SaaS and Cloud ERP Trends, Observations, and Performance 2011

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3 December, 2011 SaaS and Cloud ERP Trends, Observations, and Performance 2011 Over the past five years, Aberdeen has been measuring the willingness of organizations to consider Software as a Service (SaaS) as the deployment model for their Enterprise Resource Planning (ERP) implementations. In that time, organizations have become more educated on both the benefits and potential issues that factor into a SaaS ERP decision. In 2007, Aberdeen characterized ERP as the Last Bastion of Resistance to Software as a Service. A year later, Aberdeen revisited the topic, and found that SaaS ERP had not kept pace with the demand for other SaaS enterprise applications. In 2009, SaaS ERP still had yet to take off. Finally, in 2010, Aberdeen saw an overall 61% jump in willingness to consider SaaS ERP. That trend has continued this year, with the willingness to consider SaaS ERP increasing further. At the same time, there has been a reduction in survey respondents' willingness to consider a traditional, on-premise ERP solution. This Analyst Insight examines this trend, along with the reasons that organizations are considering SaaS ERP and the performance of organizations that have already made the jump. This document is the result of primary research performed by Aberdeen Group. Aberdeen Group's methodologies provide for objective fact-based research and represent the best analysis available at the time of publication. Unless otherwise noted, the entire contents of this publication are copyrighted by Aberdeen Group, Inc. and may not be reproduced, distributed, archived, or transmitted in any form or by any means without prior written consent by Aberdeen Group, Inc.

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5 Page 3 Current ERP Deployments While this document focuses on comparing SaaS ERP implementations to onpremise implementations, it is important to distinguish between the many ERP deployment methods organizations are using. For the purposes of this document, Aberdeen provides the following definitions: Traditional license on-premise: Software may be licensed for use on a particular computer, or by other criteria such as number of users. The license can be either on a term basis or perpetual, and is often treated as a capital expense. The software is located in-house. SaaS or on-demand: The software itself is not licensed or owned by the end user; it is provided as a service. It is often paid for on a subscription basis, and can be accessed from a normal internet connection. SaaS avoids a large upfront capital investment. This deployment method is often referred to as the Public Cloud. Hosted: Licensed applications are hosted by a third party. This deployment method may be in a separate instance on a separate piece of hardware (dedicated to an organization), or in a separate virtual instance (dedicated to an organization) where the application is housed on hardware shared by multiple companies. Sometimes this deployment method involves a Private Cloud, where the instance of ERP is hosted by a third party and then delivered to the end user on a subscription basis. Preconfigured on a hardware appliance: Licensed software is preconfigured and pre-installed on the hardware. Pre-configuration may be industry-specific and include best practices templates for workflows and role definitions. Often times, the end user neither knows nor cares how the ERP software they are using is deployed. All that matters is whether or not the functions they need are available when they turn on their computer. Deployment factors matter more to the people that are actually approving the funding for ERP and the IT staff that supports it. Still, there is a clear divide in the deployment methods that organizations are currently using when deploying ERP.

6 Page 4 Aberdeen s 2011 ERP survey has found that there is currently a strong majority of organizations using ERP on-premise. Nine percent (9%) of current ERP deployments use the SaaS model, compared to 72% for on-premise. While onpremise deployments are the consistent leader amongst all company sizes, SaaS implementations become more common as the organizations get smaller (Figure 1). Seventeen percent (17%) of ERP implementations in small organizations (organizations with under $50 million in annual revenue) are deployed in the SaaS model. This is more than the 8% in midsize organizations (organizations between $50 million and $500 million in annual revenue) and 2% in large enterprises (organizations over $500 million in annual revenue). Currently, 13% of ERP implementations in Small and Medium Enterprises (SMEs, those organizations under $500 million in annual revenue) are SaaS deployments, while 75% are onpremise. Larger organizations are more likely to consider hosted environments, keeping their data in private clouds. Some of the reasons that SaaS implementations have been attractive to smaller organizations will be addressed more fully in the rest of this document, but the fact that smaller companies are using SaaS does not mean that large enterprises may not also benefit from the unique advantages of a SaaS ERP solution. Figure 1: Current Implementations Percentage of Respondents, n = % 80% 70% 60% 50% 40% 30% 20% 10% 0% 79% 75% 75% 71% Small Midsize Large SME 17% 13% 8% 10% 11% 2% 4% 6% 5% 6% 5% 6% 2% 3% 2% 3% On Demand / Software ERP hosted and ERP hosted and Preconfigured on a Traditional licensed on as a Service (SaaS) managed by your ERP managed by an hardware appliance premise vendor independent 3rd party Source: Aberdeen Group, October 2011

