Five ways to tell if your company is ready for SaaS ERP

An IT director explains how her Florida utility evaluated whether to replace its on-premises ERP with Software as a Service.

Clouds seem to be top of mind for every CIO these days, even for key business applications like ERP. But interest doesn't always translate into action. After careful evaluation, some IT managers are deciding the time isn't right to shutter their on-premises ERP.

One of them is Hedi Ago, IT director for the Orlando Utilities Commission (OUC) in Florida. Whenever the IT staff at OUC considers a major software upgrade, standard practice is to investigate cloud alternatives. So with the current system facing an end to premium support this year, Ago's department looked into whether the time had come to move the current on-premises ERP suite to cloud-based Software as a Service (SaaS). The answer was a resounding no, for now.

"We are always looking for opportunities to save costs and take advantage of economies of scale, so we subscribe to a cloud model whenever it's right for us," Ago said. But for now, OUC's evaluation criteria indicated that transitioning to SaaS ERP would be too disruptive, costly and risky for the organization, she added. So OUC is upgrading to the latest version of the existing platform instead.

Decisions like these are happening in IT departments across the U.S., consultants said. They and IT practitioners like Ago offered insights to help executives make the right decisions in their organization's transition to the cloud.

Caution reigns

Ago isn't alone in being both cautious and interested in hosted, multi-tenant ERP services. Illustrating just how cautious IT managers are, research company IDC forecasted that the use of public-cloud ERP applications for financials and human capital management will rise only 1.3% and 2.5%, respectively, over the next two years. Still, those numbers look impressive compared to their on-premises alternatives: The two ERP categories will each decline 6.8% in the same period, IDC said.

Nevertheless, interest in SaaS ERP options is high, thanks to potential business benefits that range from helping enterprise managers quickly switch on new ERP capabilities to circumventing prolonged capital-expense approval processes. In some cases it reduces expenses compared to on-premises alternatives, said Eric Kimberling, managing partner and founder of Panorama Consulting Solutions, based in Denver.

Another plus is the opportunity to run a leaner IT staff. "The SaaS vendor shoulders most of the burden of making sure that the software is available," said Jonathan Gross, vice president at Pemeco Consulting Inc., which is based in Ontario, Canada. "A corollary benefit is that companies don't have to worry about hardware upgrade cycles for their ERP systems -- the vendor assumes this responsibility. The same applies to software. Product enhancements in the form of bug fixes, security patches and new features can be deployed nearly invisibly to the end user."

SaaS ERP tradeoffs

But consultants said SaaS-based ERP also comes with tradeoffs. Initial cost savings may eventually evaporate. "When you look out longer term -- five to seven years -- the cost-benefit tends to be somewhat of a wash, and SaaS may actually end up being more expensive than an on-premises application," Kimberling said. "It's like leasing a car; those monthly payments never go away for the life of the lease."

Furthermore, ERP buyers have limited options for tailoring SaaS software to their unique business needs, which is a particular challenge if an organization runs complex business processes. "With on premises you can pretty much do whatever you want. That can be a double-edged sword, but it is something to consider from the perspective of what the business needs," Kimberling said.

It may also be a leap of faith to let an outside vendor manage critical enterprise data and applications. "Prudent governance and risk management calls for enhanced capabilities to manage vendor compliance," Gross said.

Given these pros and cons, how can IT managers know if their organizations are right for cloud ERP? They could try the five key questions the OUC asks whenever it evaluates a potential cloud deployment and used again in its recent reassessment of its ERP needs.

1. Will a move to the cloud require complex integrations with in-house applications?

"Our ERP solution integrates with about 50 other programs, such as our barcoding and fuel-management system," Ago said. These applications must exchange data with each other, so in addition to creating dozens of interfaces, OUC would need enough network bandwidth to keep latency low between the data center to the cloud.

Advantage: On premises

2. Is the application business critical?

"ERP is used widely across our organization -- for accounting, purchasing, HR, capital asset management -- so it's a very critical business application," Ago said. "That means to move into the cloud, we would have to buy additional disaster recovery and high-availability services to make sure it doesn't go down."

She added that over the last seven years, the existing ERP system shut down only for scheduled maintenance. "It runs like a well-oiled machine," Ago said.

Advantage: On premises

3. Does the application contain proprietary information whose public exposure would damage an individual or the organization?

The OUC ERP platform stores Social Security information for employees and spouses, as well as the tax IDs for vendors the utility uses. "There's definitely a lot of sensitive information," said Ago.

Advantage: On premises

4. How costly will it be to move to the cloud?

Expenses for enhanced bandwidth and personnel resources for custom integrations represented added SaaS costs compared to the current platform, Ago said. "Initially, the cloud would be costly versus cost effective," she added.

Advantage: On premises

More on SaaS ERP

See a definition of SaaS ERP

Read what ERP vendors say about cloud tradeoffs

Decide whether to try a SaaS-only vendor

5. Can the application be moved to the cloud in a manageable amount of time that doesn't negatively impact business operations?

The OUC IT department estimated that testing, integration and other activities would require months of work. In contrast, the new capabilities in the on-premises upgrade would be available to end users much sooner.

Advantage: On premises

Exploring hybrid alternatives

Cloud ERP didn't make the cut for now, but Ago is keeping it on her radar. "In the future, cloud ERP vendors may have APIs and adapters for integrating applications," she said. "Or integration and network latency may become moot points if single vendors host all our applications so they can send information back and forth within the cloud."

In the meantime, OUC and others will opt for hybrid implementations -- a core on-premises ERP deployment enhanced with a cloud module, as exemplified by the utility's talent-tracking module. "Solutions that target one functional area with robust functionality are typically better than what full-blown ERP SaaS models offer for a larger organization," Kimberling said.

This was first published in April 2014

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