SaaS ERP is coming of age – But is it right for your business?

With all of the recent marketing hype surrounding SaaS ERP, you might be surprised to learn that it only commanded seven percent of the 2011 global ERP market share by software sales. According to a July 2011 report by Gartner Research, this translates to a roughly $1.7 billion US slice of the $24.3 billion US ERP software pie.

A drop in the bucket? Perhaps today, but that’s likely to change over time.

Gartner also thinks the global SaaS ERP market will reach $2.9 billion US by 2015 – representing a compound average growth rate of just under 14 percent.

Companies like Plex and upstart Kenandy are gaining ground with small and smaller mid-sized North American manufacturing businesses. Netsuite has decided to target larger, enterprise class businesses. SAP and Oracle are feeling the heat, and are aggressively pushing their offerings (Business By Design and Fusion Apps, respectively) into the marketplace.

It seems that the business cycle is contributing to the SaaS market momentum. With this extreme market volatility, companies want the ability to scale their systems and costs on-demand. SaaS gives them more opportunities to do so than on-premise software. Also, companies are looking to avoid tying up their cash in heavy, up-front capital investments. Although SaaS alternatives can be just as pricey in the long run, many companies are placing greater value on the lower initial investment requirements.

However, SaaS isn’t all roses. In general, SaaS ERP still can’t be customized to the same extent; meaning that it might be more challenging to get the software to handle certain critical business processes. There are also valid concerns about data privacy, reliability, as well as system responsiveness.

If your business is considering SaaS ERP in its ERP selection project, you should think about the following factors.

Short-term vs. long-term investment

SaaS isn’t likely to command the same initial capital investment in technology and infrastructure as its on-premise cousin. And, in contrast to on-premise ERP, a company doesn’t have to make an initial outlay to acquire a block of licences.

Instead, a company pays a recurring subscription fee for SaaS. However, that doesn’t mean that SaaS subscription fees don’t include a portion of the vendor’s hardware and infrastructure costs. Rather, these costs are baked into a pricing structure that prorates the costs on a period-by-period basis. What this usually means is that the SaaS alternative is more cost effective in the early years, but becomes more expensive over time. Under a long-term scenario, the costs of similarly featured on-premise and SaaS ERP systems can approach comparability.

Tax incentives

In some jurisdictions, companies are eligible for tax incentives relating to hardware or software investments. However, SaaS is offered as a service, not as a transfer of rights via licence or ownership. In many cases, this structure disqualifies SaaS investments for tax benefit eligibility. When undertaking a financial analysis, it’s important to consider the applicability of any such benefits.

Scalability

In the last five years, companies have increasingly vocalized their criticisms about how hard it is to scale their on-premise ERP systems. They say that vendors promise that their ERP systems will make their businesses more adaptable; however, when it comes time to scaling their ERP systems to respond to market shifts, these businesses also say that the vendors throw up roadblocks. Many of their concerns include restrictions and penalties that apply when a company wants to scale back its ERP system. Other concerns relate to inefficiencies when they want to – believe it or not – ramp up their software needs (i.e. purchase more).

True SaaS seems to address these concerns head on. It gives companies an ability to scale their software on-demand, without human intervention and without penalty.

Customizability

True multi-tenant SaaS ERP software is defined by a situation where a vendor deploys one instance of its software to many customers. This makes it difficult – sometimes impossible – to tweak, bend and mould the software to meet certain requirements that are unique to any given customer.

This more restrictive nature of SaaS functionality places an even higher premium on effectively modelling business processes and key requirements during an ERP selection project.

This lack of functional flexibility should be contrasted with on-premise software, which can generally be much more customizable. Further, innovations in software development have minimized many of the risks relating to software customizations. Most modern on-premise software systems can be effectively customized (up to a certain degree) without touching the underlying code.

Business continuity risks

Unlike on-premise ERP, the SaaS vendor has enormous leverage and power over its customers – it both possesses their data and processes their transactions. What happens in the event of a dispute? Can the vendor hold the company hostage by cutting off access? What about a situation where the company wants to switch SaaS providers? What are the vendor’s obligations relating to releasing customer data?

Before signing contracts with services providers, companies should understand the various parties’ rights and obligations vis-à-vis data ownership and possession.

Jonathan Gross is vice-president of Pemeco, Inc., a consulting firm specializing in ERP selection and implementation. He can be reached at jonathang@pemeco.com. This article originally appeared on Pemeco’s website – www.pemeco.com.