7 Page 5 Additionally, the current adoption of SaaS ERP varies from industry to industry (see sidebar). As it currently stands, SaaS solutions are more likely to be deployed in industries such as financial services and healthcare rather than manufacturing, for example. There is, in fact, some correlation between deployment model and the age of the currently implemented ERP system (see sidebar). Industries such as manufacturing, where the average age of the ERP solution is 7.64 years, are much less likely to have a SaaS solution. In retail, where 21% of ERP deployments are SaaS, the average age of ERP implementations is 4.37 years. This, combined with the advantages described below, gives reason to believe that the divide between SaaS and on-premise ERP deployments will not last forever.

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9 Page 7 Increasing Future SaaS and Cloud Investment The Q Aberdeen Business Review found that cloud computing / virtualization will be the top technology investment that organizations are making in This is a jump from the previous year, when cloud computing was found to be the third leading technology investment. These potential future investments in the cloud saw amplified results this year in organizations that Aberdeen considers to be High Growth (see sidebar). Thirty-nine percent (39%) of High Growth organizations planned to invest in cloud computing compared to 25% of No Growth organizations (Figure 2). While cloud computing is gaining steam across all organizations, it is particularly important for organizations that are planning to expand operations. Figure 2: Top Technology Investments for 2011 Cloud computing / Virtualization 25% 31% 39% Business process management tools Enterprise Applications 27% 31% 27% Hi Growth 27% 29% Low Growth 24% No Growth 0% 10% 20% 30% 40% 50% Percentage of Respondents, n = 1,519 Source: Aberdeen Group, January 2011

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11 Page 9 In addition to organizations' current ERP deployment methods, Aberdeen s 2011 ERP survey polls respondents on which deployment methods they would be willing to consider in the future. Over the past 5 years, Aberdeen has seen an increased willingness to consider SaaS ERP (Figure 3). This year, the willingness to consider SaaS saw its largest increase yet. Conversely, the willingness to consider an on-premise solution has steadily decreased. There has been a comparatively smaller increase in the willingness to consider hosted or private cloud, solutions. Not pictured is the interest in ERP preconfigured on a hardware appliance, which has consistently stayed between 18% and 19%. If these trends continue, there will come a time when these percentages meet in the middle and organizations searching for ERP solutions will focus on what matters most to the ultimate performance of the ERP system: functionality and ease of use.

12 Page 10 It is also interesting to examine how the willingness to consider individual deployment models varies among industries (see sidebar). In some industries, such as professional services and retail, organizations are equally willing to consider SaaS and on-premise. In others, such as financial services, there is still a large divide. In this specific industry, it may be because those organizations are wary of putting customer financial data in the cloud. Industries such as manufacturing, which has a huge divide between current SaaS and on-premise deployments, have become more willing to consider SaaS ERP. Many of these industries have current ERP solutions over seven years old, meaning they may be considering making the move to SaaS the next time they refresh their ERP. This further proves that the benefits of SaaS ERP are being noted across most industries, and the deployment model is becoming viable for businesses expecting to grow. Figure 3: Willingness to Consider Percentage of Respondents 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% 23% 52% 37% 37% 33% On Demand / Software as a Service (SaaS) % 17% 27% 31% ERP hosted and managed by ERP hosted and managed by your ERP vendor an independent 3rd party 80% 67% 65% Traditional licensed on premise Source: Aberdeen Group, October 2011

