In today’s day and age, where industries are facing constant disruption from digital players, the roadmap for long-term success lies in a company’s ability to use intelligent technologies to build better business models and design innovative workflows.
Undertaking steps to integrate new technologies like machine learning and data analytics into day-to-day processes is vital for companies to prolong their longevity – and many have already undertaken steps to avoid being caught on the wrong side of industry-wide disruption. Data suggests that worldwide spending on digital transformation is set to reach about US$2.3 trillion in 2023, which would account for more than half of all global ICT (Information and Communication Technology) spending.
Interestingly, one piece of technology that many consider the panacea to the digital disruption happening all around us has been around for nearly 30 years and that is enterprise resource planning (ERP) software. Of course, over the past three decades, the software’s capabilities and functionalities have grown dramatically.
At the most basic level, ERP helps a company integrate its core processes, such as finance, HR, manufacturing, supply chain, procurement, and other functions. There are three types of ERP implementations that a firm can opt for: on-premise, cloud-based, and a hybrid cloud – which is a combination of on-premise and the public cloud.
The major difference between on-premise and cloud-based ERP is in how the software is deployed and accessed. While on-premises ERP software is installed on computers and servers that are owned or leased by the organisation, cloud ERP is deployed on servers that are owned or leased by the vendor and accessed by the customer through a web browser – hence the cloud-based ERP terminology. These are usually software as a service (SaaS) products where the service includes software and the infrastructure it runs on.
ERP System Price Check: CapEx vs OpEx
On-premise needs higher upfront investment to purchase (or lease) the servers as well as the software. There is also the need to invest in an IT team that can manage the system. In other words, the investment is more in the nature of capital expenditure (CapEx).
Cloud-based ERP, on the other hand, is already deployed in the cloud by the vendor and all a customer needs to do is pay a monthly subscription fee for use and the price includes both the hardware and software. A cloud-based ERP is thus an operating expenditure (OpEx) that can be easily scaled up or down according to requirements. Compared to on-premises systems, a cloud-based ERP solution takes less time to deploy and requires less upfront investment.
Apart from the time to deploy and cost factors, cloud-based ERP has another powerful attraction. Changing expectations in today’s digitally driven world implies that customers now expect firms to address their queries in real-time and tailor business interactions to their personal interests. Having a unified view of a customer’s interaction with various parts of the business is important in achieving this. For example, a company’s sales and marketing, customer service and support teams ought to be able to access and share regularly updated information on the client to provide satisfactory levels of service.
While ERP systems are designed to help companies address those customer expectations, it is increasingly becoming harder to do this in real-time while running the software on-premise. Companies, especially small and medium-sized enterprises (SMEs), may not have an adequately staffed IT support team to afford the high upfront cost of building and maintaining data centres. Downtime can be disastrous for an on-premise system.
As a result of this, cloud-based ERP is the way forward as companies grapple with the need to have real-time business intelligence on their customer’s needs and wants.
The Benefits Of Cloud ERP
With cloud ERP, companies can access a suite of services through a single application, which makes it easier to maintain, without the help of a large IT team. The services are modular, which means organisations can use only what they need for a particular quarter. If there’s a change in business conditions, they can “switch on” additional functions, accordingly.
Cloud business ERP software utilises the latest technologies to automate and connect business processes that allow companies to deliver better results. Some examples include:
- Automation through artificial intelligence (AI) and machine learning. This can help firms create processes that handle inventory and incoming orders more efficiently. That frees up sparse resources for more value-added tasks.
- Digital assistants that help to keep track of projects, their statuses, and help managers focus on what’s important, like changing customer demands and needs.
- Predictive analytics that can inform and support real-time decision-making based on data. Companies, for instance, can look at a customer’s purchase history and use the information to offer more targeted deals.
As cloud ERP is delivered over the internet, companies do not have to build additional hardware to set it up. That allows for quicker implementation and offers a relatively cheaper and predictable cost structure. Usually, for cloud ERPs, firms pay a monthly subscription fee either on a flat or per user basis and the use of additional services is billed only when they’re utilised.
Companies can keep their ERP systems up to date with regular software updates for the latest and most secure technology. That prevents the need to undertake expensive IT overhauls every year.
Hybrid Cloud ERP Solutions: Best Of Both Worlds
Due to cost and compliance reasons, organisations are also looking at a third option for ERP deployment and that is hybrid cloud ERP solutions. A hybrid ERP is a mix of public cloud computing and an on-premise operating model. The rationale behind this is quite straightforward. While companies would like to take advantage of the lower cost of public cloud computing services like, for example, email, they would rather have more sensitive data like business processes and financials in more secure on-premise servers.
The implementation cost and time for a hybrid ERP approach are generally somewhere between a pure public cloud (lowest costs and quickest implementation) and on-premise (highest costs and most time-consuming implementation) options.
While ERP systems are vital for the functioning of an organisation, they do not come cheap. Pricing models for cloud, on-premise and hybrid ERP systems bear little resemblance to each other.
As cloud-based systems are hosted and managed by the vendor on their own servers, there is a lower barrier to entry than in an on-premise set-up. Cloud ERP solutions are usually available through a monthly per-user subscription model, while on-premise systems offer perpetual use for a single (steeper) upfront fee.
For on-premise ERP, SMEs can expect to pay between US$75,000 and US$750,000 for implementation. Costs for large businesses can range from US$1 million to US$10 million.
Companies that can’t afford large upfront implementation costs should choose a cloud-based business, which doesn’t require hardware installation but may not offer as many customisations.
Over the course of a year, the cloud ERP price will typically add up to about 20 to 30 percent of the cost of an on-premise system’s perpetual license. However, the total cost over time tends to converge as the shelf life of ERP systems are quite long and on-premise is usually a one-time payment. Depending on the vendor, the maintenance and support of on-premise systems could add to the cost. On-premise users are usually required to pay annual support and maintenance costs, which can run between 10 to 20 percent of the original licensing fee. Feature upgrades could also cost extra, depending on the type of contract signed.
It makes sense for smaller companies with lower budgets to look at cloud ERP solutions while larger companies with bigger budgets can look at on-premise set-ups. Interestingly, even large companies with global operations are increasingly moving to cloud-based ERP for the additional functionalities and geographical reach that such systems offer.