Or would you have stuck to what was comfortable, and risk getting relegated to the sidelines in the wake of the communications revolution that was to follow?

I’ve zeroed in on the fax-email dynamic quite intentionally. Just as enterprise email servers and messaging software have relegated fax machines to the sidelines, so too have they begun to be replaced by cloud-based, SaaS enterprise mail, such as those from Microsoft and Google.

Having been a technology writer for the better part of a decade, I see a couple of trends in enterprise-class messaging that I think may be relevant indicators that describe the relationship between on-premise and Cloud ERP.

Two growth areas for Messaging SaaS

There have been two broad groups of organizations that have embraced cloud enterprise mail.

The first group are major companies like GalxoSmithKline, who have found it more cost effective to convert their mail, calendaring, and contacts functions to a subscription service via the cloud with Microsoft Office 365, rather than to maintaining the hardware and software needed to do these in-house.

It also frees up their IT people to focus on more high-impact IT projects, rather than to patch, update, and otherwise manage a global deployment of enterprise mail.

Says Alastair Robertson, VP of Information Workplace at GSK : “Moving to Online Services will enable us to reduce our IT operational costs by roughly 30% of what we’re currently spending. The ability to introduce a variable cost subscription model for these collaborative technologies allows us to more rapidly scale or divest our investment as necessary.”

The second group is made up of small and medium-sized enterprises that could not or did not want to part with the funds and resources needed to set up on-premise enterprise-class messaging.

That all changed with the cloud – in what represents a major evolution for SMBs, enterprise-class messaging became something that even start-ups could count on, along with Internet connectivity, power, and other utilities that are taken for granted in many parts of the world.

Where Cloud Messaging goes, Cloud ERP might follow

The two categories of Cloud Messaging adopters also, somewhat coincidentally, represent two major markets for Cloud ERP. Similar patterns can be discerned here.

Cloud ERP in the Enterprise

For instance, there is the large enterprise that has grown weary of being locked in by a costly ERP vendor with a pricey maintenance package, and where innovation has taken place at a pace somewhat slower than other enterprise solutions. And then there is the growing SME that is availing itself to cost-competitive ERP SaaS for the first time.

At this time, we should acknowledge that it’s not easy for a major company with an existing ERP system to move to a cloud-based one. It’s a challenging decision and process, but with planning and preparation, and the right partner, this is entirely doable.

Cloud ERP software in the SMB market

The SME has fewer constraints. Often, they can be quite eager to embrace the ERP Cloud to optimize for growth, and leave behind the need to juggle spreadsheets.

For these smaller companies new to ERP, SaaS and the ERP Cloud are highly viable and affordable alternatives to on-premise ERP.

In fact, in a survey conducted in 2011 with over 300 SMEs each posting less than $500 million in annual revenue, Aberdeen Research found that 77% of the SMEs interviewed have already implemented an ERP solution.

A significant number of these SMEs reported adopting an ERP solution due to the expectation of strong growth despite the uncertain economy, with almost four in 10 adding that they were doing so due to lower cost options, like the SaaS and the ERP cloud.

Summary

Naturally, the comparison between different SaaS products is not a perfect one, but the parallels between how Cloud Enterprise Messaging has evolved, and how Cloud ERP will evolve, are ones that any business and technology decision maker would do well to heed.

In today’s blog, I wanted to touch on how a made-to-order manufacturer finally decided to commit to moving their ERP to the cloud after a black swan event that has shaken up the organization. This was a tip-off that we received from one of the Cloud ERP vendors that we partner with.

So – how is this manufacturer currently managing the many complex and distributed ways its business is running?

With pen and paper. Seriously. Good old-fashioned pen. And paper.

Could have, should have, gone with SaaS

Here’s the backstory. The manufacturer’s previous on-premise ERP system had been hacked, which disrupted its ability to function and exposed its business to significant risks. To add insult to injury, the hacker or hackers encrypted all of the compromised files and data, effectively locking the manufacturer out of them.

With no other means to continue operations, the company has had to resort to the technologically primitive stopgap measure of taking orders, managing manufacturing, and ensuring fulfillment with paper forms – and lots of legwork, calls, and faxing.

Starting over with SaaS

At the same time, its team has had to rebuild. So they are now reviewing a new SaaS ERP solution because in their minds, not only would this mean less work for their IT people, it would even be more SECURE than their previous on-premise set up.

