This article originally appeared on Diginomica.com; it has been modified for this space.
CIOs are facing ongoing pressure from several angles to shift ERP to the cloud. Vendors are pushing their cloud roadmaps. The business is demanding cloud capabilities to achieve growth and gain competitive advantage. Some CIOs feel they are being asked to move to cloud ERP “for cloud’s sake” without a business case that justifies it.
There are two parts to the cloud ERP discussion – hosted infrastructure as-a-service (IaaS) and software as-a-service (SaaS). Hosting ERP infrastructure in the cloud as IaaS can save money and increase enterprise agility and flexibility. Switching “systems of record” (SOR) like ERP to SaaS can be more risky and costly than advertised by the vendor. However, SaaS for “systems of engagement” (SOE) can accelerate innovation.
Refreshing ERP by moving it to SaaS may not be the right move to drive innovation and achieve growth and competitive advantage. As CIOs incorporate cloud technologies into their ERP roadmaps, they should understand the following common misconceptions and realities of moving ERP to the cloud, and make the move for business’ sake, not for cloud’s sake.
1. COMMON MISCONCEPTION: Shifting my ERP to the cloud as a SaaS suite is better than best-in-class SaaS applications.
REALITY: Operating an ERP suite as-a-service does not eliminate its complexity or improve the benefits of being tightly integrated. For installed ERP licensees, moving to a SaaS ERP model can be expensive, risky and cause disruption for little, if any, business improvement. The opportunity cost of ripping and replacing suites to SaaS is also huge. Resources could be better spent on best-in-class applications that can modernize your ERP to drive innovation faster.
RECOMMENDATION: Before replacing your ERP suite, evaluate your application strategy and ensure that your requirements can be met by a SaaS ERP suite. Also, SaaS doesn’t need to be approached as an ‘all or nothing’ option. Consider where best-in-class SaaS makes the most sense. Assess whether shifting to a ‘cloud first’ approach is appropriate. A hybrid strategy for ERP infrastructure and applications will be the norm for the next several years.
2. COMMON MISCONCEPTION: Buying SaaS applications from my current ERP vendor is the best strategy.
REALITY: ERP vendors develop products that fit the broadest common denominator of requirements, which means they may not be the best choice for your industry-specific or customized business needs compared to best-in-class alternatives. Also, your ERP vendor’s SaaS products typically operate on their proprietary cloud infrastructure which locks you in to the vendor’s cloud infrastructure.
RECOMMENDATION: Many alternative SaaS applications are better suited to meet complex business needs than those offered by your ERP vendor. The best strategy is to let your business needs drive application choices. Evaluate the features and functionality of best-in-class technologies in comparison to the ERP vendor’s offering to decide what best fits your business. Consider choosing SaaS products that are vendor cloud infrastructure agnostic.
3. COMMON MISCONCEPTION: I should move to my ERP vendor’s cloud infrastructure.
REALITY: Adopting your ERP vendor’s cloud infrastructure could lock you in to a platform that limits your choice of products and services. Instead of the best-in-class options for your level of business complexity, you are limited to applications that operate on- or integrate with the vendor’s technology stack. ERP vendor IaaS can also cost more. For example, Oracle’s price per Oracle compute unit (OCPU) doesn’t reflect the total cost of cloud infrastructure. Once other operational needs of running ERP in the cloud are factored in, it can cost more to operate an ERP vendor’s cloud infrastructure.
RECOMMENDATION: Consider infrastructure and platform vendors that are ERP vendor-agnostic (e.g. Amazon Web Services or Microsoft Azure) in order to preserve your flexibility and agility, making your enterprise better able to withstand change. Be sure that your choice of cloud technology stack supports your business roadmap because the cost and disruption of reversing course will likely be high. Make sure your IaaS contract includes all of the costs of operating in the cloud.
4. COMMON MISCONCEPTION: I need to move to my vendor’s SaaS ERP or risk losing support.
REALITY: You don’t have to move your ERP to SaaS if there is no business value in doing so. The move can be expensive, risky and disruptive. The ERP vendors’ new SaaS platforms are designed to benefit the vendors, not the licensees. The vendors’ revenue generation strategy is to force customers to their new platforms via planned end of full support dates (rather than improved customer value). These new SaaS ERP platforms can cost 2-3X of what customers pay today.
RECOMMENDATION: You can take advantage of alternative third party support options to stay supported. Continue to operate your stable and proven ERP releases while waiting for SaaS ERP to mature, for the cost and risk to decrease, and an ROI to emerge.
5. COMMON MISCONCEPTION: SaaS ERP functionality matches my current ERP.
REALITY: In limited situations, some SaaS ERP modules provide a comparable or good enough fit. In most cases, SaaS ERP has not yet reached functional parity with your installed ERP. Nor can it replace all of your ERP customizations. If you have customized ERP to support your business, a SaaS ERP product may lack functionality that you need.
RECOMMENDATION: Confirm whether the lowest common denominator functionality of SaaS ERP is good enough or whether the better route is to keep the customized ERP that meets your business needs today and is capable of meeting your needs for years to come.
6. COMMON MISCONCEPTION: SaaS ERP costs less.
REALITY: Migrating to SaaS ERP is not always a good strategy for reducing costs. For example, Oracle cloud licenses often cost as much as 3x more than internally deployed seat plus maintenance costs.
RECOMMENDATION: When estimating the TCO of SaaS ERP, add in the “rip and replacement” costs, including those for replacing customizations and interfaces. When evaluating IaaS options, include ERP operational costs (e.g. scaling up/down, monitoring, security services) to get a truer picture of the TCO.
7. COMMON MISCONCEPTION: SaaS ERP updates are simple and easy.
REALITY: This is true for small or simple deployments where customizations and interfaces are limited. Otherwise, the more frequent, immediate upgrades will require more frequently doing the “heavy lifting” upgrade activities – analysis, configuration, testing and rollouts.
RECOMMENDATION: Since upgrade disruption will be almost an ongoing event as you lose control over upgrade timing and execution, review and enhance your upgrade processes and governance to accommodate the change in upgrade ownership and frequency.
8. COMMON MISCONCEPTION: I should move all of my ERP to the cloud.
REALITY: This is not a smart move for most enterprises. In our experience, early adopters have learned that results vary by cloud layer and that a hybrid approach to sourcing their ERP solutions often yields the best of both the cloud and internally deployed worlds. IaaS and PaaS are proving to be the least complex and most cost-effective initial moves. SaaS ERP is still an evolving market with functionality and operational issues that are yet to be solved. Moving to SaaS ERP doesn’t improve most enterprise’s ability to operate systems of record processes. Nor does it necessarily make an enterprise better able to respond to business needs or help drive innovation.
Instead of moving all of ERP to the cloud, start with the IaaS and PaaS layers. This increases IT flexibility and agility, making the enterprise better able to withstand change. Consider IaaS/PaaS vendors that are ERP vendor-agnostic and that keep you from getting locked in to your incumbent ERP vendor’s cloud technology stack. Wait for the SaaS ERP market to mature. In the meantime, innovate now with the help of SOE applications that can be integrated with your SORs.
SaaS and IaaS can be great accelerators for growth and innovation when scoped properly. However, moving to SaaS ERP may not be the right direction. Moving your internally deployed ERP to an open, vendor-agnostic cloud infrastructure as IaaS can yield better return, at a lower cost, and with less disruption. In the meantime, innovate now with other SaaS technologies, particularly in systems of engagement that improve the customer experience. This is a great way to let what the business needs drive your cloud moves to support competitive advantage and growth.