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SaaS ERP vs. on-premise ERP software: Six key differentiators

A smooth ERP software implementation today is the key to ERP success and benefits in the future. Learn some ERP implementation critical success factors and find out how to avoid making costly implementation mistakes.

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 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 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.

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