Cloud ERP vs. Traditional ERP: Which is Best for Your Business?

Enterprise resource planning, or an ERP system, is a powerful lever to pull for businesses looking to streamline operations and boost efficiency. At its core, ERP is a comprehensive software solution that acts as an organization's central digital hub, connecting back-office processes. From finance and human resources, to supply chain and customer relationships, an ERP system can bring data, infrastructure and apps together under one digital roof.

When it comes to implementing an ERP, companies have options. The two main choices are cloud-based and on-premises systems.

Cloud ERP is flexible, scalable and accessible from anywhere with an internet connection. On the other hand, on-premises ERP gives firms total control over their data and its customization, which can be a big plus for companies with specific security or compliance needs. 

This article will explore the differences between Cloud ERP and Traditional ERP and empower you to make the best choice for your organization when choosing which ERP to implement.

In This Article:

1. What is a Traditional ERP System?
2. What is a Cloud ERP System?
3. What are the Advantages of Cloud ERP?
4. Disadvantages of Using Cloud-Based ERP Systems
5. Cloud ERP vs. Traditional ERP Cost 

Traditional on-premises ERP systems have been the backbone of enterprise resource management for years. Stable software systems unite various company departments, offering a single point of truth for data access. 

A company installs and maintains an on-premises ERP solution within that firm's physical location. While customizable and secure, this approach requires substantial hardware investments, encompassing servers, storage solutions and network equipment.

Cornerstones of Traditional ERP Systems

• Complexity = Investment: Implementing a traditional ERP system can be a cumbersome undertaking that requires significant upfront capital. It typically involves oversight from an organization's IT staff and often requires a dedicated team of specialists for ongoing maintenance and upgrades. An on-premises approach can prove both costly and time-intensive.
• Fit for Purpose: Despite their challenges, on-premises ERP solutions are known for adaptability to specific business needs. This makes them particularly appealing to organizations with intricate processes or those operating in heavily regulated sectors, such as finance, government and healthcare.
• Security-Focused Industries: Certain industries, such as aerospace and defense contracting, favor on-premises, industry-specific ERP solutions. The preference stems from a need for enhanced safety measures and security clearance requirements, which an on-premises ERP system can more easily support than a cloud ERP.  
• Typical Use Cases: Historically, large corporations with substantial capital and infrastructure have been the primary users of on-premises ERP systems. Industries such as manufacturing, biotechnology and banking have traditionally leaned towards on-premises deployments, valuing the freedom to fully control their data. However, there are industry-specific ERPs that can be used by businesses of all sizes.
• Shifting Landscape: While on-premises ERP systems offer numerous benefits, their inflexibility and high costs have led many businesses to explore more agile alternatives, including cloud-based ERP solutions.

Cloud ERP can serve as an organization's powerful yet flexible digital backbone, delivering advanced functionality for all core processes by leveraging the power of the internet.

Growth businesses can access mission-critical applications anytime, anywhere, while gaining unparalleled scalability and opportunities to speed up innovation through real-time data access.

Cornerstones of Cloud ERP Systems

• Renting, not Buying: Hosted on a provider's expansive cloud computing platform, cloud ERP is typically delivered as a software-as-a-service (SaaS) model. SaaS eliminates the need for upfront hardware investments, as customers simply lease the software on a flexible subscription basis. Their cloud vendor takes full responsibility for application maintenance, upgrades, data storage and security, allowing businesses to focus on their core competencies— differentiating their product or service and growing the business. 
• Partner Networks: As B2C and B2B customer expectations continue to rise, companies have to adapt to deliver more reliable products at higher speeds and lower costs. To achieve this, businesses often collaborate with a diverse network of partners, leveraging a unified suite of applications to manage accounting, order processing, inventory management, production, supply chain and warehouse operations. Cloud ERP emerges as the essential tool for navigating these complex internal processes and often their global business networks.
• End-to-End Visibility: By adopting cloud ERP, companies gain clear visibility into their data and tighter control over their operations—including those with multiple subsidiaries, business units and legal entities. Real-time visibility at local, regional and headquarters levels powers wise decisions, while standardized business processes ensure consistency—which translates to efficiency.

For example, a multinational manufacturing company with North American, European and Asian facilities can seamlessly leverage cloud ERP to coordinate its global operations. By centralizing data, the company can optimize inventory levels, streamline production and respond efficiently to changing market demands. The scalability of cloud ERP lets the company expand into new markets or launch new product lines, accommodating extra software seats and users while avoiding significant IT investment.

The advantages of cloud-based ERP systems are compelling. Consider that you can:

• Get Started Fast: One of the most significant benefits is the speed of installation. Unlike traditional on-premises ERP deployments, which can take a year or more and cost millions in consulting fees, cloud ERP systems can be up and running in a matter of weeks or months. This agility allows companies to start reaping benefits much sooner. 
• Utilize Enhanced Security:  Vendors specializing in cloud ERP typically employ dedicated security teams that dwarf the IT departments of many of their clients. These teams solely focus on safeguarding clients' systems and customer data, applying critical security patches promptly while addressing vulnerabilities swiftly. In contrast, companies running on-premises ERP often struggle to keep up with these security dimensions due to limited IT resources.
• Implement in Phases: Cloud ERP also means great flexibility, enabling businesses to adopt a phased approach to manifesting new capabilities. For instance, a company might begin with cloud-based financials and gradually add modules for risk management, procurement, analytics and supply chain as needed. A modular approach allows for a more manageable and cost-effective rollout.
• Scale Up or Down: As ERP usage fluctuates throughout a quarter or year—such as during a frenetic quarterly close—a cloud provider manages the ups and downs in capacity. The customer's IT team doesn't need to worry about allocating additional server or storage resources to handle the increased load. Additionally, companies can easily add or reduce user subscriptions as their needs change without the hassle of managing software and hardware capacity in-house.
• Cut Operating Costs: Lower operating costs are another compelling reason to move to a cloud ERP. With a cloud-based model, businesses only pay for the number of employees actually using the applications, and they can easily adjust this number as needed. Also, the cloud provider is responsible for installing, maintaining and updating applications and underlying hardware, reducing the need for in-house IT staff and consultants.
• Make Business Visible: Cloud ERP also improves visibility by making it easier to aggregate, report and analyze data from different systems, such as marketing, human capital, supply chain and inventory management. This integrated approach breaks down data silos and enables better decision-making. For instance, integrating data from sales planning, marketing campaigns and inventory can help finance teams generate more accurate revenue forecasts and manage cash flow more effectively. Cloud ERP also enables mobile access, allowing users to access data and insights anywhere.
• Work in Real Time: Real-time data is another significant benefit of cloud ERP. A cloud-based system lets stakeholders log in from any location and work with a single, unified data set. This ensures that everyone is looking at the same information in the same format and enables real-time updates that are immediately reflected in operational dashboards. For example, data from a warehouse management system can be displayed alongside data from an order management system, providing a clear picture of whether sufficient inventory exists to fulfill new orders. The user-friendly interfaces of cloud applications, designed with modern point-and-click navigation, are also more intuitive for younger generations entering the workforce.
• Update Automatically: Another advantage of cloud ERP is faster updates. While legacy on-premises applications typically receive major upgrades every three years, cloud ERP systems are updated with new features more frequently without downtime. This ensures the software stays current with the latest financial standards, such as GAAP and Sarbanes-Oxley, facilitating compliance.
• Embrace Mobility: Mobile accessibility is a critical feature for businesses with employees who travel frequently, work in the field, or need up-to-date information from the shop floor. Cloud ERP systems are accessible from any web browser on any mobile device and often have dedicated mobile apps that streamline common tasks and reporting. For example, managers can quickly approve employee expenses on the go using a cloud ERP expense app.
• Shrink Your Carbon Footprint: Cloud ERP also helps companies reduce their carbon footprint. The data centers cloud providers use to deliver ERP services are more energy-efficient than the combined power consumption of the many individual companies running their own data centers. Cloud providers are financially motivated to minimize their power costs through advanced load balancing and other techniques, resulting in a lower overall carbon footprint for these applications.
• Prioritize Resources: Cloud ERP improves efficiency by allowing companies to redeploy IT resources to higher-value business areas. It also provides a single source of truth for all internal and external reporting, enabling stakeholders to access data and reports from anywhere. Increased automation and widely shared data minimize the time spent on manual processes while connecting and quantifying processes.
• See a Bigger Picture: Finally, modern cloud ERP applications are designed to integrate data from different sources while maintaining appropriate security and access controls. For example, integrating an ERP system with an HR application could allow the finance department to analyze the ratio of employees to expected sales. This seamless integration enables a holistic view of the business.

While the cloud offers undeniable advantages, it's smart to approach any technology shift with a cautiously optimistic perspective. Firms must consider potential challenges before migrating to cloud-based solutions.

One key concern is absolute data security. Though cloud providers invest heavily in security measures, some businesses remain wary of entrusting sensitive information to third-party systems. This perception often stems from a lack of direct control over data storage and protection. 

Connectivity issues also present another potential hurdle. Cloud-based systems rely heavily on stable internet connections. Outages or slow speeds can disrupt operations, impacting productivity and customer service. To mitigate these risks, it's a good idea to have redundant internet infrastructure in place.

Limited vendor application suites may necessitate integrating cloud and on-premises applications, potentially increasing complexity and costs. Finally, the lack of control over when and how software updates happen can sometimes lead to resistance from employees accustomed to existing workflows.

The investment required for each option differs significantly, impacting both short-term budgets and long-term financial planning.

For traditional on-premises ERP systems, companies should anticipate a range of upfront expenses. These typically include application software licensing, hardware procurement, system software and utilities, installation and implementation services, data conversion, software customization, user training and implementation support. While the exact breakdown may vary, historically, costs are often split evenly between hardware, software and services. However, as hardware costs continue to decline and service costs rise, firms should adjust these percentages accordingly.

The total cost for a traditional on-premises system can vary widely based on company size and specific requirements. Small companies might invest between $20,000 and $200,000, while mid-sized organizations could spend anywhere from $150,000 to $750,000. Granted, these windows are so broad they're nearly meaningless, but they demonstrate that every business's situation is highly unique regarding cost.  

Regardless of a firm's size, it's vital to consider lifecycle costs over a 5- to 7-year period, in addition to purchase, implementation, support and maintenance expenses. This approach allows a more accurate assessment of the total investment and potential return.

Cloud-based ERP systems, on the other hand, present a different cost structure. Typically offered as Software-as-a-Service (SaaS), these solutions minimize upfront hardware, software and installation expenses. However, companies should still budget for implementation services and user training. The SaaS subscription model, classified as an operating expense rather than a capital expenditure, encompasses software licensing, ongoing support and maintenance, hardware and IT support.

Interestingly, when evaluated over a 5- to 7-year period, the lifecycle costs of cloud-based and SaaS ERP solutions often compare to those of on-premises systems. The long-term financial impact may be similar despite differing initial investment requirements.

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