Cloud ERP vs. On-Premise ERP: What’s the Difference?

Small to midsize business (SMB) owners and leaders often have to figure out how to upgrade their ERPs. However, the decision frequently goes deeper than pinpointing the right features and integration possibilities. You have to figure out where to host it. Despite the rise of cloud computing, the "to cloud or not to cloud" rages on when it comes to choosing the best environment for an ERP.

Understanding the best environment for your ERP makes it easier for data engineers and IT staff to refine your ERP strategy. Also, by settling the cloud vs on-premise ERP debate, you simplify the process of choosing which apps you'll be able to integrate. Some applications may require a cloud or on-prem setup, such as those that need the scalability of the cloud or the low latency of on-prem, so deciding which ecosystem to use may be pivotal.

Even though cloud computing has been evolving into the norm, there are still several reasons why a small or midsize business might choose a traditional on-premise ERP system. Which one is right for your organization? Well, this rundown of what each involves, their deployment options, and the pros and cons of each setup should make it easier.

What is ERP software?

Enterprise resource planning (ERP) software is a business tool that integrates data from various aspects of operations, enabling centralized management of your organization. ERPs use individual modules, each designed for a different element of your operations. These enable you to integrate data from multiple facets of your company to optimize efficiency and collect data for insights.

For example, you could integrate employee salary data from an employee management module with a cost of goods sold (COGS) feature from an accounting module. This gives you the ability to see how employee pay impacts your COGS.

Similarly, you could integrate data from an inventory management module into a manufacturing module. With this integration, you can automate purchase orders based on how quickly you use components and how many are currently in your inventory.

For an SMB owner, ERP cloud software empowers you to exercise deep control over your operations while also providing in-depth visibility into how your business is doing. You can use data-based insights to predict and overcome challenges, such as drops in sales or ineffective marketing campaigns. ERPs also give you access to performance analytics that streamline employee management and efficiency engineering.

What is the difference between cloud and on-premise ERP?

A cloud ERP system is hosted on remote servers and users access it over the internet. You pay a subscription fee to use your ERP solution to a software-as-a-service (SaaS) provider. In turn, your cloud ERP service handles the maintenance of your environment.

On the other hand, an on-premise ERP is one you run from your organization's internal servers. This means you have to take care of setting up, configuring, managing, and updating your environment.

The biggest differences between cloud and on-premise ERPs include:

• Where they are deployed. While a cloud ERP lives in a data center, an on-premise one is inside your physical building.

• How you pay for them. Setting up and maintaining on-prem ERP involves purchasing equipment and software, as well as updating and securing it. With a cloud ERP, your software provider sources and maintains your solution.

• Scaling. The scaling process for cloud ERPs involves asking your cloud provider for access to more features and perhaps computing resources. Scaling with an on-prem ERP centers around your internal staff installing additional features, and if you need more computing, you have to purchase it yourself.

• Securing your ERP environment. Cloud ERP setups come with the security systems your cloud provider uses for its environment, as well as those it uses for your specific ERP. With an on-premise ERP, you're responsible for purchasing and updating the security tools used to limit cyber risk.

Cloud-based ERPs solve some of the more difficult challenges businesses have to tangle with, especially when it comes to scaling and controlling the cost of deployment and maintenance. You simply pay a monthly fee and your provider takes care of this for you.

An on-prem ERP is a good fit for a company that wants ultimate control over its ERP environment, especially when it comes to making new configurations and implementing integrations with other on-prem systems. Some businesses may also feel more comfortable if they can secure their ERP environment themselves, particularly when they consider the possibility of hackers infiltrating their cloud environment.

Regardless of the hosting solution businesses choose ERP use is on the rise. According to Gartner, in 2023, the ERP market jumped 13% to $51 billion. [1]

Deployment and pricing of cloud ERP vs. on-premise ERP

The deployment and pricing of your ERP are interdependent because you have to shoulder the costs of an on-prem deployment while the expenses of a cloud deployment get absorbed by your provider.

Here's how this plays out in terms of pricing:

• While there are exceptions to this rule, in general, cloud software is priced under a monthly or annual subscription, 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). However, subscription-based models are also available. There are recurring fees for support, training, and updates.

Thus, on-premise systems are generally considered a capital expenditure (one large investment upfront). A cloud ERP solution, on the other hand, is typically considered an operating expenditure (an additional overhead cost the organization will continue to pay).