And while they are planning a cloud ERP system from the ground up, they are also taking the opportunity to load up on a few extras.

On top of the accounting package with BOM, inventory control, OE, Purchase Order and payroll modules, they are also planning for future upgrades such as bar code functionality and serial number allocation to the BOM to minimize errors, as well as a way to create RFQ’s in the purchasing module that would convert the RFQ into a new PO.

Conclusion – Changing Views of Security

Perceptions around security and Cloud ERP and SaaS have come a long way. Four years ago, security perceptions were the number one reason that customers elected not to go to the Cloud. In a 2010 Aberdeen research survey, the desire to control upgrades surpassed security as the number one concern for ERP buyers. As more articles on cloud ERP security are published, customers are overcoming inaccurate perceptions of security. Advice to companies with on-premise servers – perhaps it might not be a bad idea to start planning for a transition to a Cloud ERP solution before a black swan comes a-calling!

If you’re not happy with the service that you receive, take your business elsewhere. That’s pretty much what Amazon CTO Werner Vogels said at an event organized by the company’s Amazon Web Services recently.

His exact words were: “You should keep your providers on their toes every day. If we are not delivering the right quality of services, you should be able to walk away. You, the consumer of these services, should be in full control. That is core to our philosophy.”

That comment created quite a stir in the cloud community. Most people agreed that, philosophically, Vogels was right – nobody wants to be pay big bucks just to be held hostage to a cloud vendor, regardless of whether it was for IaaS, Paas, or SaaS. For that matter, nobody wants to have to pay big bucks to break free, either!

A one-way SaaS ticket?

However, at least one commentator took issue with Vogels. In an article on GigaOm , Barb Darrow pointed out that those who have tightly integrated their SaaS applications, such as with ERP Cloud for instance, with AWS would have a much harder time switching IaaS providers.

Darrow quoted the CMO of VoltDB, Fred Holahan as saying: “Depending on the level at which you’re building software, you might be quite insulated from the details of the underlying infrastructure, but part of the objective of a platform vendor is to provide you with tantalizing services that lock you in.”

While many of the new AWS services do result in more tightly coupled scenarios between AWS and its customer data centers, there are ways to avoid vendor lock-in by planning ahead, both in the Cloud in general, but also in the ERP Cloud in particular.

Planning ahead to keep SaaS portable

Ensuring your organization’s ability to switch providers whenever it makes sense to do so entails a couple of things: planning ahead, and picking a provider that is committed to an open, interoperable framework.

With proper planning, your organization could turn the lights on for its alternative cloud so that it can run in parallel with the legacy provider, and have data written to both databases at the same time. That would allow a smoother transition for when there is a need to do so.

The other thing to consider is to drill down with the service providers of choice, and make sure that they take an open approach and are set up to compete based on the best product, the best service levels, and the best value over the long term, rather than luring you in with sweeteners, but making it painful to leave. This is especially relevant for SaaS applications and the ERP Cloud.

It might be a bit of a pipedream, but perhaps the open service provider that already has that perfect mix of product, service and value might just be able to turn openness and interoperability into a fourth competitive advantage!

SaaS ERP more expensive in Long Run

In the CRN article, Joe Langner, EVP for midmarket and CRM solutions at Sage was quoted “For most resellers, the recurring revenue stream eventually exceeds that up-front payment.” This suggests that for customers, SaaS is a more expensive solution in the long term than purchasing a license.

In a prior ERP Cloud News article we did a cost comparison between on-premise, hosted, and SaaS ERP solutions. This comparison validated the fact that purchasing ERP as SaaS can be more expensive in the long term. The breakeven point between SaaS and a hosted license varies according to the assumptions made regarding the cost of doing upgrades, managing the application, the cost of IT resources, maintenance payments, hardware costs, hosting costs, and several others.

For many mid-market pricing scenarios, the breakeven (point at which SaaS became more expensive) occurred before year 3 when purchasing a license and utilizing an external hosting provider. So, if you are planning to use your ERP system for less than 3 years, then SaaS makes good sense from a pricing perspective. But, most ERP solutions are installed for 7 years to 10 years or even longer.

