A successful ERP SaaS offering includes: lower cost of operation, lower costs for updates, ability to maintain your own custom code line, robust personalization capabilities, and ability to integrate to your other applications seamlessly.
Yet ERP SaaS is not the right solution for every company. Organizations need to conduct a realistic and objective analysis to accurately evaluate the total cost of ownership of different ERP solutions.
SaaS is a great fit for start-ups and other companies with limited budgets. While entry and maintenance costs are low, SaaS limits customization and may cost more in the long run.
ERP SaaS may not be optimal for firms with long standing on-premise ERP systems with unique and complex business processes. The cost of switching from on-premise to SaaS is high. Companies have made enormous investments in their business processes, personnel training, procedures, and interfaces to other systems that eclipse the amount of money spent on software and hardware.
There are three key issues when it comes to ERP SaaS analysis: cost, customization and security.
Three key questions:
- How unique or complex is your business relative to others?
- Are you more willing to increase capital versus expense budgets to support a new ERP system?
- How much control and security do you need over your ERP systems?
What are the advantages and disadvantages of ERP SaaS?
ERP SaaS Pros
- Cost of ownership. The ERP vendor that you are using is costing more in yearly maintenance than a SaaS offering would cost. Maintenance of hardware, operating systems, and databases is getting more expensive.
- Implementation costs for new releases. It is becoming increasingly more difficult to install your vendor updates.
- Management of custom applications has become difficult to maintain. In a good SaaS implementation, custom applications can live synergistically with the "standard" system.
- Other business applications such as HR and CRM have moved into the SaaS world. Parts of your business database and software applications already live in the cloud.
ERP SaaS Cons
- Unrealized cost savings
- Opex vs. Capex
- Implementation issues
- Limited customization
- Security concerns
- Licensing issues
- Infrastructure issues
Moreover, there is controversy over purported SaaS cost savings considering capex vs. opex.
Capex (asset is a newly purchased capital asset or an investment that improves the useful life of an existing capital asset) vs. opex (operating expense for normal business operations) is how compute resource is paid for by the consumer of those resources. For example, if one uses a ERP SaaS service, payment is made on either a monthly, yearly or a highly granular level for the use of the resources — either time (so much per server-hour) or consumption (so much per gigabyte of storage per month). The consumer does not, however, own the assets that deliver those resources. The third party ERP SaaS firm owns the server, ERP application and storage machinery.
From an accounting perspective, owning an asset is considered a capital expenditure. It requires payment for the entire asset and the cost becomes an entry on the company's balance sheet, depreciated over some period of time.
By contrast, operating expenditure is a cost associated with operating the business over a short period, typically a year. All payments during this year count against the income statement and do not directly affect the balance sheet.
Depending upon the use scenario of the individual application, paying a yearly depreciation fee may be more attractive than paying on a more granular basis. Consider automobiles — it's economically optimal to purchase a car for daily use in your home town, but cheaper to rent a car for out-of-town business trips.
Consider three layers of cloud computing:
- SaaS (Software as a Service)
- PaaS (Platform as a Service)
- IaaS (Infrastructure as a Service)
- Application design and development
- Bug and enhancement tracking
- Database support
The PaaS layer helps define how the software is delivered and how custom code deviations are handled. SaaS offerings also must support a very robust personalization scheme, placing business rules and behavior specific to the client in a user-specified area. The SaaS code must behave based upon a particular personalization. Personalization must also allow the user to specify which forms, which pieces of data, and which applications can be accessed.
Translation. A viable ERP SaaS system must also support translation. Multiple languages must exist simultaneously. Labels must be changeable on forms and reports.
APIs. Interfaces to other systems are critical in today's business environment. It is important to look at the available APIs in the PaaS and IaaS layers to ensure that you can get the most interoperability. There are Open Standards under development, but you can't count on them today. A robust ERP SaaS offering will have standard APIs for common business systems.
Implementation Complexity. The ERP implementation process is not automatically easier just because ERP is in the cloud. ERP SaaS implementations can be as complex as an on-premises implementation. In some areas, such as integration and customization, the job may be even more difficult. Converting from an in-house system, moving the data, and running parallel, integrating different systems are all necessary and important steps that also need to be done in a SaaS implementation. Look to see if the ERP SaaS vendor has standard tools for converting data and associated business procedures.
Upgrades. Many companies considering a ERP SaaS system are interested because of the difficulty in installing and upgrading complex releases in their own data centers. Look for a SaaS vendor that delivers pure technical upgrades with no requirements for the IT staff or end user. New software versions, which may add new functionality or changes to existing functionality will require a careful analysis on any impact to the current business processes. The system complexities (database versions, operating system versions, tools, etc.) are all taken care of by the SaaS vendor.
It is important to consider how ERP systems are architected for SaaS delivery. Make sure the benefits of SaaS can be realized: lower cost of operation, lower costs for updates, ability to maintain your own custom code line, robust personalization capabilities, and ability to integrate to your other applications seamlessly.
Most important is ERP SaaS vendor due diligence when it comes to security, reliability, performance and availability. The vast majority of companies that have opened their doors as cloud providers don’t have the rigorous infrastructure and support structure in place.
Many cloud service providers are also stuck and confused about their software licensing models. This is a serious problem because old licensing models don’t fit well with the cloud. As they transition to newer billing models, there is a great amount of confusion because there are so many different models.
ERP SaaS is a great concept that can work today for some organizations. Yet it is still a baby that needs time to grow. New technologies and paradigms need to be created to be successful for many businesses.