Cloud ERP Software Perceptions

August 16, 2011
By djohnson

Cloud ERP PerceptionsThe Cloud represents a major technological change that impacts ERP software. The change is real in terms of how software is designed and developed. But there are perceptions (both real and false) about using the Cloud to run your business. In this post we look at 3 common perceptions associated with Cloud accounting and ERP:

- Perception 1: Cloud software costs less than traditional software
- Perception 2: Cloud software is only for small businesses
- Perception 3: The Cloud and hosted ERP are the same

Perception 1: Cloud software is less expensive

In the technology world, people are conditioned to think in terms of Moore’s Law. If I paid $X for ‘it’ 2 years ago, I should be able to pay $X for ‘it’ this year and get twice as much. Moore’s Law applies to things like memory sticks, computing power, and silicon chips … and it also applies to software perceptions.

With ERP software, the Cloud represents the latest, greatest, and most influential change in years. Since people associate the Cloud with technology, customers expect to get double the features and software the same price that they paid 2 years ago.

While the cloud can reduce upfront costs (see article on customer pricing models), it may not offer the degree of savings associated with Moore’s Law.

Cloud cost savings are primarily derived from:

  • Reduction in IT staff – this is a valid source of savings, be careful not to overlook the overhead associated with Internet access, user management, user training, and data management.
  • Reduced server costs – server virtualization allows datacenters with multiple servers to share workloads and increase overall server utilization. Remote access can be managed without additional servers and costly software.
  • Economies of scale – outsourced datacenter management (backup, replication, operations, etc.) can lower computing costs, just like buying power from a power company can lower energy costs.

Despite the fact that these savings are real, there are many other ERP costs in areas such as requirements gathering, software configuration, training, data migration, and customization. Unfortunately, the Cloud doesn’t significantly reduce costs in these areas. Since these areas can represent a significant part of ERP expenses, the cloud may not live up to expectations when it comes to savings.

Conclusion 1: Somewhat true, but not for everybody in all situations

Perception 2: Cloud ERP software is only for small businesses

Cloud software solutions are appropriate for all customers – from small shops to Fortune 500. Here are a few reasons why the Cloud is good for enterprise businesses:

  • Scalable. Cloud software and cloud datacenters are scalable so the solution can grow rapidly to serve large customers with significant processing requirements. The cloud can also shrink in periods of lower demand.
  • Multi-National. The Cloud is everywhere so it can span continents for a multi-national business. Cloud software can serve remote offices without requiring additional servers and IT staff to manage the applications.
  • Advanced Security. Cloud software has strong user and group security settings so specific data and capabilities can be limited to specific individuals.
  • Choice of Device. Web-based software works with browsers, so users can access the system with their choice of device regardless of operating system, hardware platform, or form factor. This is useful in companies with multiple subsidiaries that cannot mandate a standard platform across all users.

Even though Cloud software is appropriate for large businesses, Cloud adoption started with small and mid-sized companies. This is because SMBs are more nimble. In a small business there are fewer committees and organizations that need to be convinced of the value and included in implementation, so decisions get made faster, deployment starts sooner, and training finishes faster.

A small business environment has more flexible processes than most enterprises. Years ago, when cloud software had fewer features than the ERP client-server incumbents, businesses with rigid processes were not willing to make the switch. These customers postponed their buying decision until all features were ready and tested. Most medium sized businesses have the same needs as larger businesses, but the benefits of automating may not justify the cost of waiting for the feature while utilizing outdated technology. A manual process performed once per week is acceptable. A manual process preformed once every 5 minutes would benefit from automation.

Conclusion 2: The cloud can serve all size businesses, but market adoption initially favored SMBs

Perception 3: The Cloud is nothing more than hosted ERP

We have argued that a hosted deployment is different from a Cloud deployment. With the help of NetSuite and several IT analysts, the concept of the Fake Cloud is being exposed as a poor substitute for a web-based system that requires no client software. More on this perception.

A cloud based application is different from client-server on many levels. The obvious difference is that customers do not install or maintain client software. Several less obvious differences involve statelessness, network traffic, and security.

The stateless nature of cloud applications ensures that they continue to work if there is a temporary break in internet connectivity. Client-server applications were designed to utilize a steady network connection. Think of cloud communications as exchanging postcards (that are instantly delivered without stamps), while client-server communications are more like cell phone calls (when your connection drops you have to “rewind” your conversation).

Cloud applications are built to minimize network communications. Going back to our postcard analogy … the goal of a cloud application is to get each instruction on a postcard. Most client-server applications are designed with the idea that there is a fast ethernet connection between the client and the server. Therefore the design didn’t worry about the amount of data being passed back and forth. When client-server applications are hosted – this is why the client’s remote desktop applications are usually co-located with the server.

Cloud application design involves different security considerations than client-server applications. Communications between the browser and the server are always untrusted. The underlying assumption is that the browser could be compromised or the connection between the browser and the server could be tapped. This means that all business data is verified by the server before being moved to the database. It also means that the transmission path is encrypted by design. Finally, each instant-postcard sent to the client will only contain data that is allowed by the security model. Each request received at the server will only be processed if allowed by the security model.

Conclusion 3: False – as explained above, the two architectures are very different

Summary and Outlook

The cloud will continue to grow and perceptions will continue to change. Fortunately, the three perceptions above are changing in a positive way … towards the truth. As adoption continues and education expands, false perceptions are gradually weeded out. In some cases vendor marketing can slow the process (as with perception 3 above), but the truth about cloud software progresses with time.

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