When evaluating an ERP or software solution for your organisation, you will be presented with 3 main deployment options. In this document, we provide an overview of the options and a summary of the pros and cons of each.
3 Main Licensing Options
Software as a Service
- This is where the vendor provides the software on a subscription basis.
- You pay recurring monthly or annual fees.
- You do not need to worry about server infrastructure as the software is hosted in the cloud and this is included as part of the fee.
- This can be “single tenant” where there is specific infrastructure dedicated to your company, or “multi-tenant” where you share infrastructure with other customers.
- Multi-tenant typically limits the amount of customisation you can have to meet your specific requirements.
- The software will typically be automatically upgraded by the vendor on a regular basis.
- If more processing power or storage is required, this can often be increased or decreased with minimal effort. Obviously, this carries a cost.
On Premise
- This is where you buy the software licenses (often referred to as perpetual licenses).
- You pay for the user licenses and then you pay a fee for ongoing maintenance. Annual Maintenance is typically around 20% of the license fees.
- You are responsible for providing the On Premise servers and associated infrastructure.
- Upgrades are typically conducted as projects by vendors and your internal support staff.
Private Cloud
- This is a hybrid approach where you buy On Premise licenses and then host the solution in a cloud data centre, often on your own servers.
- You have the advantage of lower long term pricing than the SaaS annual subscriptions.
- You are responsible for the technical infrastructure and upgrades to the software.
Considerations for each Option
There are several considerations you will need to assess to determine which option is best for your circumstances. The following table identifies the positives and negatives of each.
Software as a Service
Positives
- No need to worry about acquiring hardware or having technical resources in-house to configure or patch servers.
- Scalability risk is minimised as server resources can be increased where required. They can also be decreased if less are required E.g. downsizing.
- No need to plan upgrades as these will typically happen automatically.
- Easy to access the system from anywhere.
- High security levels are built into data centre or hosting provider infrastructure.
- No need to plan for server upgrades / refreshes as the hosting provider handles this as part of the fee.
- Licenses can be turned on or off depending on user numbers. This impacts the monthly subscription costs on the next billing cycle.
- Saves costs of internal server rooms, air conditioning, fire suppression and associated physical access controls.
- Product innovation incorporating leading best practices may be offered with each upgrade, however, this will depend on individual vendors.
Software as a Service
Negatives
- The mid to long term operating costs are higher. Typically, at around 2.5 to 3 years of SaaS licensing, costs will start to exceed On Premise options.
- Many vendors moving legacy ERP systems to a SaaS model offer a compromised functionality level to the previous On Premise systems. Clients are often required to accept functionality that reflects that the software is “partially baked” as a SaaS offering.
- Typically, customisation options will be more limited; forcing you to accept business processes as defined by the software developers.
- If the SaaS service or internet access goes down, there is no software availability for your business.
- Forced upgrades can be disruptive and require your staff to retest new versions, incurring additional staff costs. The upgrade may offer no benefits to your company but will still need resource allocation to test.
- Data sovereignty risk may exist depending on where the data is hosted and by which companies. For example, Australian companies and government agencies must avoid offshore data centres due to things like the impact of the US Patriot Act on data privacy, access and security.
On Premise
Positives
- Provides control over your own destiny in terms of customisations and upgrade cycles. Many clients plan an upgrade every 2 or more years, depending on the benefits of innovations or new functionality available.
- Cost savings over SaaS models start to become evident after 2.5 – 3 years.
- Lower susceptibility to external factors such as internet and hosting provider outages.
- Backups are available locally for client access and use.
On Premise
Negatives
- Often clients underestimate the internal support resources required to manage and maintain the ERP system and servers.
- Provision of servers and infrastructure are the responsibility of the client. Company growth impact on server infrastructure, for example, will need to be planned and costed.
- Software and server infrastructure upgrades need to be planned as projects and these can create disruption, costs, and resource demands.
- Once licenses have been purchased, they cannot be returned for credit and maintenance will still need to be paid ongoing to ensure support and upgrades are enabled.
Private Cloud
Positives
- Provides the optimal mix of being able to control your own destiny with respect to customisations and upgrade timings, while taking advantage of a lower cost of ownership from a licensing perspective over the mid to long term.
- Saves costs of internal server rooms, air conditioning, fire suppression and associated physical access controls.
- Access from multiple geographical locations is simplified and typically more resilient than On Premise infrastructure.
- Security and access are provided automatically to data centres that are typically certified and have multiple redundant services such as electrical and internet links.
- Private cloud hosting providers can typically offer server monitoring, maintenance, and patching. This alleviates the need for in house technical resource requirements.
- As companies expand geographically, this provides the simplest and most effective access to the software.
Private Cloud
Negatives
- Similar to On Premise negatives.
- Prima facie seen as more expensive than On Premise options due to the external hosting and servicing costs. In reality this could be illusional when On Premise costs are fully documented.
- If the internet access goes down, there is no software availability for your business.
What are the other considerations?
Industry investors are pushing for more SaaS focus. Why is this?
- SaaS yields better and longer lasting ongoing annuities for investors.
- Subscription prices can be increased with minimal recourse from clients.
- SaaS assists client retention due to the risks and effort involved for a client to move to alternative solutions.
- This model enables better granularity on costing to clients, typically resulting in higher vendor revenues. g. additional backups are costed, additional modules can be switched on, services provided can be individually charged.
Does SaaS mean you get the latest and greatest software?
- Although SaaS is being portrayed by some vendors as a “silver bullet” for ERPs, it is not necessarily the right model for all businesses. For example, a large manufacturing business with an Industry 4.0 focus on the factory interconnections to the ERP may be better deploying On Premise to minimise any risk of an outage to production and operations.
- For pure play SaaS systems like Salesforce and NetSuite the answer may be a resounding yes. For legacy ERP systems that are in the process of migrating their solutions to the cloud it may mean that their clients will need compromise on preferred functionality in favour of “best practice”. Best practice is illusory and, in this scenario reflects the software’s inbuilt capabilities rather than what the client actually needs.
Next Steps
- The key is to assess the above points and to determine what is best for your business. Don’t just look at costs alone.
- Ensure that you prepare a Financial Model for the 1, 5 and 10 year cost of ownership to clearly understand the actual costs.
- Ensure that on site server infrastructure, staffing and support costs are included in your costing model.
- If in doubt, have a discussion with an independent consultant to work through the minefield and to determine what will be the best approach for you.
