encourages development by increasing the feasibility and capacity for new products and services.
All of these benefits make it a worthy investment for many different companies across a variety of industries. Over time, more of them will realize the advantages of managing their business in the cloud and make the move.