Justifying the Higher Price

SaaS deployments may cost slightly less in years one and two – so if you have short term cash constraints, then a more expensive long term solution can be justified. But, if your company is not worried about accounting and cash flow issues and plans to use the software for the long term, then you must justify the higher long term cost of a SaaS ERP system.

SaaS versus On-Premise

Justifying SaaS over an on-premise deployment can be quite simple. If you don’t have spare IT resources, servers, OS licenses, and database licenses, then the cost of hiring or contracting with a vendor can be too high. And even if you justify the cost, it’s probably not worth the hassle of developing in-house expertise or taking on the liability of providing 24×7 operations.

SaaS versus Hosted

Hosting differs from SaaS in that customers purchase a software license and maintain responsibility for maintenance payments and software upgrades. Hardware, power, Internet connectivity, monitoring, and other services are outsourced depending on the hosting provider and the service plan. Different cloud hosting services can provide everything from bare bones virtual servers (infrastructure as a service) to a fully monitored and updated operating system (platform as a service).

In this case, the higher price of SaaS can be justified by the fact that server operations, application upgrades, and maintenance payments are included in the price. Think of SaaS pricing as including a “convenience fee” that adds up over the life of the service. A license and hosting arrangement is usually less expensive than SaaS, but the hassle associated with doing upgrades and managing the application should not be underestimated. SaaS vendors specialists in their application and provide a single point of blame if things go wrong (although behind the scenes the SaaS vendors usually outsource the hosting operations to a third party).

Conclusion

Depending on your level of expertise, company needs, and company infrastructure, SaaS may provide value or simply be a more expensive choice. There are situations where you are willing to pay for convenience and there are situations where you want to maintain control or do-it-yourself to save money.

One thing to keep in mind is that your needs, requirements, and expertise may change over time. While making your choice of SaaS or on-premise, keep your long term goals in mind, or select a vendor that allows you to move seamlessly between a SaaS and an on-premise version of their software.

In a traditional ERP deployment all ERP related tasks are performed in house. In this case the ERP Manager is responsible for a team of employees that can manage servers, update software, configure the application, oversee data backups, and other system related tasks.

All of these tasks will take a considerable amount of time and money. The organization must consider the cost of employing and training this team to oversee the ERP system that they are going to be implementing versus outsourcing this to a company that specializes in configuring and maintaining ERP systems. In many cases companies split responsibilities by keeping some in-house and outsourcing others.

Software as a Service (SaaS) frees the organization from the responsibility of maintaining servers and performing most IT related tasks. The responsibilities that fall under an ERP Manager in a SaaS environment include managing internet access and helping users understand how to use the system properly. This challenges the ERP Manager to become more involved in understanding the business and less involved with routine information technology (IT) tasks. The ERP manager will need to be capable of carrying out tasks across several different departments that an ERP system can carry out. This will ensure that the manager is able to take appropriate action if something goes wrong with the system.

Don’t Underestimate the ERP Manager’s Role

All operations within the company must be monitored and the ERP Manager must ensure that all potential problems within all departments are dealt with in a timely fashion. If a mistake is entered into the ERP system, it will spread throughout the company since an ERP system brings together all the different departments within an organization and it will be the ERP Managers responsibility to track down the source of this mistake and to put it right.

Some Tasks Remain the Same

An ERP manager managing a traditional, in house ERP system will be required to report to the companies’ investors and must therefore possess a professional attitude with good communication skills in order to instill confidence in the people who the manager will be reporting back to. Similarly a SaaS ERP Manger will be required to report to the company.

Finally, like all managers, an ERP Manager must take steps to improve the morale of all the staff that the manager is responsible for namely, all the people that will be maintaining the ERP system. The ERP manager would need to ensure that all staff are assigned tasks that are fair and should receive useful advice when they have professional, work related problems. An ERP Manager with poor people skills will affect the attitude of the staff; this will result in them not working to their full potential and ultimately making them incapable of bringing out the full benefits of the ERP system.

Conclusion

Software as a service is a positive development for ERP Managers. SaaS technology creates IT efficiencies that allow ERP Managers to spend less time on repetitive tasks and more time interacting with business people and becomming involved with core business processes. Tasks such as maintaining servers, doing data backups, and updating software can be outsourced to highly specialized cloud providers while investigation of new technology, advanced system configuration, and training can be kept in house.

