Pros and Cons of Cloud-based ERP
From ASP model to Sass to Cloud computing. Cloud computing does bring about some level of benefits, especially to smaller setup whom probably doesn’t want to have a heavy upfront investment on any hardware or ERP software, and with cloud being the buzz word now, does that mean you should also jump into the Cloud model?
Just like every business decision , every technology has its pro and cons. Here are a list of pointers to share with you for your assessment to judge and see if Cloud is suitable for your business.
Whats the Advantage?
- Reduced the need for upfront heavy investment cost
Most ERP Software will need you to invest in server and related hardware infrastructure such as ensuring the minimum spec for your PC that will be installed with the ERP. Going into a Cloud environment will eliminate the investment cost on hardware.
- Reduced maintenance fees
Possible as without housing any in-house hardware infrastructure, there is no need to worry about server being down or hiring a system integrator or an in-house IT to maintain and managed your network and servers.
Now looking from above and from business perspective, saving cost seem to be the top consideration in every owner’s mind BUT does that mean hosting your own Enterprise Resource Planning in-house will be higher cost and not worth your investment? Now let’s take a look at a simple Total Cost Of Ownership (TCO) comparison chart.
Assuming a 10 users environment for a ERP System for a Manufacturing company, using a 5 years comparison basis as most companies change their ERP at least 5 years and beyond.
| Cloud Model Cost For ERP|
|Per Named User at $200/user / month|
|Total Users at 1 year, let’s assume 10 users = $200* 12 months * 10 users = $24,000/year running cost|
|Total User remain at 10 users in 2nd year = $200 * 12 months * 10 = $24,000/ year running cost|
|Total User remain at 10 users in 3rd – 5th year = $200 * 36 months * 10 = $72,000/ year running cost|
|Total Cost Of Ownership for 5 years, assuming company has NO expansion in headcount = $120,000|
| Non-Cloud model cost For ERP|
|Total User License fees + Professional Services for training, setup etc (1-time payment only) = Ranges between $30,000 – $65,000 (we take upper end for comparison)|
**Assuming Mid-market range ERP Software for SME market
|Estimated Hardware Investment cost for buying new server etc = $25,000 or less (depending on your current infrastructure)|
|Annual Maintenance for ERP Provider for 5 years = ( market average of $3000 – $6000/year, we will take the upper end for comparison) = $6000 * 5 = $30,000|
|Total Cost Estimated for 5 years with same assumption that company has No expansion in headcount = $120,000|
Looking at above table of comparison, most likely the TCO is about the same but let’s take a look at some possible additional downside of Cloud model.
What’s the con of a Cloud model?
- Cost of usage is NOT FIXED
In above table for the purpose of simple comparison, we keep the number of users constant but its quite unlikely in real business environment whereby your business will grow, your users size will grow and a lot of time, Cloud model charged by Named User and not by Concurrent Users.
- Reliance on Internet stability/availability
Cloud model will usually require you to make use of Internet to access the offsite hosted application. Let say today you face Internet line down, your entire company’s operation will be crippled. Now how tolerant is your business for downtime and at what opportunity cost? Hosting the ERP in-house will usually mean almost zero reliance on Internet since it will run within your Local Area Network (LAN) and minimized interruption of work only for users whom are mobile and outside of office only.
Most of the ERP data contain your company’s sensitive information such as financial accounting data. How comfortable are you not owning the servers and having your data lying out there in an external servers not within your means of management? How can you get your data back when you decided to switch the Cloud vendor? How much data privacy do you really own?
- Lack in ERP System flexibility
Most of the time, having a Cloud ERP software solution will usually mean you cannot have much customization according to your requirements as the concept of Cloud usually means sharing to tap on the scale of economies. How ready are you to adjust your operation to suit a standard ERP system as opposed to having the flexibility to tailor-made according to your specified needs?
- Lack in Integrated solution for most cloud model
You probably need a ERP software that covers not only accounting but also your operations and HR. Can you find one that covers all your needs? If not, how to integrate with 3rd party devices (such as barcode, RFID, biometric TMS etc) or 3rd party software. Something worth to ponder over….
Cloud ERP Software will probably served a good need for small companies or newly setup whereby user size is small, requirements are very basic. For bigger SME whom has easily headcount of 30 and beyond and the need for more integrated and customized solution, probably a non-Cloud model will be more suitable. Whichever model you go for, assessment of both monetary and non-tangible aspects are something to look into carefully.