How the cloud is going to reinvent ERP — and how long it will take

How the cloud is going to reinvent ERP — and how long it will take

Summary: ERP is the backbone of business and especially very large business but the cloud, once seen as a threat to ERP, may be the breakthrough that redefines the entire industry.

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Over the past 30 years, enterprise resource planning (ERP) has become the mainstay application of most companies.

These systems sit on mainframes or servers, fussed over by a select bunch of IT people, cosseted and quietly churning through the vital work of keeping the company going. Whether it is supplying all the right information on a just-in-time basis, keeping close control of inventory or just printing out employee time-sheets, the ERP system will be the ultimate controlling mechanism.

The software used always needs to be state of the art and is often so expensive that it can turn CEO’s hair white overnight if it has so much as a glitch: in short, ERP is both mundane and absolutely crucial to any production company's success.

But is it time to call time on ERP? Many CIOs are eyeing these expensive systems and wondering whether ERP can be moved out into the cloud.

"The cloud will completely disrupt the ERP market," Gartner analyst Nigel Rayner told ZDNet. The world is moving to the cloud, he said, and it will be the most important factor in the development of ERP over the next 10 years or more.

Not that the cloud is going to banish the core of on-premise ERP. "For the next five years or more we will see the deployment of what we call hybrid-ERP, a mix of on-premise and the cloud", Rayner said. "What we do know is that there will be come occasions when on-premises ERP is the way to go and some where the cloud is better suited."

As Rayner puts it in his report, Hybrid ERP Integration:

"The traditional view of ERP as an integrated, end-to-end process suite sourced from a single vendor has been under increasing pressure in the last 10 years because many organizations have faced challenges with the cost and complexity of maintaining these solutions ...and have struggled to keep pace with vendor-driven upgrade cycles. The emergence of cloud-based business applications has dramatically increased this pressure in the last five years, and now ERP leaders see large elements of the ERP footprint being challenged and even replaced by cloud 'upstarts' in areas such as talent management (Oracle Taleo Cloud Services, SuccessFactors) e-procurement (Ariba, Coupa), travel and expenses management (Concur, Infor) and more."

Classic ERP systems consist of a range of different applications in various strands of what used to be called production control, through human resources (HR), and facilities management. One of the key among these is human capital management.

"Human capital is a big cost for companies and there are great efficiencies to be gained from using the cloud for this," Rayner said. "There are some really good small business solutions that are being used by many companies and these can be scaled up."

The move to the first stage hybrid-ERP will, according to Rayner, offer two main advantages — a reduction in IT costs and a reduction in complexity.

"Companies are finding that they just don’t need all those people," he said. "They can manage with fewer people by using cloud-based applications instead of overly-complex, often tailor-made solutions."

Nowhere is this more true than in the systems department because, Rayner said, so much of IT's work is upgrades and patches and other routine tasks. If you use cloud computing, he said, then another company becomes responsible for all that patching and uploading. "The first you should know about it is that your system has been upgrades while you have been home in bed."

Does this mean that a lot of IT jobs are going? No, said Rayner, who believes that in the short term companies will see getting rid of IT people as a way to save money, but in the long term they will be looking to recruit more people with different skills.

Rayner said that if you had talked to managers and IT people about the cloud just a few years ago they would have said, "No way." Now the story is different, he said, and everyone can see the benefits of the cloud, especially the finance people who see flexibility in the cloud where before there was no flexibility at all.

Tony Lock, of analysts Freeform Dynamics largely agreed. But how far you are from implementing cloud computing for your production systems largely depends on who you are and what business you are in.

"People can see already some of the things that cloud computing can offer them but in this [the ERP] market people will be cautious," Lock said. "Just because you are looking at an ocean it doesn't mean you have to try and cross it in one go, you can go from island to island and still get there."

Which is his way of arguing that the best way to deal with ERP is to look at which of the many different applications and modules offer the best initial returns and start by trying those. How fast you take on new modules in your cloud will largely be a matter of personal preference, he thinks, but he believes a five- to 10-year timescale to roll-out cloud-based ERP is certainly not unreasonable.

"People are going to be cautious," he said. "They will want to roll out cautiously and make sure that things are working well before moving on. But the rewards will be there I think."

Lock said that he sees three main issues linking ERP and the cloud:

  • Integration: At the technology level where companies can pick up on new facilities can exploit them.
  • Relationships: The need for the vendors and the customers to understand that their joint use of the cloud will be a long-term relationship if it is to be successful. Both sides need to understand what each other can expect from the relationship.
  • Capabilities: Do you have the right skill sets within your company to deal with the cloud. Do you have the legal and financial capabilities or to put it another way, is your organisation ready for cloud computing.

What CIOs need to bear in mind, Lock said, is that they cannot do everything at once. "The first decision is what to do first and take it from there, one step at a time," he said. And if there is a key word, "the word is focus".

The gradual shift from on-premise to cloud is illustrated by a comment to Gartner's Rayner by one IT manager at a large production company who said: "I don't want to go down as the last guy who spend a fortune on SAP and Peoplesoft."

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Topics: CXO, Cloud, Enterprise Software

About

Colin Barker is based in London and is Senior Reporter for ZDNet. He has been writing about the IT business for some 30-plus years. He still enjoys it.

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9 comments
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  • The cloud is going to reinvent ERP? Hardly!!

    I love it; CIOs will come up with new reasons to spend millions of dollars and completely destroy their staffs and users then leave before it all goes to pieces!!!
    richphx
  • CIO = Career Is Over

    Well said. The cloud is beginning to see a new kind of ERP - not the old complex crap from on-premise computing, but brutally simple apps that do just enough - and cost a fraction of what went before. Overall, the traditional IT industry will shrink dramatically and IT departments, as we know them, will disappear. CIO = Career Is Over.
    Being Guided
  • I think those with knowledge of ERP

    will remain in demand. Even as it shifts to the cloud.
    The Danger is Microsoft
  • What a complete and utter joke.