- – - –

About the Author:
Rashed Khan has a Msc in Software Engineering and regularly guest blogs on business and technology related topics. Rashed is currently blogging on behalf of ERP Systems experts Epicor.

Recent weather events including flooding along the Mississippi and Missouri Rivers, tornados from Northern California to Oklahoma, thunderstorms from Illinois to New York, and heat alerts in the Southeast have demonstrated the impact of ‘bad clouds’ on business and data availability.

I’ve often heard the phrase “you have to fight fire with fire.” Today many businesses are fighting clouds with The Cloud. In the case of one Oklahoma manufacturing firm, the solution to business problems involved using the Cloud to centralize data in a secure location that is impervious to the impacts of local disasters. By using the Cloud, DDB Unlimited (www.ddbUnlimited.com) was able to automate financial processes, streamline operations, eliminate accounting costs, and process orders faster.

Building a Cloud Solution

AIM Solutions in Dallas, TX helped DDB Unlimited, a rugged enclosure manufacturer, take advantage of Cloud technology. The solution was designed to automate business processes while simplifying infrastructure requirements.

DDB Unlimited manufactures rugged enclosures

After some investigation, DDB Unlimited determined that the Cloud could unify several operations in a single system. The Cloud eliminated manual accounting practices, providing an out-of-pocket savings of $80,000/year. In addition, the Cloud ERP solution did not require client software so installation was fast and maintenance does not require touching each computer or mobile device.

The Cloud solution came with import and export tools so existing data – including the chart of accounts, current account balances, customer, active orders, and much more could be easily imported. The solution was up and running in about one month.

Weatherproofing Financials

By replacing papers and forms with electronic orders, businesses such as DDB Unlimited have become much more efficient. However, when installed locally, a computer driven solution is just as susceptible to natural disasters as papers stacked in a filing cabinet. In addition, a faulty hard drive can have the same impact as a tornado when not properly backed-up.

The Cloud enables businesses to store their critical data offsite in a fault-tolerant datacenter with multiple sources of power and bandwidth. Data is replicated in different fault zones so a single disaster does not hinder business operations. DDB Unlimited’s manufacturing plant can still be impacted by local weather conditions, but it’s financials and business operating data are secure in a weatherproof electronic vault.

Documents as well as transactions

In addition to company financials, the Cloud can store critical business documents. Intellectual property, business processes, sales list, and company records can be maintained in a safe location. These documents can be linked to transactions to provide an audit trail and simplify the auditing process.

Don’t wash away the technical experts

The Cloud does not eliminate the need for technical experts. Access to the Internet and application configuration are still required.

The cloud allows technical experts to spend less time managing servers and more time helping solve business problems and analyzing business data. This allows IT employees to shift from being an unwanted expense to become an integral part of company profitability.

Are financials useful if your plant is impacted by a natural disaster?

If a natural disaster destroys your plant, does it really matter if your financials survive? The answer of course is yes. Insurance frequently covers your plant and allows you to rebuild in the event of a disaster. Putting a value on your financials, sales lists, customer orders, and critical business data is difficult, so it is frequently not insured. Often this uninsured data is what adds value to your business (many companies are purchased for only their customer lists and intellectual property). By using the cloud, you can effectively “insure” this part of your business. In the event of a natural disaster, you can still access your information using a computer from any Internet connection.

Contact us if you want a copy of the 2-page DDB Unlimited case study.

Yes, no planning needed

With the Cloud, you simply turn on more service as you need it. Retailers can add capacity during the holiday shopping period, accountants can add capacity at tax time, distributors can add capacity to keep up with transactions, and businesses can add remove capacity during slack periods.

When your applications run on external hardware (Cloud and some hosting plans), you don’t have to worry when your hardware will become obsolete because the service provider delivers updates as needed. The virtualization technology employed makes the transition to new servers nearly 100% seamless.

On-demand capacity is also very useful in situations where traffic spikes occur frequently. In this case you don’t have to worry about having servers running at 5% capacity during 90% of the time. This is one of the reasons that Cloud service providers can offer prices that are less expensive than the cost of building and maintaining your own datacenter.

No, planning is still required

To get capacity on demand, you have to pay for what you use. Therefore, when doing your business plan, setting a budget, or calculating the cost of providing service, you need to have a good idea of how much capacity that you are going to need.

