HOW TO BUY ERP. SaaS, Custom, Packaged, or Hybrid Software? A Buyer s Guide to Purchasing ERP Solutions

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1 HOW TO BUY? ERP SaaS, Custom, Packaged, or Hybrid Software? A Buyer s Guide to Purchasing ERP Solutions

2 INDEX SaaS, Custom, Packaged, or Hybrid Software? Packaged Off-The-Shelf Software Custom-Developed Software Software as a Service (SaaS) Hybrid Custom Software Comparing ERP Development Models ERP Financial Considerations Summary / Key Takeaways

3 SAAS, CUSTOM, PACKAGED, OR HYBRID SOFTWARE? A BUYER S GUIDE TO PURCHASING ERP SOLUTIONS Computing and communications technologies have transformed the business landscape during the past three decades and the pace of this transformation continues to accelerate. These changes offer the potential for small and medium businesses (SMBs) to operate more efficiently and effectively, but also create new expectations that can be difficult to fulfill. Today s customers frequently expect every business regardless of size to deliver big-company service, responsiveness and sophistication. The answer is Enterprise Resource Planning (ERP) software that not only improves customer service, but improves effectiveness and saves money as well. And now it s available to SMBs in four different forms: Software as a service (SaaS) Packaged off-the-shelf software Custom-developed software Hybrid custom software This buyer s guide will help you navigate the ERP solutions designed for SMBs and various deployment options so you can make the best choice for your business. 2

4 PACKAGED (OFF-THE-SHELF) SOFTWARE Packaged software has been developed by a third party and licensed for use. The advantages of this ERP software approach include: Proven (existing) software platform Large network of integrators/consultants to assist with deployment The challenge is that instead of starting with your business processes and writing the software to fit them, a specialist configures the software in an attempt to match the existing business. However, businesses typically have to change their processes to align with the software. An alternative to licensed packaged software is open source ERP software, such as OpenERP. Similar to Linux, the object code is free. The advantages of this ERP software approach include: No software licensing fees Access to the object code for configuration However, an open-source ERP software comes with other fees, such as: Online hosting fees Warranty for bug fixes and source code maintenance Configuration and deployment 3

5 Open source has been used extensively to deploy various infrastructure components, but has been used sparingly when it comes to ERP. Recently, though, new ERP suppliers are leveraging open source software to reduce the total cost of ownership of business applications, and to enable customizations that would be difficult to achieve without access to source code. Examples of these open source software ERP suites include Compiere and Openbravo. However, the open source business model provides a limited incentive for testing. And a lack of testing and accountability contributed to the Heartbleed bug that exposed millions of passwords to hackers across organizations that implemented open source solutions. The impacted organizations included Yahoo and the Canadian Revenue Agency. Any SMB that plans to implement an open source ERP solution would do well to ensure that the product is well tested and can be supported by in-house staff or a competent third party. CUSTOM-DEVELOPED SOFTWARE Custom development is work for hire whereby the SMB specifies the software solution, contracts with a developer, and owns the resulting source code. As such, custom-developed software fits the business because it is designed and developed to accommodate established business structure and processes. This is important because it eliminates the need to change established processes. Further, employees require less training and are more likely to use the ERP software since it was built specifically to make their job easier rather than just to satisfy the needs of management. From a CFO s perspective, the fact that custom software is an asset has important implications for the balance sheet. License fees are typically expensed and will not improve the company s valuation. However, custom software is an important intellectual property asset that can improve the multiple in any M&A transaction. 4

6 However, the most important benefit of custom software may be flexibility. Companies that own the source code to their own ERP can adapt, innovate, and respond more quickly to changing market conditions specifically because they control precisely how the ERP functions. In summary, the advantages of the custom ERP approach include: Reduced employee training costs Higher ROI due to greater software adoption and usage Stronger balance sheet and higher valuation Improved flexibility Because custom software is developed for a single company, that company must bear the entire cost of development, so some argue that custom ERP is not the cheapest way to go. Further, because it must be developed before it can be used, custom software may take more time to get into production than a product that already exists. SOFTWARE AS A SERVICE (SaaS) Duringر the past several years, cloud computing has moved from the fringes to the mainstream of business practice for SMBs and mid-market enterprises. The claimed value of cloud computing is that it shifts the IT burden from the customer to the cloud computing application vendor, which provides Web-based access to applications as a service through a subscription pricing model. In theory, this eliminates the need for customers to buy, deploy, and manage IT infrastructure and solutions as the cloud vendors take responsibility for everything: servers, storage, operating system, database, business software, updates, migration, data center space, and support services. 5

