Introduction
Cloud ERP systems ((that’s cloud enterprise resource planning systems) are now a very common business solution. In fact, many of the traditional on premise ERP providers now also offer some kind of cloud-based deployment option, or are completely axing their on premise solutions altogether.
Meanwhile, multiple experts identify the cloud as being the future of business technology:
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Cloud computing spending has been growing at 4.5 times the rate of IT spending since 2009 [Source: Forbes]
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85% of ERP adoption in 2018 was either SaaS or cloud-based versus just 15% for on premise. This is in total contrast to the year before, which saw on premise solutions contributing to 67% of all ERP adoption [Source: Panorama]
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60 – 70% of all software, services and technology spending will be cloud-based by 2020 [Source: Forbes]
Today, it’s very rare to see anyone writing favourably about on premise solutions; it’s all about the benefits of cloud ERP.
When looking for new software, most focus on two areas: features and price.
Both are important, but very few seek to understand their nonfunctional requirements as well. Most software projects fail, not because of a lack of features, but because of poor migration, poor adoption, poor project management, and a lack of ongoing support to a required standard.
Therefore, throughout this article, we’ll do our best to highlight all of the areas we think you need to get a grasp of before purchasing ERP software, so that you can be sure any choice you do make is 100% informed.
And as we’re a retail and wholesale technology provider, we’ve also tailored this article to these two industries so you can be sure that any pros and cons we do list are actually relevant to your business.
What is Cloud ERP?
The most basic difference between cloud ERP and on premise ERP is pretty clear-cut.
On premise solutions are installed locally on your computer and company hardware, with all servers and software updates managed by your own in-house IT team.
While cloud ERP, (sometimes also referred to as Software-as-a-Service, or SaaS ERP for short), is provided as a service to you by a vendor. In this case, the vendor takes care of all associated server, maintenance and running costs at their data center, providing you with cloud access to your data and ERP functionality via an Internet browser or mobile app, and sometimes both.
Cloud ERP vs On Premise ERP
There are some resources online that claim on premise ERP solutions should be considered by large enterprise businesses, simply because they have the budget and resource available for handling maintenance and IT infrastructure changes.
But – we believe – that with the right scalable and reliable technology in place, businesses of all sizes can operate on the cloud, reducing upfront costs, and investing that money in sales, marketing and other business growth activities… no matter the size of the business.
So, let’s get started!
Below is a quick at-a-glance overview of cloud ERP software versus on premise ERP. You’ll find more detailed information further on.
Total Cost of Ownership
Cloud ERP
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Usually based on a subscription pricing model
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Includes all hosting, server, maintenance and software updates
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Implementation and training services are charged as an additional fee
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Typically listed as an operating expense
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Can be as much as 46% less compared with on premise
On Premise ERP
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Often charged as a one-off license fee
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You’re responsible for hosting, maintenance, software updates, and all general running costs
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Implementation and training services are charged as an additional fee
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Typically listed as a capital expense
Maintenance and Software Updates
Cloud ERP
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Regular and routine updates are managed by the vendor
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No in-house Developer or IT Administrator is required
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You’ll have access to commonly used e-commerce solutions like BigCommerce, Magento and Shopify
On Premise ERP
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Often requires a full-time IT Administrator
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You’re responsible for all maintenance and software updates (including large version upgrades)
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You may be required to use e-commerce solutions from the vendor’s own marketplace
Deployment and Implementation
Cloud ERP
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Hosted by the vendor and accessed via mobile apps, Internet browsers or both
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Faster to deploy (i.e. days or weeks)
On Premise ERP
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Installed locally on your own computers and servers
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Slower to deploy (i.e. months or even years)
Business Changes and Adaptability
Cloud ERP
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Quick to make software and process changes
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No Developer or IT Administrator required
- Great scalability as needed
On Premise ERP
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Cumbersome to make software and process changes
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Developer or IT Administrator required
Connectivity and Integration
Cloud ERP
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Easily integrate to third party systems (such as CRM software, order management solutions, and other business applications) via API connections
On Premise ERP
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Some systems can be integrated but will require heavy customization
Security
Cloud ERP
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Reputable cloud vendors have strict security measures in place and adhere to PCI DSS standards
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Software updates benefit from automation and often involve security enhancements and improvements
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You’ll need security processes in place for remote workers and those taking sales on the road with their mobile devices
On Premise ERP
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ERP applications are locally installed, so there’s a small security risk
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You’ll still need to be aware of computer hackers and viruses
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Data security is your responsibility
Performance
Cloud ERP
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Built with maximum network and server performance in mind
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Dynamically adapts to surges in demand or spikes in server load
- Reliant on a strong internet connection
On Premise ERP
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Typically slow and clunky
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Requires manual monitoring in real-time in case of spikes in demand
Post-Sale Support
Cloud ERP
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Subscription fees should cover technical support and bug fixes
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Support via phone, email, and / or live chat
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Remember to find out who conducts the support. Is it in-house by industry experts? Or by third parties and resellers?