Cloud pricing can be confusing

Cloud services have several different pricing terms including computing hours, storage capacity, database capacity, inbound and outbound bandwidth, memory, CPU size, and other items. Understanding the different terms can be confusing and predicting your level of consumption can be nearly impossible.

Assume an ERP scenario where a distribution company has 10,000 SKUs, 100 purchasing transactions per month, 500 sales per month – 20% through an ecommerce portal, 250 invoices per month, 10 salespeople using CRM, 2 accountants, 5 customer service personnel, a customer portal for accessing order status, 50 credit card transactions per month, 100 document updates and new SKUs per month, etc.

The first step is to translate all of these business cost drivers into the cloud pricing parameters. For example, 500 sales per month may generate 100kb of database storage as well as 250 shipments and 25 customer service inquiries. Each shipment creates 4 additional transactions and each customer service inquiry generates 5 transactions on average. So, in addition to the 100kb of storage, there might be an additional 100kb of shipping, shipping inquiries, and customer service transactions. Keep in mind that your new web-based ERP software is likely to utilize less capacity per transaction than your legacy client-server solution that was designed for on-premise operation over thick pipes. Therefore, your past capacity planning efforts will have to be modified.

Cloud ERP Vendors to the Rescue

The nearly impossible planning task described above has been eliminated by most cloud ERP vendors who price their service by user, server, module, and other things that you can predict more easily. In this case, the Cloud ERP vendors take the risk that you are not going to be distributing feature-length motion pictures through your ERP system and run up massive infrastructure charges.

Bandwidth Concerns

The one thing that cloud ERP customers still need to be concerned with is the amount of bandwidth available to connect their offices to the cloud computing service. In most cases, the amount of traffic is minimal because cloud ERP software is optimized for performance over slow and latent Internet connections. Employees working from home or while traveling will connect directly to the cloud service, so you won’t have to worry about VPN connections into your office.

Computing the amount of extra capacity to connect to the cloud will vary by business. If you already connect remote offices to a centralized system, your bandwidth requirements are most likely going to decrease. If you utilize new functionality such as the ability to attach documents, pictures, invoices, and other data to transactions or a product catalog, then you may have to do a more rigorous planning exercise.

Conclusion

If you are building an internal cloud, you still need to do capacity planning as you have done in the past. If you are utilizing a Cloud ERP solution that is hosted or delivered as SaaS, most of your capacity planning issues have been handled for you. You will still need to estimate bandwidth requirements from your office. These capacity requirements will be small because modern cloud ERP systems are built to minimize network traffic – partly to increase performance and partly to reduce costs (ERP vendors that offer SaaS pay for bandwidth).

What is Cloud?

An example of this would be the recent debate on Focus.com, where a question was given to the visitors of their site, simply asking “Is Facebook a Cloud?” The fact that there was even a debate highly indicates to me that there is confusion over Cloud terms, one-way-or-the-other. As I believe most readers of this Blog know, the Cloud is on-demand computing resources that are available on a consumption basis. The Cloud is enabled by virtualization technology providing hardware and operating system efficiencies, making it easier and less expensive to deliver on-demand computing resources. SaaS, on the other hand, in its most basic form is a delivery model allowing a business (or someone) to access applications on the Cloud infrastructure. This is what Facebook is doing, providing their application to millions of people. SaaS uses Cloud, not SaaS is a Cloud. The Facebook application is written for the Cloud and could be considered a Cloud-based application, but it is not “the Cloud”.

Utilizing Cloud in SaaS ERP

Another example is a company I know about who is currently living with the fact that their well-entrenched, on-premise ERP system was acquired by another software provider, and now, their maintenance has tripled, their support is nowhere to be seen, and they truly believe their product is now a product without future direction (ouch!). Even though it seems like this company would be doing anything it can to abandon their current situation, they are not. The reason, as I understand it, is rooted around the fear of the unknown (alternative solutions), the disruption of a bringing in a new system and the cost that it would take to convert to something new.

So the question is why this company has not considered the SaaS-based direction as a way to escape their current situation. It is simple; they still are not aware of the many benefits of SaaS. This company, like many companies, has not been exposed enough to SaaS and Cloud computing already in order to see it as a viable option. To me, SaaS and Cloud computing would be an excellent alternative solution for this company, and others in the same situation. The benefits of SaaS and Cloud computing, including the speed of implementation and low cost of entry naturally makes it the perfect option (shortest possible route) to something new. With SaaS and Cloud computing they would have new, innovative technology that would lower their current internal IT resources and maintenance costs, and could provide the product support they deserve.

