Trends in ERP: Traditional vs. Hosted vs. SaaS
Mar 29, 2010
Over the past couple of years, the ERP market has seen a trend in the movement from the traditional ERP approach to a hosted or a SaaS “Software as a Service” approach. The terms “cloud computing” and “on demand” will also be used to describe the hosted and SaaS approaches. There are many variations to these approaches so an organization must take several factors into account when deciding on which ERP approach will best suit it, including functionality, pricing, data security, Internet connectivity, disaster recovery, and available IT support.
The Three Approaches
The traditional ERP approach requires the purchase of databases, server and peripheral hardware, as well as software. Maintenance and support costs can range between 15 to 25 percent of the software purchase price per year. The customer owns the software and is responsible for all upgrades as well as backup systems. A traditional approach requires an IT staff with a database administrator and a developer. Customizations are usually handled internally within the IT department. Software implementations may require specialized resources and will require more effort and time to deploy. Year-one costs include server and peripheral hardware, software, support, implementation, and IT staff. Year-two and beyond costs include IT staff and ongoing maintenance and support.
The hosted approach typically requires the same purchase of server and peripheral hardware, software, maintenance, and support as the traditional approach. The customer purchases the software licenses but is not responsible for maintaining the operating system, database, or a disaster recovery plan. This approach reduces internal IT requirements and typically internal IT staff levels. Customizations may or may not be performed by the hosting provider. Implementation usually calls for less effort during deployment. Initial costs generally include hardware, software, maintenance and support, hosting, and implementation. Year-two and beyond costs include some ongoing internal IT staff cost (lower than a traditional approach), hosting, maintenance, and support.
The SaaS approach does not require the purchase of server hardware or software. The software, along with maintenance and support and disaster recovery, are provided via a subscription and delivered over the Internet. Software upgrades can be continuous so customers are not forced to plan for and embark upon significant upgrade efforts every one to two years. Customizations are performed by the provider at the customer’s direction. This approach typically requires minimal IT staff. Implementations and deployment typically require less calendar time since server hardware acquisition and installation are avoided. Year-one costs are low and consist of the implementation and subscription fees. Year-two and beyond costs include some ongoing internal IT staff cost and the subscription fees. Total cost of ownership may or may not be higher than the traditional or hosted approaches over time depending on all of the factors involved.
Factors to Consider
Functionality. Regardless of the deployment approach, the software’s functionality must satisfy the organization’s needs. Be aware that some vendor’s SaaS solutions are not as functional as their traditional or hosted solutions. Carefully review and evaluate the organization’s requirements against the software capabilities.
Pricing. Traditional and hosted models typically base yearly maintenance and support costs on the number of named or concurrent users of the software. The SaaS model may also base price on user counts, but some vendors also offer unlimited users based on the organization’s annual sales. This pricing structure provides predictability to a major portion of the IT budget and reduces the traditional, large year-one capital investment.
Stability. In recent years, organizations considering the SaaS approach were concerned about the security of data, Internet connectivity, data center stability/”up-time,” and vendor viability. The viability of the providers offering SaaS solutions have dramatically improved and many organizations have entrusted significant portions of their application environments to such providers. If evaluating a SaaS or hosted approach, ensure that the provider’s data center is compliant with the current standards by requesting and reviewing the results of its latest SAS 70 audit.
If your organization is struggling with functionality gaps, disintegrated systems, staying up to date with the latest ERP version, or is experiencing high or unpredictable IT costs, it is time to consider the various ERP solutions and approaches that are now available.
Plante and Moran’s experienced professionals offer services in ERP assessments, selections, and implementations to help companies with these important business decisions.