Over time, however, system costs tend to converge. Below is a chart showing the total costs of ownership (TCO) over 10 years for both cloud-based and on-premise software.

Advantages of cloud ERPs

These are some of the biggest draws for cloud ERP customers.

Better security

Security is often the top concern for prospective ERP buyers. It's a small wonder, considering the critical information stored in an ERP system—including company financials, corporate trade secrets, employee information, client lists and more.

But while buyers once were wary about the security of cloud-based software, many are becoming less skeptical today (evidenced by the growing market stats highlighted 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.

Mobile accessibility

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 access company files on their personal mobile devices.

Disadvantages of cloud ERPs

Despite the advantages, some ERP shoppers have some concerns about customization and the impact of shadow IT.

Limited Customization

More accessibility can also mean less customization—and cloud ERPs offer less flexibility for businesses that seek to tailor their system to their hearts' content. But organizations with less specialized needs, such as general consulting firms, can get by just fine with a cloud system's out-of-the-box capabilities.

More risks due to shadow IT

Shadow IT involves employees performing their own software maintenance, updates, installations, and configurations, which can be a problem with cloud ERPs. Users can access your ERP from anywhere with an internet connection. Therefore, unless you enact strict controls on the kinds of configuration adjustments users can make, they may make changes that negatively impact your app's performance.

Advantages and disadvantages of on-premise ERPs

On-premise ERPs are still very attractive for some larger organizations, but they also come with some limitations.

Advantages of on-premise ERPs

With an on-premise ERP, you can enjoy a more hands-on experience, which means enhanced flexibility for some companies.

Easier to modify

In general, on-premise systems are much easier to modify. The ability to customize to their specific needs and requirements is paramount for many organizations, especially in niche industries, such as specialized manufacturers with unique processes.

The freedom to modify workflows in your ERP is especially important, given the uniqueness of different business models. As Gartner's ERP Primer for 2024 explains, it's important to "develop a composable ERP strategy that supports digital and differentiated business models." [2]

Given the enhanced ability to modify their on-premise ERPs, some businesses are willing to sacrifice scalability for the control that comes with an on-prem environment.

More control over security

On-premise ERPs put more control in the hands of the organization, up to and including the security of its data. It's, therefore, essential that a business be capable of safeguarding an ERP's most sensitive information.

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 not an insurmountable problem, but it can be a pain point.

On-premise ERPs are, therefore, best-suited for larger enterprises with higher budgets, a desire to customize system operations, and the existing infrastructure to host, maintain, and protect ERP data.

Here's a handy comparison chart for both deployment options:

How to choose between a cloud ERP and an on-premise ERP

While there are several factors you have to take into consideration when choosing between on-prem and the cloud for your ERP, the decision is often quite simple. You can use these questions to steer you in the right direction:

• Do you need the ability to incorporate on-premise data sources, such as sensors and machinery, extremely quickly? If so, then on-prem may work.

• Do you need to be able to scale quickly and inexpensively? If that's the case, the cloud may work better.

• Would you rather have a predictable monthly cost or invest heavily upfront and have variable maintenance costs down the road? For a more predictable cost structure, you'd want to go with a cloud-based ERP.

• Would you rather manage your own security or use a cloud provider's tools? With a cloud-based ERP, you can take advantage of the most recent cybersecurity tech. At the same time, you may have little control over your security architecture.

Switching from on-premise to the cloud

Many companies decide to shift from on-prem to the cloud to control their costs, enable scalability, and always have access to the most up-to-date security tools. At a high level, the process involves:

• Gaining support and implementing input from all stakeholders whose jobs or lives may be impacted by the migration, including customers.

• Establishing goals and then using performance benchmarks to gauge your system helps you progress toward each goal.

• Pinpointing the right software and systems for transitioning your architecture to the cloud.

• Executing your migration in phases. Scaffold your transition by choosing which systems or applications you want to migrate first. Take notes regarding successes and challenges, then implement the lessons learned as you transition additional elements of your ERP.

If you're looking for a solution that simplifies and streamlines the process while reducing the cost, it's best to talk to an expert. Contact a Software Advice advisor and vet your ERP options today.

Start exploring your cloud ERP options

When it comes to choosing a new ERP system, there are more options than ever for businesses of all sizes. Cloud-based deployment models have made this software more accessible for SMBs, 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 expensive upfront, and many don't support mobile. This can be problematic for smaller buyers but, as is usually the case, it depends on the specific needs of the individual business.