Continuing Cloud Knowledge Building

Though these examples may seem different, they are similar in the fact that they are part of the marketplace that lacks an understanding of Cloud and its benefits. Whether it is the company who doesn’t realize how SaaS can help them, or it is people debating whether something is a Cloud or not, says to me that we still have a ways to go.

Though SaaS and Cloud computing is growing, one of the biggest challenges today is the continued education of these technologies in the marketplace. It is my belief that the recognition of SaaS and the Cloud is typical of any new technology direction however. And like other new technologies before it, it too will come to a point where it becomes a natural option in each case for businesses as their needs change. But for right now, it is important for the marketplace vendors (and even users) to take their part in expanding SaaS and Cloud computing knowledge, not only from their product’s perspective, but from what the technology can provide as overall benefits to every business. With understanding comes even more wide-spread acceptance, so important to not only software providers selling SaaS and Cloud products and services, but to the marketplace in general with particular needs that are best supported by this kind of technology

This article presents costs associated with different ERP software deployment scenarios. The numbers presented in this article have been gathered by averaging quotes provided by 2-3 different ERP and hosting service providers.

ERP Software Purchasing and Deployment Options

The Cloud has inspired a new way of thinking about ERP software deployments. Companies have the option to purchase a license or purchase a SaaS solution. When purchasing a license you own the software and have the ability to deploy it in your datacenter (on-premise) or outsource operations to an external provider (hosting). When you purchase a SaaS solution (sometimes called an on-demand solution), you rent a complete turnkey package that includes software and the entire delivery mechanism.

This article will examine the financial ramifications of these three models on your business.

Small Customer Licensing

With a very small deployment scenario, the cost of licensing the software is $20,000 and the cost of one year of SaaS is $16,000. The resulting chart (on the left below) shows that a SaaS deployment can provide lower costs in year one, but after 2-3 years of service, the hosted model can be less expensive in terms of total out-of-pocket money.

By looking at the graph, you would conclude that you should never purchase a software license and try to build your own infrastructure. However, in some scenarios (for example you are are running a point-of-sale terminal that needs to connect to your server) an on-premise deployment makes sense because you may not want to rely on an external Internet connection.

{click graphs to enlarge}

Mid-Sized Customer Licensing

For mid-sized businesses, we increased the cost of the license to $50,000 and the cost of SaaS to $40,000 per year. The resulting chart (above on the left) shows that the break even point for SaaS versus hosting occurs sooner (around year 2). In year 5 the cost of SaaS approaches the cost of a license plus internal infrastructure. These changes occured because the cost of the fixed license and recurring SaaS payments increased proportionately while the infrastructure cost remained relatively fixed. We observed a proportionate increase in SaaS and license pricing by comparing specific customer proposals from SaaS and license vendors.

Even though we increased the cost of hosting to $500/month, the cost of paying for 1/5 of an IT person to maintain the server, operating system, and software application caused the on-premise deployment to be more expensive than hosting over the long run.

Review of Assumptions

Cloud-based and Web-based Software

As previously reported, there has been significant discussion judging the merits of hosted ERP versus SaaS. In this comparison, we assume that the same software can be run as SaaS or deployed on-premise. This means that we are not considering the scenario where legacy client-server software is being hosted on the web along with VPN software, hosted desktops, etc.

We assumed that the software was web-based so client upgrades are not required.

Relationship between SaaS and License Pricing

The cost of the SaaS annual fee compared to the cost of the software license is critical to the analysis. For this analysis we used the following rule-of-thumb:

SaaS annual price = (2/3) x (Cost of license + One year maintenance)

This approximation accurately represents actual market data provided by SaaS providers and on-premise license providers. In both cases, the cost per user (when applicable) is reduced as more users are added at approximately the same rate. Also in both cases, the addition of modules increases the cost.