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14 Page 12 Factors Influencing SaaS Decisions The reasons that organizations are becoming more receptive to purchasing SaaS ERP solutions stem from the current perceptions about SaaS ERP. Many of the top reasons that organizations are willing to consider SaaS ERP involve costs (Figure 4). A SaaS solution may have a lower total cost of ownership, and lower upfront costs. A key benefit of ERP paid for in the subscription model is that it can be recorded as a monthly operating expense rather than a large upfront capital expenditure. There are no upgrade costs because upgrades are handled automatically. These reasons make SaaS an attractive option for smaller, growing businesses. With a SaaS solution, organizations can receive the improved efficiencies that ERP provides while acquiring the resources they need to expand operations. Figure 4: Positive Factors Influencing SaaS Decisions Lower total cost of ownership 75% Reduces the cost and effort of upgrades Lower up front costs Perceived ease of implementation Seeking best fit solution regardless of delivery model Focusing internal resources elsewhere Limited IT resources 52% 49% 44% 41% 38% 38% 0% 20% 40% 60% 80% Percentage of Respondents, n = 553 Source: Aberdeen Group, October 2011

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16 Page 14 Some cost savings of a SaaS solution are not immediately evident. SaaS ERP minimizes the strain on internal IT departments, as IT support is handled by the ERP vendor. Again, this is attractive for organizations that want to focus the resources that would be used to staff an IT department on other essential areas of the organization. There is no need to build an IT staff to support ERP with a SaaS solution. Another factor that positively influences SaaS ERP decisions is the perception that SaaS is easier to implement. Aberdeen has found that the time from installation to the first Go Live milestone is significantly shorter for SaaS ERP than it is for onpremise (Figure 5). SaaS ERP is attractive for organizations that want to quickly get up and running especially for organizations in a massive growth phase, which could quickly spiral out of control without ERP. Figure 5: SaaS Means Quicker Jumps Out of the Gate Months, n = On Premise SaaS Time from installation to first "Go Live" milestone Source: Aberdeen Group, October 2011

17 Page 15 Larger organizations may also benefit from SaaS ERP's shorter time to Go Live. Aberdeen s SaaS and the Multi-tiered ERP Strategy (November 2011) explored how organizations that are acquiring new business units or starting subsidiaries are using SaaS ERP to quickly and cost effectively bring these units to full operation. This unique advantage of SaaS ERP can benefit all organizations that need an ERP system as soon as possible. Lastly, 41% of organizations that are willing to consider SaaS ERP are looking for the best fit solution, regardless of deployment model. This is consistent with the trend that SaaS and on-premise are approaching equal consideration. Aberdeen s ERP Selection: Starting Out on the Right Foot (August 2011) laid out strategies for selecting an ERP solution. Aberdeen s ERP in SME 2011: Setting the Stage for Growth (September 2011) illustrated what the top factors should be (see sidebar). In fact, deployment model was not one of the top 7 factors. It is becoming more and more clear that deployment model for ERP is only a small piece of the ERP puzzle.

18 Page 16 What is holding them back? Of course, there are some negative perceptions that organizations unwilling to consider SaaS ERP are citing (Figure 6). For the most part, these concerns have decreased over the past three years, as organizations have become more informed about SaaS ERP. The only factor that has actually increased is the concern about the security of SaaS ERP. Sixty-seven percent (67%) of respondents listed security concerns as a reason they are unwilling to consider SaaS ERP. They may be wary of exposing internal financial or customer data to competitors, or the potential for data to become corrupt. These are valid concerns, but Aberdeen s report Web Security in the Cloud: More Secure! Compliant! Less Expensive! (May 2010) found that, on average, on-premise solutions had 11 incidents of data loss or data exposure in the last 12 months, compared to 6 incidents for those that are cloud-based. This is evidence that the actual impact of cloud based solutions on security has been communicated poorly. Are on-premise solutions truly as secure as they are believed to be, or is security best left to those organizations (the SaaS ERP vendors) whose existence depends on their ability to provide safe and secure environments?