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The vendor maintains control over software upgrades
On Premise ERP
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You’ll be responsible for all bug fixes, maintenance and software updates
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Limited help available from vendors, or time-consuming and costly to request their help
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You’ll be in control of when to update your software
1. Total Cost of Ownership
While there are some exceptions to the rule, cloud ERP costs are generally placed under a subscription model, whether monthly, annually or otherwise. The recurring price you pay includes all hosting, maintenance and software updates that the vendor does on your behalf, although you may be asked to pay fees on top of that for training and implementing any services you require. There may also be cost differences if you want a private cloud, or are happy with a multi-tenant cloud (sometimes called a public cloud).
On the other hand, on premise software is often charged as a large one-off license fee. However, as you’re responsible for hosting, maintenance, software updates, and the general running costs of the solution, you’ll also need to factor in these additional fees into the total cost of ownership of an on premise ERP solution. Similarly to cloud ERP, all training and implementation services you receive from the vendor or third party resellers are usually charged as an additional fee.
On premise software may lead to a full digital transformation, as you adjust your customer relationship management (CRM) system, and other business functions, to match. This can get expensive – fast.
On premise systems are typically considered to be a capital expense as it’s just one large investment upfront, while the costs of cloud ERP systems are usually considered to be an operating expense, as it’s an additional overhead your business will continue to pay for the length of time that you have the software for.
The reduced infrastructure, hardware, software and licensing costs associated with cloud-based ERP usually results in a lower total cost of ownership compared with on premise solutions and eliminates the need for large capital outlays. Over time, these IT and technology savings add up. In fact, it’s been proven that cloud ERP can be as much as 46% less than a comparable on premise solution.
2. Maintenance and Software Updates
Typically, cloud ERP users receive regular and routine updates as part of the continuous improvement model associated with most cloud and SaaS systems, which means you can often avoid the dreaded experience of large version upgrades that are synonymous with on premise solutions.
This is perhaps one of the most crucial benefits of cloud ERP, as it means you’ll always gain access to the latest features, with no need to work with developers to help you update your system. This can help streamline your workflows, and worry less about interrupting crucial business processes to update everything.
Whereas on premise environments usually require businesses to employ at least one full-time IT Administrator, meaning human resources will need to get busy! When it comes to support, these platforms are not always retail centric, making technical issues more difficult and time-consuming to resolve.
Depending on the vendor, many may also require you to choose your e-commerce platform from their own proprietary marketplace, as opposed to enabling you to choose from commonly used e-commerce solutions like BigCommerce, Magento and Shopify that may better suit your needs and budget.
3. Deployment and Implementation
As mentioned in the ‘What is Cloud ERP’ section above, cloud-based ERP software is hosted on the vendor’s servers and accessed through mobile apps, Internet browsers, and sometimes both. Whereas, on premise ERP software is installed locally on your own computers and servers.
Although ease of use, cost, accessibility and maintenance are all dependent on how your ERP solution is deployed, there is also another crucial factor here: time to launch.
As configuration, hosting, setup and implementation are all managed by the cloud ERP vendor, these systems usually take mere weeks to setup, rather than months or even years compared to a traditional on premise solution. You don’t want to slow down your entire supply chain management process just to set up a new system.
At Brightpearl, we get businesses launched with our complete retail operations platform in a third of the time compared with legacy ERP systems.
“Brightpearl was very easy to implement, we got up and running in just 24 days. Our implementation consultant was amazing and helped us make a smooth transition. We found the training process both efficient and professional.”
– Kasia Konwinska, Managing Director, Arthauss Furniture
And we’re not the only ones!
Panorama Consulting has previously said: “Project approval to installation of [on premise] software at many companies might take 3 months. You must go through procurement, negotiate with vendors, ship hardware, install hardware, set up OS and other infrastructure software, get all your network and security setup, backups, etc. Then install the software and configure it in dev, test, and prod. With cloud, on the other hand, your technical environment can be up and running in 24 hours.”
Want to ensure an efficient ERP implementation? Read this blog for our top planning tips!
4. Business Changes and Adaptability
Pre-Internet, businesses would usually upgrade and change their software perhaps once every five years. This was fine to do as – in that time – the world hadn’t changed much and the upgrade was typically just to support the latest hardware and operating systems anyway.
However, in today’s “always on” society, retailers and brands alike require a high level of agility in order to keep pace. If it takes over six months to install and customize software, three months to build an integration to the latest sales platform, or four to six months to task a developer with changing your systems to support vital business changes, then you will simply fall behind and someone else will take your place at the top of the retail chain.
Because cloud-based systems are typically much less complex than their on premise counterparts, you’ll gain the flexibility to make changes as your business grows and as the industry itself evolves, without needing to wait for – or pay for – a developer to implement those changes for you.
5. Connectivity and Integration
On premise enterprise resource planning solutions typically have a lot of potential for customization, with a whole host of features your business will benefit from, alongside others you may not use as much, or at all. However, because they’re installed locally, the features and functionality you’ll get access to would only be through that piece of software, with little way of integrating it to other systems that might provide additional functionality you require.
Whereas cloud-based systems – by their very nature – have been designed to work in unison with other systems via API connections. So whether your business requires custom EDI functionality, front-end website personalization, fine-tuned email marketing and more, you should find that most cloud ERP vendors will have options to integrate with various expert solutions.
