The evolution and gradual prominence of cloud computing has begun to point its spotlight on ERP and business software providers. In an industry with its fair share of horror stories of investments that gave minimal or no returns except lawsuits, it fits that the concept of cloud (or SaaS) ERP, a nicely packaged product that you can simply subscribe and plug into, has so much appeal.

Cloud ERP brings with it some very valuable propositions that can do away with a lot of the commitment anxiety and hesitations present in the software selection process. By framing it as the “modernization” of ERP (and why not?), the idea of a version-less software solution that is automatically updated, repaired, and improved at the same time as technological advances happen is a very tempting offer for any business manager. Add to the equation that these solutions offer clients a personalized upgrade path, modules ordered a la carte, scalability of resources that can be adjusted to your businesses needs and it quickly becomes hard to imagine why on-premise ERP is still a factor in the market. Especially if ERP is supposed to make businesses more efficient, isn’t the cloud the epitome of efficiency? But wait, there are some very substantial and little publicized draw backs to SaaS ERP as opposed to on-premise ERP.

If cloud ERP is the solution of the future, than why have suppliers of business management software taken varied stances in the degree of focus being placed on products available as SaaS? (Read our previous blog on What is Cloud Computing for background on this). It may be that they are simply sitting back and letting the conversation evolve to, according to them, time their entrance and efforts appropriately without undermining development (and investments) already in place in on-premise and client hosted applications. It may be that they are avoiding having to deal with clients and users that have invested heavily on technology installed on site. It may also be that providers themselves have made heavy investments developing, marketing and updating on premise business solutions, that shifting focus to SaaS ERP would be too much of a change to their existing business model. It probably is all of the above plus the fact that cloud ERP does not give clients the same value offering as on-premise ERP.

As it currently stands, small businesses are taking the most advantage of the benefits of cloud computing (read our previous article here). Forgoing the need to invest heavily in infrastructure & maintenance, or on people to operate the infrastructure, may seem like incentive enough for cash-strapped small businesses, but in reality it is their size that renders them flexible enough to move quickly and get on board with this new technology trend. Small businesses don’t have to worry about big investments made in the past with forecasts going well into the future, or convincing various levels of management of the benefits of transitioning to new systems, much less training an employee force large enough to populate a small village. But as medium and large businesses start exploring the cloud for their ERP solutions they will quickly come to understand the shortcomings of SaaS ERP, and to the eventual realization that it will not be what killed on-premise ERP. Here is why:
•Limited customization: SaaS ERP are like leased cars, changes that can be made to fit business processes are very limited since the business does not own the software.
•Challenging integration with legacy systems: since it’s not the company’s software, options are limited on how to integrate existing data into cookie-cutter software solutions.
•Data Security: a business depends on the provider to secure and store its data that is hosted externally. A lot of trust is involved.
•No visibility into maintenance or upgrades: the provider owns the rights to change and fix the software, so the client has very little control.
•Hidden long-term costs: annual SaaS subscriptions will be higher than maintenance for most on-premise solutions.

It is very important to note that the main reason why ERP systems run into problems (check here, here, and here), or why the costs can run wild, had little to do with ERP being installed and operated on premise. The most challenging part of choosing, implementing and operating an ERP enabled business was, and still is, related to developing a blueprint of business processes, gathering support from staff and management, requirements recognition, customization of modules, and end user training. In a nutshell, people and processes. So even though the hype of cloud ERP solves some of the costs and issues with on-premise ERP, the essence of the ERP selection and implementation process remains intact. But what is very alarming is that with SaaS ERP, a business has less tools available to deal with the necessary changes to adapt a software to its people and processes. Cloud ERP may be a great solution, but only for businesses that have the problems that this technological advance aims to solve.

Top image created by graur codrin.