Evaluating SaaS vs. on premise for ERP systems

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1 Evaluating SaaS vs. on premise

2 Increasingly organizations are given more options and evaluating SaaS vs. on premise options can be challenging for organizations. In this expert E-Guide, readers will learn key considerations and best practices for choosing the right ERP system for their organization. between SaaS and By: Brenda Cole, Associate Site Editor Manufacturers have more ERP options than ever before. Innovations in business technology -- including Software as a Service (SaaS), server virtualization and cloud computing -- have freed users from traditional, onpremise ERP. But more options also mean a more complicated selection process. For manufacturers that can t -- or don t want to -- maintain an inhouse ERP system, an important decision is choosing. Each delivery model approaches ERP differently. For, a customer buys a traditional ERP package and then pays a third party, such as Verizon or AT&T, to install the software on its servers, according to Chris Carter, CEO and CTO of HiLn Solutions, a provider of both SaaS and. [The application host] runs the ERP on server hardware that the client has purchased, Carter said. Through this method, the software still exists on a physical server, but the customer doesn t have to store or maintain that server in its own facility. With SaaS, the ERP application is stored on a virtual server -- also known as "in the cloud," according to Carter. You re not charged for hardware, because you re renting virtual space, he said. You re purchasing bandwidth, not physical hardware, and paying for the amount of time and users needed. Page 2 of 9

3 SaaS is [also] usually built from the ground up to be multi-tenant at all layers of the stack: database, server and application, said Liz Herbert, principal analyst at Forrester Research. All users run the same code, with customizations and configurations stored as metadata parameters. Unlike, which is typically provided by a third party, SaaS is delivered by the software creator, Herbert said. SaaS ERP and on the front and back ends On the front end, SaaS ERP -- especially ERP designed specifically for a SaaS environment tends to be more user-friendly than, according to Herbert. Many SaaS ERP vendors grew up in a thin client, browser-based model with a strong focus on selling to the business and leveraging an easy-to-use look and feel, she said. They are often perceived as more user-friendly, sometimes simpler, user interfaces, versus traditional on-premise apps exposed as SaaS. Users interested in interface customization are less likely to face additional fees with SaaS ERP, according to Carter. If the client wants something different, something customized, they can do that with SaaS under contract, he said. In a hosted environment, clients are usually charged extra for customizations. For smaller manufacturers with a limited or nonexistent IT staff, outsourcing the back end work of maintaining an ERP system makes sense. You may not have an ERP-savvy staff, Carter said. You probably do have folks who know hardware and networking, but because of the size of ERP implementation, you re going to have to increase your staff. Why do that when you can send it to a hosted company and they ll take care of it? On the back end, ERP designed for SaaS environments can be less customizable for users, according to Herbert. SaaS applications are typically more standardized, she said. This helps SaaS stay profitable as well as manageable across multiple upgrades per year. But in many cases, it means that SaaS users have less flexibility to customize. They must conform to certain standards around the data model and certain approaches to integration. Page 3 of 9

4 Warren Wilson, research director for Ovum Summit, recommends that potential SaaS ERP customers review their must-have business processes before buying. [SaaS ERP] needs to be considered in the context of whether it s better to customize to your business processes or whether the built-in best practices of the SaaS are better for your business to adopt, he said. Cost and support options differ for SaaS and When it comes to cost, SaaS ERP looks to be the better option for cashstrapped manufacturers, those with small IT budgets or those that can t afford large, upfront implementation bills. SaaS is usually pay-as-you-go, subscription-based pricing, Herbert said. Hosted models are more likely to require upfront setup fees or long-term commitments that ultimately cover the setup costs to the hosting provider. Hosted ERP may work better for larger businesses that are looking for more options, both in the implementation stage and in extended support. Larger hosted firms have tiered pricing models based on space, backup support, whether it s a junior or senior admin helping or whether there s late-night support offered, Carter said. SaaS tends to have one fee per user, though, and fewer additional fees. For software support, SaaS ERP providers often bundle their services, according to Herbert. This can be a benefit but can also create challenges, particularly as firms are increasingly faced with a multi-saas environment, she said, adding that support across multiple applications tends to be more viable with hosted services. Wilson stresses the importance of a SaaS ERP provider having a reliable support staff. Unlike providers, whose physical servers are less affected by network downtime, SaaS ERP providers and users cannot access their programs while the network, and the cloud, are down. SaaS ERP is a different animal, he said. The consequences of an outage could be huge. You need to look very closely at a provider s track record. Page 4 of 9