In other words, your ‘out-of-the-box’ software will enable you to think outside of the box and implement improvements and solutions that your competitors might not be using yet.
6. Security
When it comes to security, particularly data security, there should be little comparison between on premise and cloud ERP solutions.
As on premise systems can only be used by those who have access to your computers and hardware, you should find that they are safe and almost risk-free. There is, of course, still the potential risk of computer hacking and viruses, but one could argue that this is simply a consequence of the modern age that we now live in.
Regarding cloud computing, there is some confusion over the level of security involved.
Reputable cloud vendors will often have very strict standards in place in order to keep your data safe, including backup data recovery procedures and the ability to adhere to PCI DSS standards. Furthermore, they will also often have full-time employees dedicated to mitigating risks and keeping your software up-to-date with the latest security measures.
In fact, almost 94% of businesses believe their security is better after implementing cloud services, which includes their use of ERP. Alongside this technical prowess when it comes to security, cloud vendors will also often publish best practice articles and guides on how you can do your bit to keep your data secure, for instance in the case of employees working remotely or while on the road.
Therefore, when it comes to security, cloud and on premise ERP solutions are pretty much on par with one another, providing you’ve already recently updated your on premise software with the latest security features.
7. Performance
Many on premise ERP solutions are also referred to as legacy systems. They’re often old and clunky in appearance due to having been around for decades, but this can also affect how performant they are as well.
You may need to consider serious enhancements and improvements to your own legacy systems in order to get them up-to-speed with modern technology, and even then, you may find that they’re still not as performant as cloud-based ERP systems. They might need a particular operating system to run, limiting your upgrade options.
Due to its young age, cloud software architecture has been built with maximum network and server performance in mind. As long as you have a good internet connection, you’ll have great functionality. Additionally, if there is a surge in demand for your products, perhaps during the holiday season or whenever your peak season is, or because of flash sales, cloud ERP has been designed to withstand these peaks and dynamically alter server load to cope with the demand… for you and everyone else that shares the same network as your business.
A local IT department is simply not going to be able to offer you the same level of performance monitoring at the speed that cloud solutions can.
8. Post-Sale Support
If you choose an on premise ERP, then you’ll be required to handle bug fixes, maintenance and software updates yourself in-house. On the one hand, this means you have more control over when your software will be updated, however on the other, your own IT team becomes your technical support team and getting additional help from your software vendor can be tricky, time-consuming and costly.
As for cloud ERP, your subscription fee should also include access to a technical support team, whether this be via email, phone, live chat, online documentation or otherwise. They aim to provide you with a good user experience, and will be on hand to support you with quick how-tos and technical difficulties, while also supporting you if you encounter a bug in the system. As the vendor is also in charge of software improvements, your subscription fee will cover the cost of any bug fixes and changes that need to be made to your system.
One of the key things to bear in mind here is who will conduct the support. With the best cloud ERP systems, you’ll have access to an in-house support team that specializes in that piece of software, and in some cases, such as when purchasing industry-specific ERP like retail ERP, they will also have expertise within your particular industry.
Other cloud ERP systems will provide you with support, but this may be conducted through neutral third parties and resellers that aren’t experts in that particular solution or your industry. Although this is sometimes okay, you would see far greater benefits from having technical help tailored to your business type.
Conclusion
Making a decision between cloud ERP versus on premise ERP is all about understanding both the functional and non-functional differences between the two.
There’s a clear difference in how software updates and maintenance are handled. But you shouldn’t underestimate the importance of understanding the differences between the deployment schedules, contract costs, and post-sale support you’ll receive when deciding which ERP vendor will be your long-term business partner.
Furthermore, any decision you make regarding your business operations also affects your customers.
Over the last few years, the connected world has transformed the user experience of shopping to the point where we can buy anything, from anywhere, at any time. We can choose where we want to collect the item, or where to have it delivered, potentially for free, and even gain access to free returns.
The retailers that are succeeding are innovating. They’re keeping pace with what their consumers want, and in a modern world, this just can’t be done effectively with a room full of IT hardware, particularly when the certainty of the future is no longer guaranteed. Value needs to be bled from every single dollar or pound of investment and poured into enhancing the customer experience, not running costly operations.
Cloud ERP provides you with that advantage, so you can meet the high expectations and constantly changing desires of the modern consumer, while also combating low loyalty rates from Internet-savvy buyers.
So when considering cloud ERP versus on premise ERP software, be sure to consider the needs of your customers first ahead of your own business requirements because this will give you the answer you’re looking for.
This debate should never be simply a technical one or one based on cost alone, yet this crucial factor is often missing from many other resources out there that discuss the pros and cons of each technology type.
Hopefully we’ve been able to open your eyes even wider with our article and all the things we think you need to know when making a decision between cloud ERP versus on premise ERP.
Do you have any further questions? Don’t hesitate to get in touch with us!
And if you’re a retailer or wholesaler, you can read up on all of the benefits that a retail-specific ERP system can bring to your business in our follow-up article now.