(5 minutes to read)
When selecting a new enterprise resource planning (ERP) system, one of the most critical factors in your decision will be whether you choose cloud ERP vs on-premise ERP.
Cloud-based ERP systems have become much more popular in recent years—especially among small to midsize businesses. But there are many reasons why a firm might choose a traditional, on-premise system.
This article provides a breakdown of the advantages and disadvantages of each type of ERP system, and how you can determine which is best for your organization.
Deployment and Pricing of Cloud ERP vs On-Premise ERP
The biggest difference between these two systems is how they are deployed.
Cloud-based software is hosted on the vendor’s servers and accessed through a Web browser.
On-premise software is installed locally, on a company’s own computers and servers.
Some vendors also offer “hybrid” deployments, in which cloud software is hosted on an organization’s private servers (more on this later).
Another key difference between cloud and on-premise solutions is how they are priced. While there are many exceptions to this rule, in general, cloud software is priced under a monthly or annual subscription basis, with additional recurring fees for support, training and updates.
On-premise software is generally priced under a one-time perpetual license fee (usually based on the size of the organization or the number of concurrent users). There are recurring fees for support, training and updates.
Thus, on-premise systems are generally considered a capital expenditure (one large investment up front). Cloud-based systems, on the other hand, are typically considered an operating expenditure (an additional overhead cost the organization will continue to pay).
The low entry cost of cloud-based software—compared with hefty, upfront perpetual license fees—has contributed to its widespread adoption. According to one study, 69 percent of enterprises were using cloud-based software or system architecture in 2014.
However, it should be noted that over time, system costs tend to converge. Below is a chart showing total costs of ownership (TCO) for both cloud-based and on-premise software.
Cloud ERP Is Cheaper Up Front, Stable and Easy to Use
Here’s a breakdown of the advantages and disadvantages of cloud-based ERP systems:
|Cost||• Predictable costs over time
• Cheaper upfront investment
• No additional hardware investments (e.g., server infrastructure)
|• May end up spending more money over the course of the system’s life cycle|
|Security||• Data security is in the hands of the vendor||• Data security is in the hands of the vendor. While vendors pledge strict data security standards, some organizations might not have total peace of mind with this arrangement.|
|Customization||• Offer greater stability and continuous updates from vendor as a result of less customization
• Organizations can work with vendors to see what changes can be made
|• Less customizable in general|
|Implementation||• Typically take less time to implement||• Shorter implementation times are largely a result of less customization|
On-Premise ERP Systems Are More Customizable, Offer Greater Control Over Data
Here’s a breakdown of the advantages and disadvantages of an on-premise ERP system:
|Cost||• Reduce initial price of system||• Upfront investment can be seen as riskier
• Have to pay associated hardware and IT costs
|Security||• Data security is in the hands of the organization||• Data security is in the hands of the organization. Some organizations might not be as adept at practicing proper data security protocols.|
|Customization||• Greater ability to customize||• Customizations can delay implementation time
• Customizations can result in headaches when vendor updates software
|Implementation||• Organization has more control over the implementation process||• Implementation process can take significantly longer|
Cost, Control and Customization Drive the Debate
Security is often the top concern for prospective ERP buyers. Small wonder, considering how critical the information stored in an ERP system is—including company financials, corporate trade secrets, employee information, client lists and more.
Though buyers were once wary of the security of cloud-based software, many today are becoming less skeptical (evidenced by the adoption rates above).
Reputable cloud vendors have strict standards in place to keep data safe. To further ease concerns, prospective buyers can seek a third-party security audit of a vendor they’re considering. This can be especially useful if the vendor is less well-known.
Beyond security, there are some functionality issues to consider. In general, you’ll find many of the same features in both cloud and on-premise ERP systems. However, there are a few notable differences.
Mobile accessibility can pose an issue for on-premise deployments. These often require a third-party client to communicate between a mobile device and the on-premise software. It’s definitely not an insurmountable problem, but it can be headache.
Most cloud systems enable easy mobile accessibility, and many even offer native mobile apps. But this ease of access also comes with greater security considerations, especially if employees are accessing company files on their personal mobile devices.
Finally, as mentioned above, on-premise systems are generally easier to customize. For many organizations, the ability to customize to their specific needs and requirements is paramount—especially in niche industries, such as specialized manufacturers with unique processes.
Organizations with less specialized needs—such as a general consulting firm—can get by just fine with a cloud system’s out-of-the-box capabilities.
Vendor Comparison: Cloud and On-Premise Deployment
While most vendors have gravitated towards subscription-based cloud software, some vendors still offer on-premise or hybrid solutions. In general, the more your organization is willing to spend, the more likely a vendor will be able to accommodate a customized hybrid or on-premise deployment.
ERP Vendor Comparison: Cloud, On-Premise and Hybrid Deployments
There are more options than ever for businesses of all sizes when it comes to choosing a new ERP system. Thankfully, cloud-based deployment models have made this software more accessible—though these systems come with a few drawbacks, such as more limited customization and potential security concerns.
Conversely, on-premise ERP systems offer advantages in customization and control, but are more expense up front, and many don’t support mobile.
Still not sure which deployment model is right for your organization? Give one of our Advisors a call at (888) 918-2748. One free 15-minute phone conversation can help you determine your needs, and get you a short list of vendors who can fulfill your requirements.