Three Sticking Points for SaaS ERP Adoption

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In May, citing a survey from Forrester Research, I wrote a post pointing out that companies seemed to be sitting on the ERP fence. (Although, I did also mention conflicting opinions from Hackett Group and Deloitte.) Despite years of lagging investments in ERP, the Forrester survey found nearly three-quarters of IT decision-makers plan to stick with their current ERP applications. While Forrester predicts the ERP market will grow from $45.5 billion in 2011 to $50.3 billion in 2015, it believes license sales will fall and vendors will make more profit on maintenance fees.

 

It also thinks a growing portion of the market will go toward software-as-a-service ERP applications. While SaaS now accounts for just $1 billion of total ERP revenue, Forrester forecasts annual growth of 21 percent through 2015, when SaaS will command a still-small 4 percent of the ERP market. I got a similarly bullish take on SaaS ERP from Paul Turner, senior director of product marketing for NetSuite, when I interviewed him in late 2010. (Not all surprising, given his company's product line!)

 

Given ERP's reputation for complexity and high cost, I would think that SaaS ERP would be an attractive proposition for many companies. That said, SaaS ERP certainly won't be the right solution for every company, a point Panorama Consulting's Eric Kimberling makes in a recent blog post. In Panorama's experience, he says, SaaS ERP customers "are disproportionately skewed toward smaller to mid-size companies," while bigger companies with sunk on-premise investments are not all that interested in switching to SaaS.

 


Given the three questions Kimberling poses for companies considering SaaS ERP, it's easy to see how SaaS ERP might appeal more to smaller companies than their larger counterparts. The questions:

  • How unique or complex is your business relative to others?
  • Are you more willing to increase capital versus expense budgets to support a new ERP system?
  • How much control and security do you need over your ERP systems?

 

Acknowledging that security concerns about SaaS are often overblown by writing "this question isn't 100 percent based on reality," Kimberling says companies in sectors with stringent compliance requirements such as the pharmaceutical industry nonetheless still often opt for the "better safe than sorry" approach of sticking with on-premise ERP because of worries over data security. This despite the fact that "SaaS vendors are able to provide more world-class security and reliability than most IT departments," Kimberling writes. (NetSuite's Turner made the same point in our interview.)

 

SaaS is a great fit for startups and other companies with tight limits on capital budgets, Kimberling writes, though SaaS could end up costing more in the long run. He encourages companies to create a "realistic and objective case" for ERP to accurately evaluate the total cost of ownership of different solutions.

 

In my opinion, the question over unique and/or complex business processes is the biggest sticking point for companies considering SaaS ERP. The more unique and/or complex your processes, the more customization you will need. And as Kimberling writes, "SaaS ERP systems are still not as flexible as on-premise solutions." Naturally, Turner begged to differ when I spoke with him, telling me more than 70 percent of NetSuite's customers customize its software, and adding:

The big benefit with the cloud is, you can customize but you're not going to get into version lock. That is a key differentiator. Our customers can add custom scripts, do the integrations, add custom workflows and tailor the solution to their vertical, but no matter how much they customize, they'll still be upgraded to the latest and greatest version twice a year. If you customize other on-premise ERP solutions, you're looking at some serious consulting costs the next time you upgrade.

I get the strong sense that many companies may view their business processes as more special than they really are. Not only that, but customization is one of the quickest ways to drive up the cost of on-premise ERP implementations. With that in mind, I offered some tips on cutting down on ERP customization in a post from May.



Add Comment      Leave a comment on this blog post
Jul 21, 2011 7:44 AM Mani Periasamy Mani Periasamy  says:

Well written article. While SaaS' fit for large corporations is up for debate, it makes sense for small and medium business to go the SaaS way. It not only reduces cost but also can help in benchmarking a company against the industry standard (assuming many companies belonging to the same industry are with the same vendor).

I tend to disagree with the statement " SaaS ERP systems are still not as flexible as on-premise solutions". Many vendors have configurable systems and we at iBE are also focussing on configurable settings by industry, geography, etc.

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