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

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.
Written by Colin Barker, Contributor

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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