• Digital Transformation  |  ERP Systems  | 
  • 5 Min Read
  • Cloud-Based or On-Premise ERP: Making the Right Choice for Your Business

    Mike Davis

    Written by Mike Davis
    Thu, Sep 05, 2019

    Gain insight and alignment with internal stakeholders before making a choice on cloud ERP or on-premise ERP.
    Gain insight and alignment with internal stakeholders before making a choice on cloud ERP or on-premise ERP.

    When it comes to enterprise resource planning systems, or ERP software, you may find yourself faced with a difficult choice: deploying your ERP on-premises or in the cloud. How do you know which deployment model is the best choice for your business?

    While cloud ERP remains the hot trend, both on-premise and cloud ERP deployments offer advantages and disadvantages. Making the right decision can be critical to your ERP implementation’s success. Factors like the size of your enterprise, what industry you are in, IT security policies and individual organizational needs all play a role.

    What is the Difference Between Cloud ERP and On-premise ERP?

    Deployment Method

    Deployment method is the single most significant difference between these two systems. According to Gartner and TechTarget, 35% or more of new ERP deployments in large enterprises will either support SaaS or “be loosely coupled with on-premises manufacturing execution systems,” or MES.

    Also Read: 6 Thing Manufacturers Need to Know When Implementing an ERP System »

    With a cloud-based ERP system, the vendor hosts everything on their servers, either in a public cloud or a privately-hosted cloud combined with a managed service, with many variations in between. In either case, you can access software and resources via a browser-style user interface (UI). Cloud ERP services tend to be simpler to setup since the host handles much of the technical work, particularly in a “managed service” scenario.

    To deploy an on-premise ERP solution, you must install the software on your own servers and access it through your in-house hardware. This makes “on-premises” more complicated to setup and maintain since it requires an internal IT team to manage every aspect of technical upkeep in order for the system to operate. The trade-off is that an on-premise environment lets you retain total control over your own ERP environment, more easily facilitating custom modifications (such as for specialized manufacturing processes) and adhering to IT security requirements.

    A third deployment model also exists called hybrid deployment that combines features of both on-premises and cloud ERP.

    NOTE: Whichever deployment method you choose, enterprise mobility solutions that use mobile barcode technology to achieve digital automation can integrate with equal flexibility to cloud, on-premise and hybrid ERP systems. Learn More »

    Having the ability to support an in-house IT team is a requirement of running an on-premises ERP solution.

    Solution Cost

    Deployment isn't the only consideration that separates these two ERP software solutions. There is also the matter of cost.

    Most cloud-based systems vendors offer a subscription model called SaaS, or “software as a service.” For a recurring monthly or annual subscription, the vendor provides access to the software, hosting, maintenance and technical support. Variations on SaaS include PaaS, or “product as a service,” and IaaS, “infrastructure as a service,” and may include additional or deeper functionality.

    On-premise solutions deliver systems when you buy a license. The license fee reflects the size of your business and the number of computers and users deploying the software. Customer and technical support, staff training, maintenance and updates are all added costs.

    SaaS may cost less up front but at the expense of limiting your organization’s ability to take full control of the solution, especially when it comes to custom development. On-premise requires a large lump expenditure up front but enables your team to manage the ERP internally. One significant downstream added cost for ERP software is in developing the ERP to meet specific business requirements. Modifying your cloud ERP with custom code can be difficult when the ERP server isn’t maintained in-house. This could mean paying for development hours from the ERP provider or a third-party vendor.

    ALSO READ:  Mobile App DevelopmentUse a low-code mobile app development platform (MADP) can significantly reduce development costs. If you are extending your ERP (whether cloud or on-premise) with enterprise mobility, look for a solution that does not install custom code on your ERP server. More »

    The on-premise model is effectively a capital expenditure. If you don't have the servers and hardware to host and deploy the ERP software already, you must factor their purchase and installation into your budget, too. Businesses absorb cloud-based ERP solutions into on-going operational costs and need no capital purchases.

    The low starting costs, ability to spread payments, “only pay for what you use” and “scale up as you need” approach make cloud-based ERP an attractive choice. However, depending on the size and structure of your enterprise, as well as available resources for the project, the up-front costs of an on-premise solution may make more sense.

    You may also find that over time the price comparison between cloud ERP and on-premise ERP models more-or-less equals out. The difference isn't so much about total costs as achieving the right balance for your business between capital expenditure and cash-flow management.