Other Assumptions

• Calculations did not include NPV calculations.
• Hardware and software costs for an on-premise deployment are similar for small and mid-sized customers. This equals approximately $15,000 for the deployments shown. This does not include off-site backup storage.
• Maintenance fees are 20% per year of the license costs. In the hosting scenario, maintenance covers only the application, in the on-premise scenario the maintenance costs cover the application, OS, and database software.
• Configuration, training, and data migration fees are equal across all three deployment models. We used a 1:1 ratio of license cost to consulting fees for this analysis.
• Customization fees are not included, but would be equal across all models.
• Application support is not included, but would be equal across all models.
• For an on-premise deployment, power and replacement server parts were assumed to cost $1,000/year.

When is SaaS Better?

Businesses benefit from SaaS when they do not have IT resources to dedicate to installing and managing applications. Even in the hosted scenario, some level of IT expertise is required to install application upgrades. We assumed upgrades occur two times per year and require approximately 5 hours to install. As a result of this assumption, we budgeted $1,000/year for application upgrades in the hosting scenario. In all cases we assumed that the application was web-based so no client software upgrades were required.

Break Even for Mid-Sized Businesses

By lowering the SaaS cost by changing the SaaS rule of thumb (discussed earlier), we computed a break even point over a seven year deployment. Holding other assumptions steady, the break-even occurred when the cost of the SaaS annual fee is approximately 1/3 of the cost of the license plus one year of annual maintenance. So, if your only concern is out-of-pocket expenses, the option to purchase a $50,000 license + hosting + maintenance is roughly equivalent to a $20,000/year SaaS license.

Adding Cost of Capital

** section added May 2 **
After publishing this article, I received several requests to include the cost of capital in my calculations. Adding a cost of capital has the following impact on the different models:

• SaaS – expenses are deferred, so the model becomes more attractive as the cost of capital goes up.
• Hosted – the license cost is paid upfront, but some costs are deferred, so the benefits are less than with SaaS
• On-Premise – the on premise model contains the most upfront expenses as well as significant ongoing IT expenses that paid over time. As the cost of capital increases, the upfront costs are not impacted, but the impact of the ongoing IT costs is reduced so that the overall benefit is higher than hosted but less than SaaS.

Cost of Capital Impact on ERP Analysis

With ERP software there is a significant amount of upfront analysis, consulting, configuration, testing, and training, so the impact of the cost of capital is less than it would be for simple software applications. The graphs below show the impact of making adding a 3% and a 15% cost of capital to the analysis. This was done by discounting the future payments to reflect the time value of money.

  

The analysis doesn’t change dramatically for the 3% case, but when the cost of capital is assumed to be 15% and higher, the SaaS solution will always be less expensive than an on-premise solution. At 15%, the breakeven between SaaS and hosted shifts by a few months in favor of SaaS.
** end of May 2 section **

Conclusion

This article addressed costs, but costs are only one part of the deployment equation. Your deployment model should be based on your level of IT expertise, your comfort level with outsourcing, the strength of your Internet connection and tolerance for downtime, and the timing of expenses.

As your business changes, your business requirements change. Company size, IT expertise, legislation, risk, programming requirements, and other factors will influence your SaaS versus on-premise deployment over time. You should partner with a provider that offers a choice of license and SaaS deployments so you can switch your deployment as your requirements change.

Contact us if you would like to receive a copy of the spreadsheet used to generate these graphs.

But, what data do I use?     

Many people believe you plan today by using improved, current up-to-the minute information, by having better control of your operation and by better leveraging your current assets and resources. With complete real-time information at your fingertips, you have the power to better control operations and plan for new growing revenues.

Cloud computing is a great choice!

This brings me to Cloud computing and SaaS. Until recently, small-to-mid-sized companies had very few options available to them that would provide the information and controls needed to run their businesses, without the high costs and complexities associated with comprehensive enterprise-wide business software. Today however, companies have choices that include SaaS as well as traditional software deployed on a Cloud computing service.

Having this choice, means that even the smaller companies can take advantage of big ERP capabilities without the initial costs associated with the pricier on-premise systems. With it comes better control and real-time information that is sorely needed to successfully plan for and take advantage of a growing marketplace.

Conclusion

Today, applications can use the power of the Cloud to deliver role-specific dashboards and customizable reports in real-time. And because they can be access from anywhere, by more people, they are providing the up-to-the-minute information needed for better control of operations, and for leveraging current assets and resources, all requirements for today’s planning. The bottom line is Cloud computing and SaaS can help companies plan for the turned-around economy.