ERP: Long, difficult, expensive. Is cloud ERP's next big thing?

Or just a case of slicing cost differently?
Written by Steve Ranger, Global News Director

Or just a case of slicing cost differently?

Will cloud ERP like Zach Nelson's NetSuite replace on-premise ERP?

Cloud-based ERP is the way of the future, says NetSuite CEO Zach NelsonPhoto: NetSuite

Enterprise resource planning (ERP) has always been fiendishly tricky stuff.

The history of ERP is littered with horror stories of large-scale implementations that run for years: projects as complicated as knitting together a bath-full of cold spaghetti. In fact, many users would consider sitting in that bath of cold spaghetti infinitely more fun than the system with which they end up.

There is a reason why ERP has taken so long to implement, of course - it's complicated stuff that involves re-engineering the most important functions of a business.

Over the last couple of decades, companies have made vast investments in their ERP systems. This investment, combined with how critical these systems are to organisations, means CIOs have so far resisted the charms of cloud ERP, especially when compared to other varieties of business software such as customer relationship management.

But as software as a service (Saas) becomes a standard part of many companies' IT infrastructure, cloud ERP too has ambitions to become a mainstream technology option, with its supporters insisting it can replace those never-ending implementations and big upfront costs with a simple, web-based subscription model.

Certainly the cloud ERP companies are bullish: "This is clearly the future of software and our approach to running businesses is the way the world is heading. This is what a disruptive technology looks like. When disruption happens it isn't faster, cheaper, better - it's much faster, cheaper, better," NetSuite CEO Zach Nelson told the company's SuiteWorld customer conference last month.

In NetSuite's view, companies can do away with the long rollout times and upfront costs associated with on-premise by using a cloud-based ERP system instead.

"I do think we are hitting a tipping point for complex businesses turning to the cloud," he said, claiming that companies' experience of using software as a service in non-mission-critical areas like salesforce automation and HR had "led them to believe this is a better way of running their business".

Cloud ERP comes of age?

As a result NetSuite, previously focused on the mid-market, is increasingly aiming at larger companies. It says companies of over 1,000 seats is its fastest-growing customer segment, and unveiled a version of its cloud product aimed at large organisations at the event last month.

Deal-of-the-day company Groupon is in the middle of its own cloud ERP rollout, and is slated to have NetSuite running across 26 countries in three months. "We looked at the big boys but they were cost-prohibitive plus the ongoing cost of maintenance and people to babysit the servers," John Bosshart, Groupon's international controller, said of the on-premise ERP vendors.

Similarly Raj Singh, CFO of education company Knowledge Universe, said his organisation had tried to standardise on one supplier but that the costs were too great. In a lot of cases, his company acquires small businesses but the cost of putting in on-premise ERP for them "would be the same as the company's first year profit and that didn't make sense to us", he told SuiteWorld.

According to Paul Hamerman, principal analyst at Forrester Research, SaaS ERP is gaining interest "because you can deploy faster and it has predictable all-in costs and regular software upgrades".

Any trend towards cloud ERP will have implications for IT because much of that maintenance job will effectively be outsourced to the cloud provider.

"You have to change some of the roles and responsibilities that have been owned by IT but are moving over to business. IT has to open up and move to play more of a consultative role. Each company has to look at their culture and look at how they want to adopt this disruptive technology," Hamerman said.

NetSuite's Nelson put it another way - "IT has been hijacked into running software apps" - arguing that having IT staff around who only know "how to shock a server back into life" doesn't help that company.

ERP: Upfront costs versus subscription

However, cloud ERP is still a tiny fraction of the overall ERP market. Chris Pang, principal research analyst at Gartner, said ERP is such a core asset companies are reluctant to let go of it. "Once it's in place, unless there is a major change to their business, they will keep it in place as long as they possibly can."

ERP systems stick around for a long time, with the replacement cycle running at somewhere between seven and 10 years. The last cycle - courtesy of the Y2K panic - was around the year 2000, so many companies are looking right now...

...at whether to pull out that old software and start again.

NetSuite's Nelson acknowledges the Saas ERP market is challenging: "We're the last ERP system to be built in the last 20 years. This is not a greenfield because everybody had ERP."

While some companies may be interested in swapping up front capex for ongoing opex costs, the pricing issues can be more subtle than that, especially for companies buying ERP for the first time.

"The big issue is how to look at the long-term costs," Gartner's Pang said. That is, with ERP, companies are likely to have the system in place for as long as 10 years so what they might pay in subscription costs could add up to a significant sum compared to what might have otherwise been paid in upfront licensing costs and maintenance.

The other big issue for companies considering the switch to cloud is the issue of upfront versus ongoing costs. With on-premise software, the software is paid for upfront. With a subscription model, users who stop paying could be in trouble. "In the recession, people couldn't afford to pay maintenance but they still owned the software," Pang pointed out. "If you are paying a [subscription] and you can't pay the vendor they would be within their rights to switch you off."

Cloud ERP

For companies that have been promoting cloud for years, there's a new threat on the horizon: big names like SAP and MicrosoftPhoto: Shutterstock

ERP and social media

NetSuite is keen to incorporate new technologies as it seeks to entice more users to the cloud, with social media one notable addition to its offering.

The company has signed a deal with Yammer so transactions within the NetSuite system - such as users generating invoices and sales reps placing orders - can be turned into an activity stream in Yammer's enterprise social-networking software.

NetSuite decided to work with a third party rather than build social networking into its own system. "The alternative is that every line of business application builds its own social network and it gets fragmented and you have these silos," NetSuite's Nelson said. "There are many social tools and what we want to be able to do is let NetSuite communicate to all sorts of devices rather than create an antisocial social network.

"We're not going to pick the winner in social media in the enterprise, the customers will," he said.

The revenge of the big ERP brands?

But beyond this, for companies such as NetSuite that have been promoting cloud for years, there is a new threat on the horizon. The companies they have been poking fun at for so long, like SAP and Microsoft, have now decided to head down the SaaS route themselves.

Have the pure-play cloud companies built a market only to see their rivals swoop in and scoop up the customers right at the last minute? Not likely, according to Nelson: "No traditional software company has ever been successful at creating a cloud-based solution.

"No company has made the transition from a licence model to a subscription model," he adds. "You can't cross that chasm and that's the chasm they need to cross."

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