19 Page 17 The other top concern is downtime risk or concern over predictable performance. Still, this concern has decreased over time. Again, according to the Web Security report, on-premise solutions had 11 incidents of security related downtime, compared to 6 for cloud-based solutions. So these top two negative perceptions may actually be overstated. The final two concerns that ERP is too basic to the running of the business to be moved to a SaaS model, and that in a SaaS model upgrades are not under the organization's control - come down to the ultimate preference of the organization. In the past, some organizations thought that ERP was too critical to their business in order to consider a SaaS solution. Organizations are starting to realize that SaaS ERP solutions are offering comparable functionality to on-premise solutions. These organizations may also want to handle their own upgrade processes rather than letting the vendor handle it. These concerns should be weighed against the advantages of the SaaS model contains, when evaluating ERP options.

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21 Page 19 The Benefits of SaaS ERP Beyond the cost and resource savings that interest respondents in SaS ERP, there are the actual business benefits that these organizations expect to see from cloud deployments. Aberdeen s 2011 Manufacturing Operations Management survey asked respondents to state the two biggest benefits that they can receive from cloud technology (Figure 7). Again, the top benefit involves cost. These costs include the actual cost of the software, along with the cost savings gained by not having to acquire the internal infrastructure to support ERP. To many organizations, the impact cloud computing has on the bottom line is its key benefit. To the business user, there are other benefits to be gained from cloud computing. First is efficient collaboration across geographies. By interacting with a SaaS solution on the internet, employees that are located far apart can more efficiently collaborate with each other leading to better performance. Inherently, all parts of the organization, no matter where they may be located, can share a common view of enterprise data. As organizations grow, they often become more geographically dispersed, making SaaS ERP an attractive option. SaaS lowers the bar to smaller and more remote parts of the organization to have access to ERP, thus enabling the basic transactional collaboration that ERP is known for. Figure 7: Top Two Biggest Benefits of Cloud Technology Lowering the cost of optimizing infrastructure Efficient collaboration across geographies Ability to respond quickly to business demands 36% 44% 41% 0% 20% 40% 60% Percentage of Respondents, n = 163 Source: Aberdeen Group, October 2011

22 Page 20 Next is the ability to respond quickly to business demands. In today s 24 / 7 business world it has become increasingly important to be constantly connected in order to compete. Real time visibility allows organizations to quickly react to adverse events or take advantage of opportunities. Aberdeen s The Analytical SMB: More Data, More Users, Less Time (November 2011) examined the shrinking decision windows that confront modern organizations. A SaaS ERP solution helps to enable more agile decision making. Who inside the organization is receiving the benefits described above? The Manufacturing Operations Management survey asked respondents which functional areas in their organizations could most benefit from cloud technology (Figure 8). These areas have a wide range in the organization. Areas such as supply chain appear to receive more benefit because they are more likely to be distributed, and have more to gain from being connected through SaaS. Marketing and sales are also likely to benefit from cloud computing, because they can access customer data while on the road. Contrary to the outdated beliefs that cloud computing only impacts IT, cloud computing can help improve operations across many functions in the organization. Figure 8: More Functions Benefit from Cloud Computing Supply Chain Management (logistics, demand planning, etc.) Demand Management (marketing, sales, etc.) 56% 67% Production Managemnet (process control, quality assurance, etc.) Enterprise Management (financials, HR, project management) Research and Development 21% 38% 33% 0% 50% 100% Percentage of Respondents, n = 163 Source: Aberdeen Group, October 2011

