Most larger corporations still house their enterprise resource planning (ERP) system in their own data center. Even this is becoming less consequential with regard to the “cloud vs in-house” decision. It may be helpful to pause to define “the cloud.” PC Magazine refers to the cloud as a wide area communications network. The Wikipedia article emphasizes shared on-demand computing resources. Finally, IBM, the industry stalwart, adds “pay-for-use” to its definition.
Given the way some large corporations charge for internal IT services, it could be argued that even in-house hosted systems are in the cloud. The term may be losing its meaning. Even legacy applications that have been around since before the commercialization of the Internet have shed their old skin in favor of browser based user interfaces that can be accessed from devices ranging from mobile phones to laptops running Apple's OSX, Microsoft's Windows or open source Linux variations.
What, then, is the difference between an ERP system that is cloud based and one that is not? The answer to this question is far less about the commercial relationship with your software vendor and more about the architecture of the software. Maybe the most important differentiator is something called multi-tenancy. This refers to a software architecture in which a single instance of the software provides its capabilities to many commercially distinct customers.
Many older so-called cloud based solutions simply spin up another instance of their software for each customer. This preserves the old model of being able to customize the instance of the software for a particular customer. Along with this comes the challenge of continually upgrading each instance. At the University of Michigan, they have one of the most highly customized versions of Oracle's PeopleSoft product in the world. Upgrades are major undertakings and they receive little help from Oracle.
Does SaaS Change Your Process?
Here at BPTrends, we like to keep the focus on process. Does utilizing multi-tenant enterprise software make any difference to how you execute your processes? There is only one intrinsic difference and it has to do with making the system conform to your processes. Having been involved in designing a SaaS ERP system, I speak from firsthand knowledge that flexibility is paramount for software designers in this world.
Try as they may, software designers will never think of every variation of a process. This leaves customers with two options:
- Change their process to conform to the system
- Find a non-system workaround to continue supporting their existing process
In my experience, most of the time it is better to alter the process to conform. There are notable exceptions to this. Some processes are dictated by the way an organization engages its customers. Other processes are unique because they provide the organization with a strategic advantage that it will not easily give up. These exceptions warrant a workaround, but there can be other options.
PLEX is a SaaS ERP vendor that offers hundreds of modules. They have designed the system to be modular so that they can plug in functional replacement elements of the system that support different process variations. This allows them to effectively mimic customizations without actually creating the proverbial red-headed stepchild (apologies to any adopted red-headed readers).
Other solutions have opted to have configurable features that when turned off are invisible to the user. This has a similar effect to offering many modules. What is important about these approaches is that they hide the complexity inherent in configurability from the end-user. While this may put an extra burden on implementers and system administrators, it makes the system much easier to learn for new users, which is far more important to gaining system utilization.
This point cannot be understated. While I realize I am like the plumber complaining that everyone he visits has plumbing problems, I have noticed that the majority of my clients are underutilizing their existing system. In several cases, clients that contacted us to discuss assistance with finding a new system discovered during the course of our engagement that their current system was fully capable of supporting their processes if only they would finish the implementation that fizzled out too soon. Had user acceptance been better early on, this would not have likely been the case.
However, new systems are often difficult to learn and when this is coupled with the confusion of new processes, implementation fatigue takes hold before the system delivers on its promise. The result is that users fall back on their old favorite tools to fill in the gaps (most notably Excel – you can read more here). These tools often provide sufficient productivity for the individuals using them, but they create what are commonly referred to as “islands of information.” One of the core benefits of enterprise software is the ability to propagate data that is input in one process to all other processes that may need it.
Propagating data doesn't just reduce data entry, more importantly it increases communication. When it comes to this, there is a double-whammy effect because modern SaaS architected solutions have much more robust communication functionality. Alerts, dashboards and other notifications are fully integrated into the user interface. When the data needed to trigger events is not available, these features are rendered useless and a major benefit of the system is lost.
One final note about SaaS versus traditional solutions with regard to process. It is very important to differentiate between simplicity and immaturity. ERP software has been around for a long time. The older systems have massive amounts of functionality to support most process variations and exceptions. However, SaaS is a relatively new space and many vendors have either recently entered the market or have started development from scratch as their old product was not multi-tenant. These newer products emphasize their simplicity in their marketing materials because they are not particularly feature rich. Simplicity without the robust configurability I have discussed will typically end in disaster unless your organization is willing to wait years for the product to mature.
What about Infrastructure Benefits?
One of the main claims of SaaS solution providers is that on-demand software is ultimately less expensive. This can be true. However, if you are migrating from an in-house system to a SaaS solution, you will need to be prepared to make organizational changes in order to save the aforementioned expenses.
Beginning with the obvious, let's consider the server hardware on which the software is hosted. If an organization has other in-house applications, they are likely to continue to maintain some or even all of the hardware required to house the ERP software. Even if one or two servers are eliminated, other servers will still need to be administered and maintained (patches, upgrades, etc.). The incremental savings for reducing server count is small. This is even more likely if, as many data-centers are doing, virtual servers are being employed. This means that multiple “servers” are actually running on the same hardware, so eliminating a server saves even less.
The other cost-saving items include backups and downtime. These are legitimate savings as both of these things cost money. Of course, the fees associated with on-demand solutions have these costs factored in as well. SaaS based solutions that truly have the scale to distribute these costs to many customers can offer real savings. Smaller firms with only one or two data-centers probably won't be able to offer much savings over what an individual organization would pay for the redundancy and backup services necessary to ensure continuity of service.
The largest cost of hosting your own solution centers around upgrades. One of the greatest benefits of multi-tenant software is that there is only one system to upgrade. Further, many vendors are moving towards something called “continuous delivery.” This means that as soon as new functionality has been tested, it is immediately deployed to production. If you use Google's GMail, you may have seen a message indicating that there is new functionality available. This is typical of a continuous delivery environment.
If you have ever hosted your own ERP software, you know that upgrades are time-consuming even when things go well. When they go badly, which is even more likely if you've had customizations, they can be extremely disruptive, not to mention costly. All things being equal, this is reason enough to utilize a SaaS ERP solution.
What Should You Use?
However, all things are rarely equal. Limiting your choices to SaaS type systems is generally a bad idea. While it's nice to have software that is built on the most modern development technologies and using the most efficient deployment methodologies, ultimately it's about process automation.
You owe it to your company to pick the solution that best fits your processes. If it's a tie, pick the SaaS solution. There are real benefits, but they should never trump flexibility to support your business processes. The good news is that SaaS solutions have been around for awhile now and some of them have become more mature. Just watch out for big name companies with strong legacy products that have recently launched a new multi-tenant SaaS solution. Their experience in the marketplace is an advantage, but it is not a guarantee of product maturity.