    Also Read: Warehouse Technologies That Create Business Value (FREE DOWNLOAD) »

    Security Concerns

    Security is a major influence on whether your organization elects for on-premise ERP or to go with a cloud ERP solution.
    Security is a major influence on whether your organization elects for on-premise ERP or to go with a cloud ERP solution.

    As cloud services adoption becomes more widespread in businesses worldwide, anxiety about cloud-based systems security is waning.

    Cloud-based ERP vendors take client data security seriously and integrate powerful and efficient safety standards. Third-party security audits are also a common practice. If the vendor doesn't offer an external audit in their standard service level agreement, ask for one. Most reputable cloud-based ERP providers deliver belt-and-braces security at least as safe as an online banking service. If you're happy to trust the bank with your money, you should feel at ease trusting an ERP vendor with your business-critical databases.

    A clear advantage of cloud-based ERP systems in today's business ecology is mobility. Cloud-based ERP means you can access your software and data wherever there's an internet connection and from any enabled device. Often, native mobile applications come as standard. But maybe you don’t want users to access critical ERP data from anywhere, let alone from an external source.

    With an on-premise system, you have a strict geographical limitation on access. This is both a benefit and a drawback. While it may be possible to link to your on-premise system via a third-party communications provider, that's a slow and expensive way of going about things that also raises additional security concerns. However, it also limits access from outside intrusions as well.

    Having your ERP server housed on-site allows your environment to benefit from all the security protocols put into place by your IT department, as well as any additional protection layers they deem appropriate. In addition, you can customize your systems with on-premise ERP while preserving direct control over business-critical data security. For companies operating in highly-regulated industries, SaaS or cloud ERP models can be detrimental to remaining in compliance, necessitating an on-premise ERP.

    Whether you choose on-premises or cloud, decide on an ERP model that works best for your organization’s individual requirements.

    A Note on Mobility

    If your company is engaging in specialized activities, such as supply chain automation, mobile barcoding or mobile supply chain app development, then consider a total supply chain mobility solution. Enterprise mobility solutions purpose-built for the supply chain can easily inherit your security protocols while offering shorter implementation periods with lower complexity and cost. Supply chain automation software can also mitigate challenges associated with trying to force a more generalized mobile app platform into performing tasks like transacting inventory with built-in validation steps on the floor or rapid mobile barcode scanning.

    Read More: 5 Questions to Ask Before Adding Mobility to Your ERP Environment »

    Breaking it Down: Cloud-Based or On-Premise ERP?

    Making the choice to implement cloud ERP versus on-premise ERP isn't about deciding which is best, only which is a best fit for your enterprise.
    Making the choice to implement cloud ERP versus on-premise ERP isn't about deciding which is best, only which is a best fit for your enterprise.

    A quick overview of the pros and cons of cloud ERP and on-premise ERP systems.

    Cloud ERP

    Pros:

    • Affordability
    • Mobility
    • Simplicity
    • Scalability
    • Accessibility

    Cons:

    • Limited scope for functionality and customization
    • Reliance on vendor and lack of vendor/user alignment
    • Compliance challenges
    • Requires reliable high-speed internet access

    On-premise ERP

    Pros:

    • Direct control over data and environment located in-house
    • Can be built and customized to exact business requirements
    • Restricted access from external sources
    • Compliance to regulatory standards
    • Closer alignment between development team and users

    Cons:

    • Up-front capital layout
    • Complex to maintain (requires in-house IT personnel)
    • Integration with other ERP systems within the same enterprise
    • Geographical limitations

    As the cloud-based service industry continues to gain ground and consume greater market share, the customization, functionality and security gaps are closing fast. It may not be long before all businesses deploy some degree of cloud-based functionality in their systems, regardless of size. Major ERP providers like SAP and Oracle are already focusing their strategic efforts on simplifying ERP landscapes into single-platform services.

    However, this doesn’t mean cloud ERP is for every enterprise. Many major organizations still use on-premise ERPs for security and control, while many others plan to adopt some form of hybrid ERP that makes use of on-premise elements.

    Therefore, it is crucial to do your research, connect with decision-makers and business users in your organization and develop a plan to adopt, implement and support your new ERP system. Once you’ve decided on a course action for setting up your new ERP, consider how mobility can play a role in helping you modernize warehouse or factory with 21st-century automation.

    Continue reading about ERP mobility:

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