23 Page 21 Quantifiable Benefits Aberdeen s 2011 ERP survey has found a correlation between improved performance and the implementation of SaaS ERP solutions. In order to compare apples to apples, Table 1 shows the performance of SMEs with SaaS ERP to SMEs with on-premise ERP. While this does not necessarily mean that a SaaS solution alone provides better company performance, it does show that organizations that are run more effectively are choosing SaaS for their ERP deployments. Organizations using SaaS are closing their books more quickly, making faster decisions, serving their customers more efficiently, and satisfying more customers. This superior performance leads to prosperity for these organizations. Table 1: SaaS ERP Performance Definition of Maturity Class SMEs with SaaS ERP SMEs with On- Premise ERP Mean Class Performance 5.25 days to close a month 93% complete and on-time shipments 21% year over year improvement in time to decision 92% internal schedule compliance 96% inventory accuracy 91% customer satisfaction 5.36 days to close a month 89% complete and on-time shipments 18% year over year improvement in time to decision 90% internal schedule compliance 93% inventory accuracy 86% customer satisfaction Source: Aberdeen Group, October 2011

24 Page 22 These organizations are also seeing enhanced benefits as a direct result of their ERP implementations (Figure 9). These include reduced costs and improvements in inventory turns and schedule compliance. These improvements help keep costs low and operations smooth. These are key benefits to growing organizations.

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26 Page 24 Key Takeaways When SaaS ERP was first introduced to the public, organizations were, understandably, wary of actually taking the step to implement a SaaS solution. It has taken some time, but SaaS ERP is finally beginning to gain acceptance as just another deployment option. Soon, organizations will be just as willing to consider a SaaS ERP solution as they are to consider an on-premise solution. Organizations are now more informed of the benefits of cloud computing, and looking for ways to take advantage of it in their businesses. Deployment model should be looked upon as just one of the factors when selecting an ERP. When selecting an ERP solution, organizations should consider the following factors: Does the ERP system have the functionality needed to effectively run the business? How easy it is for employees to actually use the system in order to gain full benefits from it? Will the system be up and running in the time needed? What is the total cost to the business? Can the IT department effectively support the ERP system? By combining these factors with the unique benefits of a SaaS ERP system, organizations can ride this technology trend toward future growth. For more information on this or other research topics, please visit To take part in Aberdeen's 2011 ERP research, click here.

27 Page 25 Related Research SaaS and the Multi-tiered ERP Strategy; November 2011 ERP in SME 2011: Setting the Stage for Growth; September 2011 ERP Selection: Starting Out on the Right Foot; August 2011 SaaS ERP: Trends & Observations 2010; October 2010 SaaS ERP: Trends and Observations; December 2009 Are the Barriers to SaaS ERP Breaking Down?; June 2008 ERP: The Last Bastion of Resistance to Software as a Service; July 2007 Author: Nick Castellina, Senior Research Associate, Enterprise Applications and Business Intelligence For more than two decades, Aberdeen's research has been helping corporations worldwide become Best-in- Class. Having benchmarked the performance of more than 644,000 companies, Aberdeen is uniquely positioned to provide organizations with the facts that matter the facts that enable companies to get ahead and drive results. That's why our research is relied on by more than 2.5 million readers in over 40 countries, 90% of the Fortune 1,000, and 93% of the Technology 500. As a Harte-Hanks Company, Aberdeen s research provides insight and analysis to the Harte-Hanks community of local, regional, national and international marketing executives. Combined, we help our customers leverage the power of insight to deliver innovative multichannel marketing programs that drive business-changing results. For additional information, visit Aberdeen or call (617) , or to learn more about Harte-Hanks, call (800) or go to This document is the result of primary research performed by Aberdeen Group. Aberdeen Group's methodologies provide for objective fact-based research and represent the best analysis available at the time of publication. Unless otherwise noted, the entire contents of this publication are copyrighted by Aberdeen Group, Inc. and may not be reproduced, distributed, archived, or transmitted in any form or by any means without prior written consent by Aberdeen Group, Inc.

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