    Seriously.

    "These systems sit on mainframes or servers, fussed over by a select bunch of IT people, cosseted and quietly churning through the vital work of keeping the company going."

    And then you go on to say move it onto the cloud.

    Given the savings, which for a large company will be minimal, why risk the "work of keeping the company going".

    Not only that, why even begin to think of putting your whole enterprise data at risk on the cloud available to be hacked and stolen for the highest price by your competitors.

    The corporates wont even have a clue who the people who visit the site maintaining the software and hardware are.

    I have never ever seen such a stupidly ridiculous idea ever. This is a license for corruption and whole sale blackmail of corporate entities.

    First principle of any corporate database, LOCATION, BUILDING and HUGE LOCK.
    MaxDaniels
  • Evolution of ERP

    Interesting article. ERP has evolved tremendously. Remember character-based ERP? I enjoyed the article and believe cloud is definitely reinventing ERP. Check out this infographic about the evolution of ERP: http://www.acumatica.com/blog/the-evolution-of-erp
    Melissa Canfield
  • The Cloud model will drive new expectations for ERP

    Thank you Colin for your insight. SaaS ERP is the latest effort in the ERP industry to provide a rapid, cost-effective solution for customers who want an enterprise solution. A SaaS deployment model does provide the potential for greater value realization; however, the value proposition is dependent upon appropriate expectations and implementation approach. For additional insight please see my blog on how SaaS ERP is not a push button solution.

    http://gbeaubouef.wordpress.com/2013/07/10/saas-erp-is-not-push-button/
    beaubouef@...
  • The next revolution in ERP is biger then the cloud...

    this article misses the biggest change coming in ERP - broad spectrum software development platforms. Now that Cloud ERP developers move away from Java and .Net and towards broader platforms like Omnifabric then there must surely be a huge proliferation of cheaper ERP options that blend the line between cloud, hosted and apps?
    iheron
  • The shake-up of the big ERP boys SAP and Oracle by Cloud computing

    I didn't put the word big in front of my title because I think it will take quite sometime before it really shake up the big boys possibly in 10-15 years time.

    Cloud enterprise solutions no doubt will have alot of value to add, not just reducing computing or IT costs but it also enables one enterprise to connect seamlessly to other enterprises be it their customers, retailers, suppliers etc, unlike the existing ERP infrastructure it is a nightmare and enormous spending project to do so. Samsung spent like more than US$ 100 million just to integrate all its SAP ERPs worldwide into one solution many instances connected.

    The other advantage is you can use the solution anytime anywhere since it is on the cloud. Currently all ERP solutions that is on premise sits within the company LAN which means you have to go through a VPN to access your system when you are out of the LAN. This inhibits the convenience and productivity of employees.

    However despite all the optimism and future of Cloud solutions, it will take sometime to reach to the big companies. Hence the early adopters will be the smaller companies who wanted to take advantage of the cost saving and resource savings of having cloud ERP. Afterwhich the midsized companies will start to use it and eventually the big companies.

    The big companies however will use some form of cloud solutions like Ariba, Saleforce.com, Infor expense, HR system etc to cover the limitations due to the 2 points I mentioned to complement the use of their existing ERP systems as what the author points out.

    The speed of whether Cloud enterprise solutions will come to a full explosion will depends on how our internet speed, data storage capacity, computing power will take us from here.
    These limitation across the globe are still inhibiting the growth of the cloud solutions.

    I believe based on Moore's law, the internet speed, storage capacity, computing power will grow exponentially within this decade and soon enough all the factors inhibiting the growth of cloud will go away.

    By that time, if SAP and Oracle still tries to sit on its jewels/laurels of on-premise solutions and ignore Cloud, they will be finished. I am still optimistic about Oracle since most of its solutions are already web-based especially its E-business suite, I don't think it will have a hard time transforming itself into Cloud. My worry is SAP since till today it is still a client server architecture solution, hence it will take SAP lots of money, time and resource to move its gigantic mountain.
    leokh
  • More Choices are Needed in the ERP space

    Today there is a large number of cloud accounting vendors to choose from for companies just starting out. Prices are competitive, and the terms offered are simple and transparent. The customer is King!

    Unfortunately, the situation becomes more challenging as these companies outgrow their first accounting system and look at mid-market offerings.

    Talk about sticker shock.

    While entry-level solutions run a maximum of USD 2-3K/Year. Mid-market offerings start at USD 50K to and end up costing USD 100K+ when finally fully deployed. That is quite a price difference to digest.

    Further complicating things are the complex pricing schemes and terms of service that make it hard to figure out what these systems will eventually end up costing and how costs will escalate as the company grows.

    The reason for this is a lack of solution choices in this segment.

    This lack of choice allows vendors to continue demanding outrageous prices, to offer complicated terms, and dated products.

    This is changing However.

    Newer technologies, open source components. agile methodologies, and a focus on cost control, allow new generation vendors (my company Versaccounts.com is one of them) to offer affordable mid-market solutions that growing companies can deploy today.

    The entry-level accounting space is well on its way to being taken over by cloud based solutions.

    The mid-market is next.

    In the future mid-market vendors will need to get realistic about the price of their products and the terms they are offered under. This will happen as more solution providers enter the fray.

    The old ways of doing business will not be acceptable for much longer. The time has come for simplicity, transparency and fairness as a basis for win-win relationships between software publishers, channel partners and end customers.

    This in fact is the most important change that the cloud is forcing on all of us.
    Richard @...