As you consider managing your eCommerce business functions within an integrated and centralized system, you will encounter a wide range of choices for ERP software. The question then arises: should you install an on-premise ERP or choose a cloud-based ERP solution?
On-premise ERP systems are installed locally within your organization using your infrastructure, and your IT department manages them. Cloud-based ERP systems, also known as SaaS (Software-as-a-Service), are managed centrally by the ERP provider and can be accessed by users through web browsers. Let us look at some numbers and statistics to understand why businesses are choosing cloud-based ERP systems over traditional on-premise solutions.
- According to Forbes, by 2020, almost 70 percent of software, services, and technology were expected to switch to cloud-based models.
- In 2018, the adoption rate of new customers choosing cloud-based ERP was 80 percent compared with on-premise ERP.
- The rate of investment in cloud computing increased by 4.5 times over the previous decade.
There are mainly two aspects that clearly differentiate the two models: deployment type and pricing. Some of the other key factors you need to consider when deciding whether to use on-premise or cloud-based ERP software are mentioned below.
Cost of Ownership
An on-premise ERP system is typically charged as a one-time license fee by the service provider. Additionally, it requires a significant investment to set up dedicated infrastructure to manage the software, hardware, servers, and other components. You will also have to bear the costs of hosting and maintenance. The IT team in your organization must be trained to maintain the system on a daily basis. If your company does not have an IT team, you may also need to invest in hiring one.
When the ERP system requires an upgrade, the IT team should be capable of redeploying, customizing, and integrating it with your existing systems. On-premise ERP is typically considered a capital expense.
Cloud-based ERP systems are relatively less expensive. The initial cost is lower than that of an on-premise system because your primary investment is in the software and computers with a reliable internet connection. Other infrastructure requirements, such as hosting, are provided by the cloud-based ERP provider. There is generally less need for an internal IT team because the provider maintains the system and helps ensure that data is secured and daily operations run smoothly.
Cloud-based ERP systems often offer pay-as-you-go subscription plans based on factors such as the number of users. This can help you manage cash flow and reduce unnecessary investments. Thus, cloud-based ERP is typically considered an operating expense and can be significantly less expensive than an on-premise ERP system, depending on the implementation and usage requirements.
Maintenance and Software Updates
One of the major drawbacks of using on-premise ERP is that when your ERP provider releases a new update or enhances the software, it can become difficult for your IT team to upgrade to the newer version, particularly when extensive customizations have been implemented. In such cases, your IT team may have to reconfigure or retest the system. This is one reason companies can become reluctant to upgrade their on-premise ERP systems and may continue operating with outdated technology.
If you want to use an e-commerce solution, you may also need to purchase compatible solutions from your ERP provider, depending on your existing technology stack.
Cloud ERP solutions such as Dynamics 365 or Dynamics NAV are continuously updated by the service provider. This allows your ERP to stay current with newer versions and security improvements. In addition, supported customizations and integrations can be maintained as part of the upgrade process. Your IT team does not need to manage every routine update because the service provider handles system maintenance. You can also integrate an e-commerce system such as Magento with your existing ERP.
Deployment and Implementation
Deployment of an ERP system can be time-consuming because it may require significant planning, resource allocation, infrastructure preparation, and implementation when deployed on-premise. Comparatively, cloud-based ERP solutions such as Dynamics 365 or Dynamics NAV can take less time to deploy and implement. They generally require less additional hardware and infrastructure.
Depending on the scope and complexity of the implementation, a service provider can set up a cloud-based ERP system within a few months. Cloud ERP is also scalable and gives you the flexibility to add new users as your business expands. With an on-premise ERP, you may need to invest in additional hardware and infrastructure if you plan to scale the system.
Connectivity and Integration
On-premise ERP systems provide a set of built-in features, some of which may be useful to your business while others may not be required. Depending on the architecture and available interfaces, adding additional functionality or integrating third-party systems can require significant development effort.
On the other hand, cloud-based ERP systems are designed to work with other systems using APIs and integration capabilities. If your business requires integration with an e-commerce system or custom EDI functionality, cloud-based systems can provide greater flexibility for connecting these applications.
Security
Data security plays a vital role in any business. On-premise ERP software can provide organizations with direct control over their infrastructure and access policies, which many businesses consider an advantage. However, organizations are also responsible for securing their servers, networks, applications, backups, and physical infrastructure against security threats.
Cloud-based ERP service providers typically invest heavily in security and use established cloud infrastructure and security practices to protect business data. They may also provide regular backups, security updates, monitoring, and other services to help keep the environment secure.
While on-premise ERPs have contributed significantly to industrial growth across the world and numerous business verticals, many organizations are now moving toward cloud-based platforms. Today, on-premise users may face challenges when trying to modernize their existing platforms. eCommerce store owners need to build an ecosystem that can accommodate rapid growth and changing business requirements. Contact us to learn more.