7 While SaaS can deliver inexpensive functionality for department-specific applications, it has several potential limitations when used to deploy ERP across a company: SECURITY The business no longer controls the data storage and security model used to house sensitive information and must back up cloud-stored data to on-premises storage. CONTROL The business no longer controls the underlying IT infrastructure running the ERP software, so uptime is in the hands of the cloud vendor. MISSING FEATURES The customer is limited to a standard set of features shared by all users of the SaaS platform, and feature enhancements are made on the timetable dictated by the cloud vendor. This may be acceptable for some companies, but others may not want to give up flexibility, or may need functionality optimized to fit their specific business processes. 6

8 TOO MANY FEATURES Great software is simple and easy to use. The mere presence of unneeded features in an application confuses users and increases training costs. It may even reduce return on investment when people use the unneeded features in ways not intended by the implementation team. PERFORMANCE Because SaaS uses a multi-tenancy (one-to-many) model, customers find they are competing for computing resources as thousands of users are accessing the same software infrastructure simultaneously. ASSET OWNERSHIP One advantage of SaaS is that it shifts the cost of an ERP solution from a capital expense ( CapEx ) to an operating expense ( OpEx ). On the surface this can be appealing, as it requires less initial capital outlay. However, spending money to configure and integrate a SaaS product is much like building a house on leased land. With SaaS, the customer is tied to the underlying asset, but never owns it and is never done paying for it. If the customer needs to move to a different platform, it may be possible to find another integration partner who supports the same platform. However, all the money spent on subscriptions, integration and configuration is lost. For SMBs with merger or acquisition goals, owning the underlying ERP asset contributes to the overall valuation of the business and improves ROI. 7

9 ADOPTION AND USE When your business processes align with how the SaaS ERP system is configured, SaaS can be a good fit. However, this is not often the case. More commonly, a business will have to reengineer a portion of its business processes to align with the SaaS platform. Employees are often resistant to change; this resistance can translate to low adoption of the new processes. Without strong user adoption, the entire project may fail to meet the promised ROI. So any business adopting SaaS ERP should consider the additional costs of retraining employees on the new processes as well as process monitoring. HYBRID CUSTOM SOFTWARE Hybrid custom software has emerged recently as an ERP software model that combines the best of SaaS (cloud delivery and platform fees as an operating expense) and custom development (system architected around established business processes and customer owns the source code). The approach is similar to custom development, whereby the customer s business processes are mapped and an overall ERP strategy is developed with a documented, supporting software architecture. The ERP system is built to perfectly match the customer s business processes and needs, but aspects of the code development can be accelerated due to reuse of prior code modules. Additionally, Rapid Application Development (RAD) methodologies reduce the cost and time needed to create custom applications. To suit the customer s IT requirements, the system can then be deployed on the customer s server or on the vendor s servers. Individual ERP modules can be deployed as part of a time-phased rollout, or the entire ERP system can be deployed at once depending on customer requirements and budget. 8

10 COMPARING ERP DEPLOYMENT MODELS The table below summarizes the key differences between the models. With packaged software and SaaS platforms, the vendor owns the software code and you license it and pay for additional configuration to fit your business. With custom and hybrid custom software, you own the source code and the software is designed around your business processes. PACKAGED SAAS CUSTOM DEVELOPMENT HYBRID CUSTOM BUSINESS FOCUS Enterprise Small business Any business Mid/large enterprise Small and medium businesses OBJECT CODE Vendor-owned; licensed Vendor-owned; licensed Customer-owned Customer-owned USER TRAINING Variable based on configuration (OpenERP) May be substantial due to limited vendor support and process re-engineering commonly needed Low/moderate cost; no change to business processes Low cost; no change to business processes UPFRONT COSTS Yes (configure/test); integration with other systems for data sharing Yes (configure/test); possible integration with other systems for data sharing Yes (coding) Yes, with financing available ONGOING COSTS Monthly license Monthly license Periodic updates Optional: SaaS delivery OWNED ASSET No No Yes Yes 9

