How to choose an ERP system based on the needs of your business?


Sep 16, 2023

The primary distinction between Cloud ERP and On-Premise ERP lies in their hosting. Cloud ERP is housed on the provider's servers and is accessible online, boasting benefits like cost savings, quick setup, and seamless updates. However, it might pose issues regarding data management and configurations. Conversely, an on-premises ERP, set up directly within a company's own infrastructure, offers enhanced data oversight and tailored customization. Yet, it demands a heftier initial investment and takes longer to deploy.

Later in this piece, we'll delve deeper into their core contrasts, setup characteristics, pros, and cons. This insight will undoubtedly guide you towards an informed decision!

Cloud ERP

Cloud ERP refers to software hosted on the provider's infrastructure and accessed via the web. Essentially, it's a pre-packaged software solution that seamlessly integrates into your business framework for immediate use. The vendor takes care of the underlying infrastructure, timely updates, customer support, data storage, and ensures data security.

On-Premise ERP

On-Premise ERP refers to an enterprise resource planning system that's set up directly on a business's own hardware and servers. Here, the onus is on the company to handle the system's installation, upkeep, software upgrades, and the safeguarding and storage of data.

Market Distribution of Cloud vs On-Premise ERP

Determining the precise market distribution between various ERP systems can be challenging. Yet, referencing the 2022 study by Oracle NetSuite provides some insights. According to their findings:

• SaaS ERP holds 64%.

• Cloud ERP accounts for 21%.

• On-Premise ERP stands at 15%.

While it's essential to approach these figures with caution due to Oracle's limited sample size, the overarching trend is clear: On-Premise ERP lags behind its cloud-based counterparts.

Factors Influencing the Choice Between Cloud ERP and On-Premise ERP

The rising preference for cloud-based ERP systems among businesses is often well-founded, with several pivotal reasons driving this trend.

Cost Considerations

Most cloud systems tend to be more cost-effective than their on-premise counterparts, primarily because they operate on a subscription-based model. Moreover, with cloud ERP, companies can sidestep the added expenses associated with hardware procurement, maintenance, staffing, and energy consumption. For a significant number of businesses, the cost factor becomes the primary reason to lean towards cloud ERP. However, it's worth noting that this might not always be the most optimal choice, a point we'll revisit later.

Speed of Rollout

Cloud-based ERP systems can be up and running in a matter of hours or days. The provider handles the setup and operation, with the client primarily requiring internet connectivity. In contrast, setting up an on-premise ERP can span weeks, months, or in some instances, even years. This is due to the intricate integration needed with the client's existing infrastructure and operational processes.

Security Concerns

The security landscape for these systems isn't black and white. While cloud ERP might offer enhanced data protection, especially if the vendor employs cutting-edge encryption, backup, and restoration methods, on-premise ERP allows clients more direct control over their data since it's housed on their servers. However, with this control comes the onus of ensuring the system's security.

Implementation Approach

The deployment strategies for these ERP types vary considerably. Cloud ERPs are essentially plug-and-play solutions, boasting flexibility and a swift setup process, sometimes just taking a few hours. On the other hand, on-premise ERP systems offer a broader scope for customization, allowing for modifications that cater to specific business needs, ensuring a more tailored fit. As a result, the efficacy of such a system might be superior.

System Updates and Customizations

Cloud-based systems benefit from automatic updates managed by the service provider, eliminating the need for user intervention. This is advantageous for business owners as it relieves them from the hassle of system maintenance – the provider handles it all. Conversely, on-premise systems offer the flexibility to upgrade and refine based on individual preferences. This means businesses can tweak and optimize their ERP system on their terms, instead of anticipating a vendor update that aligns with their requirements.

Pros and Cons of Cloud ERP

Let's summarize the key benefits of cloud ERP systems:

• Reduced upfront expenses since customers opt for a service subscription instead of purchasing a software license.

• Quick setup, eliminating the need for installations across individual computers or servers.

• Enhanced security measures, thanks to the provider's use of the latest encryption, backup, and recovery tools.

• Adaptability and uniformity, with providers offering pre-configured solutions tailored for various sectors and functionalities.

• Hands-off updates, with the provider handling system enhancements and fixes without needing client involvement.

However, it's essential to recognize the inherent drawbacks:

• Limited data and system control since everything is housed on the provider's infrastructure rather than the client's servers.

• Restrictions in customization, potentially making the system less attuned to a client's unique needs.

• Reliance on a stable internet connection, given that system access typically necessitates continuous linkage to the provider's servers.

• Possible regulatory challenges, especially when data is stored across different legal territories.

Pros and Cons of On-Premise ERP Systems

On-premise ERP systems offer several distinct advantages:

• Total control over data and systems since they reside on the client's servers rather than those of a third-party provider.

• High customization potential, allowing the system to be tailored to a client's specific requirements.

• No reliance on internet connectivity, as system access doesn't necessitate a continuous link to external servers.

• Enhanced regulatory compliance, given that data remains within a single jurisdiction.

Yet, these systems come with their set of challenges:

• Steep initial expenses due to the need to purchase, install, and set up both software and hardware.

• Slower deployment, given the intricate integration required with the client's existing infrastructure and operational workflows.

• Potential security vulnerabilities, as the onus of maintaining system security and adhering to the latest standards falls squarely on the client.

• Possible inefficiencies and stagnation, since the client must ensure the system remains current, scalable, and updated. Many of these tasks lack automation.

Which ERP System Suits Your Business Best?

Weighing the pros and cons, you might lean towards cloud ERP systems as the optimal choice for businesses. And often, they are. A cloud-based system might be your best bet if you prioritize:

• Minimal upfront expenses and foreseeable IT infrastructure costs;

• Quick deployment and immediate operational readiness;

• Robust security measures and data backup protocols;

• Streamlined business operations;

• Hands-free updates and consistent system support.

Yet, there are scenarios where an On-Premise ERP emerges as the more logical choice. Such a system might resonate with you if you value:

• Complete authority over data and system operations;

• Rigorous control over data handling and system configurations;

• The ability to operate offline and without constant internet connectivity;

• Adherence to specific data storage regulatory standards.

Currently, the primary users of on-premise ERP systems include:

1. Financial institutions and banks, where data security, confidentiality, and regulatory compliance are paramount.

2. Manufacturing entities with intricate and proprietary business processes that generic ERP solutions can't cater to due to customization limitations.

3. Governmental bodies that mandate data residency within specific jurisdictions and restrict data sharing with external entities.

In any case, it is important not to make hasty decisions. Dive deeper into the topic, consult an expert in the field. Contact us for a free consultation and we will give you a comprehensive overview of the various nuances of ERP systems.

Viktoria Azarova

COO (Chief Operating Officer)

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