Midmarket firms are adopting cloud-based ERP piece by piece

The technology that put all that data in the cloud has improved quite a bit over the years, and industry watchers say adoption will grow at a decidedly steady pace.

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Not so many years ago, cloud-based ERP was exclusively a small company option—and for good reason.

ERP is, after all, a mission-critical set of applications that process all sorts of sensitive information, including human resources and financial data, customer lists and sales projections. The notion of putting all of that enterprise data onto somebody else’s server to be managed by outside personnel sounded like a recipe for disaster to most executives. Add to that the lack of functionality and scalability that early cloud applications had and it seemed clear to many back then that the technology just wasn't ready for prime time.

A lot has changed in recent years, however, and today more midsize and large companies are eyeing the cloud-based option.

One indication of this is how many vendors are moving into the cloud ERP market: QAD, Oracle, Epicor, SAP and Microsoft all have or are planning cloud-based ERP offerings. Other companies, such as Plex Online and NetSuite also have offerings that suit midmarket organizations.

China Martens, analyst for Forrester Research Inc. in Cambridge, Mass., said that cloud ERP—also known as Software as a Service (SaaS) ERP—made up just 2% of the overall ERP market in 2011 but is projected to be 4% by 2015. Not bad considering that ERP is not a product with a short sales cycle. That figure may be too conservative, Martens continued, pointing to a flurry of cloud announcements from SAP, Oracle, Microsoft and others as an indication that the market is starting to heat up.

“A lot of things are changing very quickly in the market,” she said.

Many Ways to Do Cloud ERP

Cloud-based ERP comes with many options, and companies are picking and choosing different features to implement.

For midsize and large companies, cloud ERP isn’t so much a complete system as a way to augment existing ERP systems with extra functionality. For example, a company could use as a cloud-based recruiting tool to help HR handle resumes better, or it might use a cloud-based expense reporting system that feeds into financials—both easy ways to add needed functionality without suffering through an on-site upgrade.

Midmarket organizations are also often swayed by the costs of hardware and maintenance needed by large ERP implementations.

“For manufacturing companies with under 100 employees, hardware is about 23% of the budget,” said Robert Parker, an analyst at IDC Manufacturing Insights, based in Framingham, Mass. “When you get up to 5,000 it gets up to 30% to 35%. Over 10,000 employees, the percentage drops dramatically, to around 20%. So the cloud is an attractive economic proposition to the midmarket.”

Saving Money Without Sacrificing Functionality

Cloud ERP can provide the functionality and scalability that midsize companies need, without the up-front costs, labor and maintenance required for on-site software, according to Parker.

Such was the situation at the Sierra-at-Tahoe Resort in Twin Bridges, Calif., two years ago. The vacation spot had been split from a sister resort, which had provided the ERP system. So it had to quickly buy and deploy a financial ERP application.

“We were given 90 days to get something running on our own, which is a pretty short window in which to find an accounting system,” said Jim Feeney, the resort’s controller. That’s a time frame only a cloud-based system could meet. After some quick evaluations, they selected NetSuite. “On top of that, we are pretty challenged for space and we have a very lean IT staff. So we’re pretty happy with our choice,”
he said.

Remote access for employees is another good reason to consider the cloud. Wireless Matrix, a $33 million fleet management software company in Herndon, Va., needed to provide remote access to sales, customer service, financials, inventory and manufacturing applications for its mobile executives and remote employees. To accomplish this, they integrated several existing systems with the cloud-based services provided by NetSuite. The on-premises, homegrown applications feed their data to NetSuite. 

Moving to the cloud also helped Wireless Matrix to automate a number of data entry tasks—like sales orders—that had formerly taken up a lot of financial and administrative time re-entering data from one system to another.

“At the time, we had about 50 customers and 13 people in the finance department. Today we have nearly 900 customers, and the size of the finance team has gone down to eight people,” said Maria Izurieta, acting CEO and previously the chief financial officer of Wireless Matrix.  

Cloud ERP Caveats

Despite its advantages, cloud-based ERP isn’t for everyone. Forrester’s Martens notes that one reason organizations often don’t go with cloud systems is they lack the breadth of sophistication found in on-premises ones. Large ERP vendors, such as SAP and Oracle, are beginning to offer cloud-based versions of their ERP functionality, so customers can add cloud apps to existing licensed packages.

“Most companies realize it’s going to be a hybrid, mix-and-match world, with SaaS in some areas and on-premises in others,” Martens said.

Some of the key issues that may come up when considering cloud-based ERP:

The product doesn’t meet internal corporate IT standards. “A lot of cloud service acquisitions are done on the business side, without IT being involved. Then the business people, who aren’t schooled in IT standards and practices, make decisions without fully understanding the impact of the choice they’re making,” said Pat Phelan, ERP analyst at Gartner Inc. in Stamford, Conn. “Business-based selection teams run the risk of making a decision that will have a negative impact on the enterprise overall.”

Integration of multiple cloud and on-premises applications. “A company begins using cloud applications to add on to their on-premise applications, maybe CRM, HCM [human capital management] or supply chain management, and all of a sudden they’ve got a whole variety of them and have to do some integration heavy lifting,” said Martens, noting that integration service providers are growing up alongside cloud ERP, making integration easier but adding to the costs.

Security. While larger firms are feeling more comfortable with the security provided by cloud applications, analyst Cindy Jutras of ERP research group Mint Jutras in Windham, N.H., noted that it remains a concern. “Any company with a track record should be willing to put their security measures into the service-level agreement,” she said. One sign of good security is having passed SAS Type II audits and been certified. And another is a backup location to ensure business continuity should the main site go down.

Managing multiple cloud providers. Services providers mean service-level agreements, or SLAs, contract renewals and human management. Someone in the organization will have to take on the task of managing one or more of these cloud provider relationships. “It’s a matter of orchestrating all of these different cloud providers, and the more of those there are, the more complicated it becomes,” Phelan said. “Someone has to be the maestro of the orchestra, managing individual SLAs, roadmaps, update cycles, dependencies.”

IDC projects fairly rapid growth for cloud-based software overall. Robert Mahowald, who covers cloud technologies for IDC, estimates that the 2011-2012 growth averaged across all cloud segments will be around 30% contrasted to a traditional IT products growth rate of 5% to 7%. Spending on cloud applications will be approximately $100 billion of IT in 2016, he said.

“When an ERP vendor comes to a company and says maintenance costs are going up or you have to upgrade to our latest version,” Martens said, “that type of thing always starts customers thinking about what else is out there in the market and start looking at SaaS.”

About the author:
Sue Hildreth is a freelance IT writer and a senior analyst for Hypatia Research in Lexington, Mass. She has covered enterprise software technology and IT management issues for many of TechTarget’s sites, including SearchCRM.com, SearchDomino.com and SearchSecurity.com.

This was first published in September 2012
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