Is Cloud Computing Right for Your ERP Software Choice?

By Sheldon Needle
 
This article is to provide you and your software selection team with background information on Software as a Service (SaaS) and Cloud Computing. These terms are not interchangeable. These terms have been used extensively for some time. This article will provide you with an understanding of what they mean in the manufacturing software marketplace and how they might be applicable to your specific situation.

Software as a Service (SaaS) is a term used to describe ERP software that is not owned directly by your company and not loaded onto your server(s). Instead SaaS ERP software is rented by a company for a defined period of time and accessed via the Internet. This software is controlled by the software developer on fully secured servers (in house or outsourced). The software developer takes responsibility for upgrades of the software as well as the maintenance of the software so that all remote users have continual access to its capability.

With SaaS you do not need extensive hardware at your facility. High speed Internet access sufficient to allow all users of the software to work with it effectively is most important. To begin to use these solutions you do not need to upgrade hardware other than to meet the requirements of the users for doing their jobs effectively. This can represent a significant capital cost savings to your Company.

As of the spring of 2012, there are not a large number of Manufacturing ERP solution providers who are offering SaaS solutions to the small to mid size marketplace. One of the reasons that this alternative is not being more widely offered, for now, is that software developers need to augment their business model in order to support SaaS customers.

Rather than the developers merely having resources that designs and codes software programs and supports users, the developer now needs to manage customer data and possibly operate a data center. The financial model is different in that there is no up-front software license purchase revenue and maintenance fees are collected monthly rather than annually.
The good news for developers is that customers can no longer discontinue maintenance as the version of the software that they are accessing daily is the only version of the software in use. You should reasonably anticipate that in the next two years all the leading ERP vendors will be offering a SaaS solution to existing and new customers.

Using a SaaS solution is also different for the customer. You trust the vendor to safely store your data off site from your business. You are also going to be faced with updates to the software that may not be of interest to you. You will no longer be able to skip annual maintenance charges since this cost is included in your monthly rental fee. You may be perpetually paying for the solution that you are using and those costs, over time, may exceed the cost of buying the software outright along with continued maintenance.

In addition to the software cost analysis required to make a decision on acquiring ERP capability in a SaaS model, you should calculate any potential savings that might be realized by reducing the management effort of your in-house network installation. One major saving could be reduced staff resource needed to address network and hardware issues related to an in-house installed ERP solution. With stable and fast Internet connectivity to your SaaS solution, your Company may not have to respond to as many daily issues of hardware and operating system errors. The savings may be even greater if your company is multi-location.

Your Company may also be able to postpone additional hardware investments, particularly if the choice of new ERP software for in house operation would have required upgrades to not only hardware but operating system software both on the server and on the desktop. (This is often the case with the upper middle market and tier one products.) This could represent a significant savings to your Company. All of these factors must be considered when evaluating a SaaS solution for your business.
Cloud computing is much more generic. Cloud computing is really any type of data processing performed outside the business. Computing in the cloud means accessing a desired application via an Internet connection. The number of opportunities is virtually endless.

Some of the ways that manufacturers use cloud computing include:

  • Manufacturers can buy their software solution but have the developer host it. This means that the company is accessing its own software via the Internet but this is not a SaaS model where the developer is responsible for all aspects of the software.

Because you own a version of the ERP solution you are not necessarily contractually committed to upgrading your version when the common version is used by all SaaS subscribers. Your company might have saved hardware costs at the onset of using the chosen ERP solution and then managed the maintenance cost differently in subsequent years. Regardless you are operating “in the cloud.”

  • Manufacturers can run and host their ERP solution on site and back it up at a certain frequency off site in a secure data center. You are backing up “in the cloud”.
  • Manufacturers can utilize their ERP software in house but go “into the cloud” for applications like CRM. Depending on the CRM solution the user may or may not be able to share information between the in-house ERP solution and the cloud based CRM solution such as sales history, invoice history, recent payments, etc.

Final thoughts about SaaS and Cloud Computing
If your company already has a substantial investment in hardware, networking, and web interface, going to the cloud and incurring cloud related processing and support costs is not usually attractive, particularly if your Company operates from a single location. If your company operates from multiple locations then a SaaS or cloud configuration may be cost justified. Clearly if your company is a start up or your organization is acquiring its first true ERP software then a SaaS solution may be the right way to go. Further, the reduced upgrade costs for hardware and non-ERP licensing may make the SaaS long term cost more tolerable. When making these decisions take into consideration the cost of internal resources necessary to manage a more complex in-house application. 

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