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Cloud ERP or Conventional ERP?

When an organization decides to implement an ERP solution for their business, the first question that comes before them is whether they should go for a conventional on-site ERP or a cloud-based ERP solution. With any new system introduced in the market, companies are skeptical about cloud-based ERP solutions. Choosing between a cloud-based ERP and a conventional ERP is similar to the paradigm of buying or renting a house! When someone rents a house for a long term, the total amount they spend on the rent is considerable. If they add some more amount to it they could have probably bought the house.In a rented house, restricted modifications are allowed but the owner of a house can modify the house as they want, depending on their budget. If the tenant is looking for a short term stay, renting a house is a better option as they can just cancel the contract and move on when they decide. So whether to buy or rent a house depends purely on the tenure of use, whether it requires any modifications and cost factor.

The cloud-based ERP software is similar to renting a house and the conventional on-site ERP is like buying a house. Considering long term usage, conventional ERP solution will be more cost effective. Cloud ERPs include usage and licensing charges over a period of time. A conventional ERP allows multiple customizations while the cloud-based ERP solutions allow only limited customizations. Implementing a conventional ERP involves a great deal of investment in terms of hardware, software, IT resources like system administrators, network engineers, data entry operators, database administrators etc. It also involves periodic maintenance and upgradation costs. But the cloud-based ERP system requires a simple implementation of a client-software, easily accessible through the internet browser with minimal system requirements. Cloud ERP system is a better option when the company does not have a large amount to invest in the initial implementation. The only investment required in case of cloud-based ERPs will be the workstations for data entry and a secured high-speed internet connection. The workstations on-site will connect to the web based server through the internet connection to fetch the processed data from the server and send the data to the server for processing and storing. Any software or hardware upgradations required are done at the server-end without affecting the end-user or the client.

Recently a few organizations in the defense and aviation sector have chosen to implement cloud ERP. Many big players in the e-commerce sector including Amazon are succeeding after adopting the cloud version of ERP solutions for their organization. Microsoft is coming up with its new cloud platform called Microsoft Azure Stack. Microsoft’s new cloud release is targeted for companies that stayed away from the cloud platform because of data security and regulatory issues. Microsoft’s Azure Stack offers a private cloud for the organization. It intends to support PaaS or Platform-as-a-Service and IaaS or Infrastructure-as-a-Service.

Another issue with conventional ERP software is that, in case the company decides to wind up the business or is acquired by some other business or change in the business line, the implemented on-site ERP becomes obsolete. In such a case, the entire investment in the ERP implementation is a loss, as the license of the installed ERP cannot be sold or transferred to a third party by this organization. If the cloud-based ERP is used, the only loss will be the licensing or usage charges already paid. The organization can decide to discontinue using the particular ERP service and move on with another product that suits the new business. Data security is another concern for many organizations, dealing with classified or highly secure data. Though security is a must for all cloud-based ERP, if the organization cannot take risks, conventional ERP will be a better option. Here the entire data is managed by the organization under their own servers. So data security is entirely under their risk when it comes to conventional ERP solutions.

Types of cloud-based ERP Solutions

There are 3 models of Cloud-based ERP solutions:

  1. SaaS or Software as a Service model; the cloud ERP solution provider shares the hardware or server with many small businesses. A small service fee or a subscription fee is charged for each user or business subscribed to their ERP solution. This is the most popular model for small businesses as the subscription fee is negligible when compared to the implementation cost of on-site ERP. It is equivalent to buying a server space to host a business portal.
  2. Hosted ERP model; each customer or business has a dedicated server. This is a comparatively expensive but preferred by larger organizations. This has many advantages over the SaaS model. Since the server is not shared, data is more secure. Issues with the data of one business does not affect the others’, as each business has a dedicated server.
  3. Hybrid ERP model; certain modules of the ERP are in the conventional model and remaining are in the cloud-based model. Businesses with existing installation of conventional ERPs can adopt this model for upgradations and additional modules. They can retain the already implemented ERP on-site and at the same time utilize the cloud-based models for additional functionalities without disturbing the existing model.

In short, the key factors in deciding on the type of ERP to be implemented are:

  • The implementation cost for an on-site ERP that includes new or upgraded IT and human resources is very high. Add to that the cost of training the employees to use a new system. If the organization has limited resources, a cloud ERP solution is the better option.
  • If the organization is planning to use the ERP for longer than 10 years, a conventional ERP would be more cost effective considering the subscription or licensing fee that will be charged by the cloud ERP solution provider.
  • If extensive customizations are required, only conventional ERP is feasible as cloud ERP does not support too many customizations.
  • If the data needs to be extremely secure, go for on-site ERP implementation, since the data security requires a considerable investment.
  • The maintenance and upgradation costs for on-site implementations will be higher than the cloud ERP solutions. Upgradations for a cloud-based ERP are done in such a way that the downtime is minimized.

Keeping all these factors in mind, the organization can decide on whether to consider a conventional on-site ERP solution or a cloud-based solution.

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