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Benefits and drawbacks of SaaS ERP software: Which option is best?

Companies thinking about implementing SaaS ERP software have many things to consider. Using SAP Business ByDesign as an example, see how to assess cost, time and related factors.

Small and medium-sized enterprises can find it challenging to choose a Software as a Service (SaaS) ERP delivery model, especially ERP suites focused on the entire enterprise. Not all companies are truly ready for SaaS services, and other factors could indicate that using a traditional on-premises server and ERP application might be the smartest move.

So, what are some of the most important considerations when thinking about SaaS ERP?

"It really depends how much a company has already invested in their existing ERP apps, if they already have them in place, the work they’ve put into customizing the apps to their needs, the integrations with other complementary apps, etc.," noted China Martens, an ERP analyst for Forrester Research Inc.

“If a company is new to ERP and previously got by with a mix of spreadsheets or low-end accounting software, SaaS can be an easy move, particularly if the company has limited IT support and would benefit from not having to run apps in-house and run hardware," Martens said.

One key indicator for SaaS success boils down to current and projected sales. "With a small or medium-size business, most of the customers that are signing off on SAP Business ByDesign are in high-growth mode," said Alan Fang, chief operating officer for ERP Logic, an SAP channel partner that provides SaaS services. "So the expectation is, the small-business owner wants to concentrate on their business and they don't want to focus on an IT organization."

The cost factor of SaaS ERP

Although cost is a critical factor in determining whether companies should use SaaS ERP solutions, they should answer an even more fundamental question first: Is the company amenable to mapping its business processes to industry best practices, as delivered through relatively rigid SaaS ERP applications such as SAP Business ByDesign?

"Cost savings is one of the myths today -- SaaS is not necessarily one of the most cost-effective solutions, especially when you consider it as a long-term solution," noted Christian Hestermann, Gartner's research director of ERP.

"We encourage customers to look at the total cost of ownership [TCO] over a number of years because you can usually find when there is a certain break-even point, the point where if you had bought a perpetual or up-front license, the investment for that license would be paid off," he explained, noting that purchasing a more traditional ERP system can be likened to the purchase of an apartment or a home rather than renting it perpetually.

Some SaaS services organizations try to show that their solutions are cheaper over a given period of years. "Depending on how you model it, the calculation can be in favor of a SaaS model or against it. In any case, it's not easy, and each customer needs to apply their own numbers and financials and make sure they get a clear picture," Hestermann recommended.

Still, when it comes to cost, "one of the biggest pros so far is the ability for companies to have a better sense of what their software implementation might cost them versus the situation with on-premise software," said Forrester's Martens.

The time to deploy factor of SaaS ERP

Another myth about SaaS is that the time to deploy is always much faster. Although that's often true, it’s not always the case.

"On average [for SAP Business ByDesign], it's about 12 to 16 weeks," ERP Logic's Fang said. "The most complex implementation we did was 16 weeks for a wholesale distributor."

Still, even for a small business, four months for an ERP implementation is quite fast.

"SaaS is much more efficient in the early phases because a technical installation and the procurement of hardware phases just go away. The system is up and running once you sign the contract. But that's not the steps in an implementation project that take the most time. Defining a business process, mapping your process requirements, building integrations to other third-party solutions, et cetera, are the areas that cost much more time," Hestermann said. He noted that organizational readiness and internal data quality do not go away regardless of which deployment model is being implemented.

And don't forget the data. "The very first day we start a project we start talking about data migration, because you can never underestimate the amount of effort that goes into data migration," Fang said.

Don't forget the hidden pitfalls of SaaS ERP

True multi-tenant SaaS solutions typically come with limitations on the types of add-on products or customizations that companies can make to the SaaS applications.

"You can run add-ons side by side, but integrating them back with a tight integration to SAP Business ByDesign … that's not so easy," Hestermann said.

What about other potential pitfalls that often go unnoticed until too late?

"A big issue with SaaS and ERP is the fact most vendors do not offer strong enough service-level agreements and disaster recovery objectives," noted Rob Desisto, Gartner's lead analyst of SaaS.

"Another issue is latency with the Internet. Most ERP systems require integration with multiple on-premise data sources, so real-time integration can be an issue [with the data and communication or both] making round trips over the Internet," he added.

Moving back to on-premises ERP from SaaS

One fear that some potential SaaS companies have is being tied to a subscription service forever. In reality, as companies grow and shift, these lock-in situations don't seem to be a huge factor.

"Companies may well move in a gradual manner to SaaS -- from on-premise to managed hosting and eventually to SaaS," Martens said. She added that occasionally companies move back to on-premises ERP, but usually only when IT plans change and move away from a SaaS approach.

Some ERP vendors offer a “comfort factor” if the different deployment options (SaaS or on-premises) are “based around a single source code," she said. “Like other apps, ERP is starting to shape up into being very much a hybrid deployment world."

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