Cloud ERP: The Time Has Come

Hardly any software vendors today want to be stuck with an on-premises-only product portfolio. In the ERP subsector, probably the most important technology area for CFOs, it took market leaders Oracle and SAP longer than most to diversify into the cloud. But now they’re leaders there as well.

But while the global cloud ERP market is expected to grow, it likely won’t be at a lightning-fast pace. Statista forecasts that the market will be $28.8 billion in 2022, representing an 8% compound annual growth rate since 2016.

So far, CFOs as a group — those at large companies, at least — have been fairly reluctant to trust their core financial and operational data to public clouds. Still, companies’ overall growing fondness for cloud computing could influence faster change in the ERP arena.

Research and advisory firm IDC estimates that 70% of companies’ core applications currently run on-premises or in co-location facilities. The rest are in private clouds (23%) or public clouds (8%).

In a recent survey by 451 Research, however, 60% of participating technology professionals said they expected their companies’ approach to IT in 2020 would be focused on off-premises cloud solutions.

More Robust

In the ERP market, count Jeff Buchheister among the converted. His company, Cetera Financial Group, replaced its old on-premises system with an Oracle cloud solution in August after an eight-month implementation period.

It’s early days, but Buchheister, Cetera’s finance chief, is impressed. Because Oracle, like other cloud providers, handles all of the system’s administration and maintenance, the IT department has eliminated two full-time positions. What’s more, his finance team is reporting efficiencies that he predicts will save him at least 10% on accounting staff costs.

A key reason Buchheister chose a cloud solution was to avoid having to keep asking the board of directors for permission to implement upgrades. Automatic upgrades are included in cloud subscription costs. “The cloud solution’s ability to constantly keep us upgraded with new functionality and to keep us from falling versions behind was really attractive,” says Buchheister.

Such converts are driven by not only automatic updates and drastically reduced maintenance expenses, but also lower up-front capital costs and faster start-up times for rented software delivered through the Internet.

Modern cloud ERP software is more robust than earlier incarnations, as well. As the market has matured, vendors have addressed earlier security fears and added capabilities that have users whizzing in hours through tasks that formerly took days.

Still, among organizations that aren’t ready to move to the cloud, some may never be. Many are stepping gingerly, adopting a hybrid approach in which they move some ERP functions to the cloud but keep those that store proprietary data on premises. Still, others think the most sensitive data is actually safer in the cloud, but they keep some processes on site. It’s not just fear that is staying the hands of those reluctant to move.

“It’s hard for a company with years of investment sunk into an on-premises ERP system to make that move to a more modern cloud-based solution,” says Melanie Posey, research vice president, and general manager at 451 Research. “Then there’s the extent to which the business depends on that system for day-to-day operations. So, there are a lot of reasons to keep the ERP as-is.”

When a company moves close to fully amortizing the cost of its old on-premises systems, though, it becomes more likely to migrate to cloud solutions of one type or another. Flavors include a software-as-a-service (SaaS) solution running in a multi-tenant public cloud, a single-tenant private cloud hosted by a cloud vendor, and a private cloud maintained in-house.

Cost Questions

At such a time, a company wants to understand the financial ramifications of switching to the cloud.

The SaaS payment model is a lure for some. Instead of paying an upfront hardware cost and annual licensing fees, cloud users pay-as-you-go subscription fees. That said, from a total-cost-of-ownership standpoint, cloud solutions may actually prove more expensive.

After five or six years, subscription fees will likely outweigh the ongoing maintenance fees a company would pay for an on-site solution. “If you do a careful analysis, an on-premises solution, while not as easy to implement and maintain, is going to be a lower-cost solution over the long term,” says Jeff Carr, CEO of Ultra Consulting.

That assessment, however, assumes that the company will continue to use the on-premises ERP for a lengthy period of time, Carr acknowledges. And, as in the case of Cetera, the opportunity to reduce staffing costs could be an important factor in going with a cloud ERP solution.

Another factor lifting cloud ERP sales is the fact that other enterprise applications already run in the cloud, as do myriad consumer products that people feel comfortable using online. Once eyed skeptically as a potential security risk for the kind of sensitive data that’s in an ERP system, cloud software is now perceived as much more mainstream.

Perceptions have slowly changed as vendors have touted encryption capabilities and the enhanced security protocols available on cloud platforms like Amazon Web Services. “In corporations that rely on on-premises solutions, adherence to updates and compliance often lags those that are well maintained by a software vendor,” says Juergen Lindner, vice president of SaaS at Oracle.

Cetera’s Buchheister buys the argument. “We’re better off having Oracle, which has a very large team that focuses on this with 100% of their time, handle our ERP security than employing our IT department to do it,” he says. “As we’re a financial services company, there are hackers trying to get into our systems, and there is a benefit to us in having our ERP system sitting outside of our primary network.”

Transition Tips

Migrating your ERP to the cloud is not as easy as flipping a switch, according to technology consulting firm Emerald TC. Some preparatory work is required. Consider the firm’s following tips:

1. Establish goals for your ERP project.

2. Build a cross-functional team composed of everyone who will use the system to guide the process of choosing the right cloud ERP for the company’s needs, identifying reports, and assessing data elements for the integration.

3. Take an inventory of current data elements throughout all departments. Back up all data.

4. Review the business processes you are seeking to improve. Cloud ERP makes processes go faster, but making a bad process faster is just increasing the speed of frustration.

5. Add extra time for project completion. Questions, broadening the scope of work, and minor glitches all take time to address.

6. Share all documentation, data dictionaries, and other information with your integration partner. The more information that is shared the better.

7. Look for a cloud ERP vendor with a proven history of successful transitions for companies in similar industries. Ask for and check on references.

8. Allocate extra time for training groups and individuals who will use the system.