It is a well-known fact that, at a certain level of growth, it is hard to keep things under control without specialized tools.
Because of this, these days, ERP is a necessary tool for any company that wants to keep its business operation consistently efficient and effective through-and-through. According to a study by Finance Online, companies are implementing ERP systems for the following reasons:
- Business performance improvement – 64%
- Company growth positioning – 57%
- Working capital reduction – 57%
However, with the emergence of cloud computing, the options for ERP integration have become much more comprehensive. In addition to the traditional ERP kept on-premise, companies can now go with cloud-based ERP systems.
Choosing the best fitting solution for a company requires a thorough consideration of all the pros and cons of both options.
In this article, we will explain the difference between on-premise ERP and cloud ERP and look at the field where each option fits best.
Enterprise Resource Planning System, aka ERP, is a management tool that integrates business processes into a unified and manageable workflow for human, financial, and computing resource monitoring.
These kinds of applications keep track of and automate various parts of business processes such as project planning, development, sales, and marketing.
In addition to this, ERP handles such integral processes as payroll, accounting, and other back-office routines.
These days, there are two main types of ERP systems – on-premise ERP and cloud ERP.
The main difference between the two is as follows:
- On-premise ERP is a system distributed by the company’s internal servers (i.e., on-premise) and entirely handled by the company’s staff.
- Cloud ERP is a software-as-a-service application provided by the ERP vendor.
Let’s look closer at each of them.
On-premise ERP is physically located on the company’s servers and available through an internal network. It was the primary mode of deployment for ERP systems up until the full adoption of cloud computing in the mid-to-late 2000s.
Even though cloud ERP is slowly taking over, on-premise ERPs is still holding 57% of the market, according to Allied Market Research.
Because the whole system is on the company’s premises, the company has complete control over its assets and bear full responsibility for its safety and integrity. This aspect manifests itself through building dedicated infrastructure and maintaining IT staff to keep it running.
System and Data control and superior data security, are the main reasons to implement on-premise ERP today. While most of the Cloud ERP providers promise a gentlemen’s package of security measures – it might not be enough for some types of sensitive data.
Security concerns are one of the reasons why many enterprise-level companies are running resource planning on-premise. Other industries with sensitive data, where on-premise ERP might be a preferable option include:
- Healthcare (both services and medical research);
- Industrial and manufacturing;
- Government-related institutions.
Another significant reason why on-premise ERPs are still in use is customization.
- Cloud ERP is nice and easy to use and it offers more than enough features to handle business operations.
- However, you are working with readymade tools with little to no room for further modification.
- On the contrary, on-premise ERP’s full control over the system’s infrastructure means you can shape it in any way your business goals require.
Cloud ERP is a type of ERP system deployed on a cloud platform as a full-fledged application. It is the next logical step in the evolution of ERP systems.
Some of the main disadvantages of old-time on-premise ERPs were availability and scalability. To put it in broad terms, on-premise ERPs were bulky and clumsy. The adoption of cloud computing streamlined the workflow of the ERP system and made it less about the complex infrastructure and more about the application itself.
At the moment, Cloud ERP is experiencing a growth period. According to the Panorama Consulting report, in 2017, cloud-based solutions were implemented in less than half of the companies surveyed, 2018 saw a drastic shift with cloud ERP deployment reaching up to 85%.
Because of its deployment type, Cloud ERPs are much more flexible in terms of availability, scalability, and data loss protection. Cloud infrastructure enables numerous automation routines, and further orchestrations, that increase the overall efficiency of business workflow.
The system itself operates as a web browser application with more flexible access management.
However, due to its deployment nature, there are some concerns over data security.
There are two sides to the coin on this topic.
- On the one hand, there is always the possibility of a data breach happening.
- On the other hand, cloud vendors have tight standards for data security. Companies can go as far as to apply a third-party security audit to be 100% sure.
The other concern with Cloud ERPs is customization. But, it is not that big of a problem. The fact of the matter is – cloud ERP is a service designed to handle basic resource planning operations. It features all the tools you might need in a more or less standard business workflow. In most cases, that’s all the company would need.
Consulting firms, cloud software development companies, recruiting firms, or IT outsourcing firms, do not require exceedingly customized resource planning solutions.
Further customization is nice, but ultimately not necessary outside of the minimal pool of use cases. For the most part, ER customization is reserved for complex banking operations, industrial orchestrations, stock market stuff, and the likes.
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The choice between Cloud ERP or On-premise ERP depends on three key factors:
- Whether your business pipeline requires a customized resource planning solution?
- Whether your corporate data is sensitive enough to require full control?
- Whether the scope of operation requires significant scalability capacity?
To understand the pros and cons of on-premise and cloud types of ERP, you need to look at the following criteria:
- Data Security
Let’s take a closer look at them:
On-premise ERP requires a significant upfront investment to set up the infrastructure and handle the deployment of the system. In addition to this, you need to train staff to operate and maintain the system.
Cloud ERP requires integration with the system, but otherwise, it is ready for use in less time than its on-premise counterpart. There is a subscription fee for the service with various hardware-software costs, and additional features included. Nevertheless, it is significantly less than the infrastructural costs of on-premise ERP. However, the costs may balloon as the system grows and evolves.
The company entirely handles the implementation of on-premise ERP. Because of this, the process takes a considerable amount of time. Depending on the type of ERP and its features, an implementation might take as long as six months. In addition to this, there are high upfront costs for hardware infrastructure and staff. On the other hand, there is a more significant extent of customization.
On the other hand, Cloud ERP implementation proceeds in a much shorter period (two-three months to fine-tune the thing to perfection) with lesser upfront costs. However, customization is limited to what features a Cloud ERP vendor is offering.
On-premise ERP is open for all sorts of customization, according to the business needs of the company. After all, the assets are all there, and you can rearrange them any way you see fit. However, this comes with additional spending and may cause various operational setbacks like prolonged downtime or accidental misconfiguration.
Cloud-based ERP service is usually bound to its set of features but enables customization to a certain extent for an additional fee.
Data security and ownership
With on-premise ERP systems, the company has full control over data. Because of this, the company needs to be cautious about its data security policies and efficiency, in order to avoid possible breaches and malicious attacks.
In the case of cloud ERP, the company’s data is on the vendor’s cloud platform and accessed through a browser application. This approach means there are various encryption and access management protocols at play. In addition to this, the ERP vendor provides frequent security updates.
On-premise ERP’s scalability capacity is limited to the hardware. These constraints mean you need to plan growth and expand the system accordingly (i.e., deploy additional hardware infrastructure).
Cloud ERP benefits from cloud auto-scaling features that allow taking as many resources as required to maintain operation.
In the case of on-premise ERP, the company is responsible for the whole thing. This aspect results in the need to train or hire specialized staff for deployment and tech support.
On the other hand, the Cloud ERP’s vendor handles the operation on its own and regularly updates the system’s features and security framework. The company requires minimal maintenance staff to oversee implementation and integration — otherwise, it is all about using the application without worrying about its inner workings.
Regardless of whether it is an on cloud or on-premise ERP system, resource planning is one of the integral parts of business operations. It is the backbone of an efficient and cost-effective pipeline that brings results and enables results first and foremost.
Understanding which option fits each kind of company best is important in making the right call.
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