11 PACKAGED SAAS CUSTOM DEVELOPMENT HYBRID CUSTOM DEGREE OF CUSTOMIZATION Customization of the application (packaged software); infrastructure customization (OpenERP) Configuration of the application only; no customization of source code Customization of the source code to fit business requirements Customization of the source code to fit business requirements DATABASE Single tenant* (user) with enterprise licensed software; multi-tenant (users) with OpenERP Multi-tenant (users); single database is partitioned via a security model in the application not separate virtual servers Single tenant (user) and data resides on physical or virtual servers owned by customer Single tenant (user) and data resides on physical or virtual servers owned by customer; customer option for multi-tenant (users) SaaS delivery APPLICATION Single tenant (user) or multi-tenant (users) Multi-tenant (users); multiple companies access the system Single tenant (user); only your employees access the system Single tenant (user); only your employees access the system FEATURE Limited to vendor Limited to vendor Customer control Customer control ENHANCEMENTS Limited to vendor releases (OTS); DIY (OpenERP) Release schedule Schedule of features Schedule of features DELIVERY On-premise servers, SaaS SaaS public cloud (vendor-owned) Customer private cloud or dedicated servers Customer private cloud or dedicated servers; SaaS with disaster recovery DATA SECURITY Customer control SaaS vendor Customer control Customer control NETWORK SECURITY Self-monitoring and response SaaS vulnerabilities Self-monitoring and response Self-monitoring and response Single tenant is usually preferred, since your data and application are not sharing space * and resources with others. 10

12 ERP FINANCIAL CONSIDERATIONS SaaS vendors often argue that their solutions are cheaper than the alternatives. However, when analyzing the total cost of ownership of SaaS ERP over five years, research firm Gartner finds that SaaS is not necessarily less expensive than custom ERP. So what factors should one evaluate when comparing the cost of the various approaches to ERP? Gartner finds that SaaS is not necessarily less expensive than custom ERP. Total cost of ownership (TCO) represents the total cost of purchasing (or in the case of cloud computing, subscribing to) and operating a technology solution over its useful life. TCO provides a realistic and holistic measure of the long-term costs required to acquire and operate technology solutions. While SaaS can appear to offer lower initial costs, monthly subscription fees are not the only costs associated with SaaS ERP delivery. Customization costs for off-the-shelf software and SaaS must be performed (typically via a systems integrator or consultant) to configure the software to the particular needs of your business. This includes mapping business processes and data requirements, creating a plan for configuring the SaaS platform modules, performing the actual work, testing, and migration. TCO FACTORS TO CONSIDER COST TYPE OTS SaaS CUSTOM HYBRID MONTHLY USER LICENSE Yes No Yes Yes UPFRONT DEVELOPMENT Yes Yes Yes Yes, but can be financed PLATFORM CONFIGURATION No No Yes Yes TRAINING AND ONGOING USER SUPPORT No No Less expensive Less expensive 11

13 SUMMARY SMBs have many of the same requirements as large enterprises. They need solutions to help them meet their business goals and challenges, but often lack the IT resources or skills necessary to deploy and manage these solutions. Custom software development ensures SMBs get an ERP solution built for them, rather than having to change their processes to adapt to off-the-shelf ERP software. However, this approach requires upfront capital and follows a traditional development schedule. SaaS solutions, on the other hand, can be quicker to launch, as the platform is already built and being used by other companies. That said, customization is limited to the application (not the source code), upfront consultant fees will be incurred for setup configuration, and data is shared on servers operating in a multi-tenant environment. Hybrid solutions merit serious consideration, because they enable companies of all sizes to access greater customization, financial flexibility, and control (owning the source code, single tenant environment). 12

14 KEY TAKEAWAYS Small and medium businesses can take advantage of the ERP software used for years by large enterprises ERP options largely fall into four categories: Packaged, Custom, SaaS, and Hybrid Custom SaaS offers lower upfront fees but no TCO advantages over a 5-year horizon Hybrid Custom is a new model that blends the best of Custom Development and SaaS REFERENCES Forbes, Heartbleed Roundup: Hacking Made Easy, First Victims Come To Light And Heartbleed Hacker Arrested: Gartner, The Gartner Magic Quadrant for Mid-Market ERP 13

15 THANK YOU!

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