5 Benefits and risks of SaaS ERP and With so many factors to consider, what are the most important elements to keep in mind when choosing? Business needs should be evaluated closely, according to Herbert. Hosting often gives the buyer more control, more customization and more ability to specify his own parameters across the application as well as physical infrastructure, including decisions that could impact performance, she said. SaaS is typically more standardized and multi-tenant, lending [itself] to faster deployment, and is typically easier to use and more accessible. Carter points to business size as another important factor. Hosted ERP can alleviate your existing network and hardware staff and is typically better for a bigger company, he said. With SaaS ERP, you don t need new hardware or new staff, and its cost is better for a smaller company. Herbert warns that often faces the same challenges as onpremise ERP, including upgrades. Hosting providers are almost never the authors of the software, so they are more susceptible to software company decisions and price points, she added. SaaS comes with its share of risks as well, Herbert said, including security -- physical, logical, access rights and identity management -- customization and integration. Long-term lock-in and the financial viability of smaller, startup vendors are also concerns. A potential risk for both hosted and SaaS ERP is loss of user access to the software if the provider s servers fail. If you lose Internet connectivity, you re down. You may not be able to access your servers or ERP if you can t talk to them, Carter said. Wilson stressed the importance of taking the time to find the right ERP service for your business. ERP encompasses a lot of things, to the extent that it involves your mission-critical operational processes, he said. You need to be very careful about any decision, because any loss of service is Page 5 of 9

6 going to be much more disruptive for ERP than it would be for other systems. SaaS ERP vs. on-premise Six key differentiators By: Brenda Cole, Associate Site Editor In uncertain economic conditions, we believe that companies will redefine the meaning of ERP and how they plan to deploy it. Today, the terms "Software as a Service" and "on-demand" describe software functionality as delivered over the Internet from a single application instance that is shared across all users. Software as a Service (SaaS) and open source are likely to appeal to some companies as potential lower-cost and lower-risk alternatives to traditional ERP. However, there are risks that need to be considered along with these two types of ERP offerings. The beauty of modern ERP packages is that you have options to choose from during your ERP software selection. You can either deploy a solution by hosting it internally on your own servers (traditional ERP), or if you would rather not deal with the software, you can have it hosted somewhere else (SaaS). In the process of ERP selection, though, you should be aware of six key variables that will ultimately factor into the decision that is right for you: 1. Simplicity. In general, SaaS is simpler to deploy from a technical perspective. Because you don't need to purchase additional servers or physically install the software yourself -- you can simply get started with a basic Internet connection -- it can be an easy and quick means of deploying the software. On the other hand, the high level of technical ease may create additional business complexities that you may not otherwise experience with traditional ERP (see #2 below). 2. Flexibility. Because traditional ERP is installed on your servers and you actually own the software, you can do with it as you please. You may decide to customize it, integrate it to other software, etc. Although any ERP software will allow you to configure and set up the software as you like, SaaS is Page 6 of 9

7 generally less flexible than traditional ERP in that you can't completely customize or rewrite the software. Besides, SaaS vendors are more likely to provide only one version, whether you need the upgrade functions or not, and since the software is delivered over the Web, you have no choice but to accept them. Conversely, since SaaS can't be customized, it reduces some of the technical difficulties associated with changing the software. 3. Control. Because of #2 above, many companies find that they don't have control over SaaS software as they would like, relative to traditional ERP. This is especially true of midsized or large companies with well-defined business processes that cannot be changed to fit the software. Small companies can generally adapt their business processes to the software more easily than large organizations can. Besides, SaaS effectively creates constraints on supplying complex functionality. 4. Accessibility. SaaS uses the Internet to access systems once deployed and maintained off-premises. Since SaaS is entirely accessed through the Web, you are in "a world of hurt" if the Internet goes down. Alternatively, traditional ERP does not require Internet reliability, provided your users are accessing the software from inside your company's network. 5. Cost. In general, SaaS can be deployed at a much lower initial cost and lower total cost of ownership; companies can avoid costly licenses, complex hardware, software infrastructure and no technology maintain needed. This type of cost-effectiveness can be attractive to smaller businesses, but the ongoing annual payment or monthly fees can be higher for SaaS because you're paying to use the software on a subscription basis. Much like leasing vs. buying a car, your payment never goes away as long as you're using the software. It can become costly as you grow and add employees to the system. 6. Integration. Companies that have implemented traditional ERP typically have applications that run on the same platform. They have avoided tough integration issues and improved visibility into operations. Integration is a major issue for SaaS companies, which need to provide on-premise integration for their customers to integrate cloud applications with existing Page 7 of 9

8 legacy applications. A company with SaaS will be left trying to integrate hosted software from a variety of vendors using middleware from yet another vendor. At a time when industries and economies are decreasing their growth forecasts into single digits, IDC has predicted that SaaS growth will be more than 40% in the current year. SaaS offers "right-sized, zero-capex alternatives to on-premise applications" and easy-to-use subscription services, which are attractive points to companies. This is true especially in this harsh economy. Clearly, there are tradeoffs between the two options. These six factors should be thoroughly evaluated as part of any effective ERP software selection project. Page 8 of 9

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