If you’re leaning toward cloud ERP, you may be wondering what to expect in terms of cost. Many factors go into the cloud ERP cost formula, and we’re exploring them all today. Read on to learn how to set realistic expectations within your ERP business case
What is Cloud ERP?
Cloud ERP works as its name implies. Cloud ERP is a form of ERP software that resides and operates in a provider’s remote cloud environment rather than in your in-house data center.
Often deployed as a software as a service (SaaS) application, it allows companies to utilize cost-efficient shared computing resources without the need to purchase and maintain on-premise equipment.
The 2024 Top 10 ERP Systems Report
What vendors are considering for your ERP implementation? This list is a helpful starting point.
The Shift from On-premise to Cloud ERP Deployments
Gone are the days when heavily customized legacy ERP systems were enough to ensure business competitiveness. That said, there has been a slow but steady transition from on-premise setups to cloud environments. Research shows that 70% of organizations currently rely on cloud-based systems to support a range of business functions.
According to one survey, two-thirds of companies are currently migrating their ERP system to the cloud or plan to make a move soon. The same report reveals that by 2021, businesses across the country will spend a collective $30 billion on cloud ERP systems.
Calculating the Total Cost of Ownership
Before making any capital investment, it’s essential to understand the total cost of ownership (TCO). You can calculate this by analyzing how much you’ll pay for a product throughout its lifetime. In addition to any upfront costs, what will you spend to operate and maintain it?
Unfortunately, there is no one-size-fits-all answer. The TCO depends on the cloud ERP application itself and the specific factors at play within your company.
5 Factors Influencing the Cost of Cloud ERP
When calculating the TCO of a potential cloud ERP system, several factors could influence your bottom line. Let’s take a look at a few of the cost considerations that can determine the cost of cloud ERP.
1. Licensing Model
Most cloud ERP systems offer a subscription-based licensing model. With this setup, you’ll pay a per-user fee on a monthly or annual basis.
Subscription licenses usually have a minimum contract length, but you have options in terms of pricing as it is often tiered based on varying functionalities and modules.
In contrast, on-premise systems operate on a perpetual licensing model. This means you’ll pay upfront for the software license based on your number of users and the required level of customization. Then, you have the freedom to use it indefinitely.
On the other hand, subscription licensing usually has a lower initial acquisition price, which makes it ideal for small businesses on a tight budget.
2. Number of Users
Cloud environments are designed to cater to a vast number of users. They’re scalable and flexible enough to support a massive amount of data and ramp up or down as your business ebbs and flows. This type of model can help you save money in the long run, as you’re only paying for as much functionality as your users require.
In contrast, you could end up paying a substantial amount of money for an on-premise system robust enough to support a vast number of users. Then, if you add new users over time, you’ll have to pay for additional licenses.
While cloud ERP is more cost-effective in this respect, the number of users can still impact your TCO as you may have to purchase a more expensive plan to accommodate a certain number of users, depending on the ERP vendor’s pricing model.
Does your organization have many complex business processes? Do you expect to increase your current complexity in the near future? If so, you may need to consider ERP customization.
While cloud ERP systems may not be as customizable as on-premise systems, they are becoming more flexible. Customization results in additional costs as it must be performed by a developer familiar with the software. The more customizations you request, the more you will have to pay the developer.
Our software consultants have worked on many project recovery engagements, and in analyzing the root causes, one common theme is excessive unplanned customization. We recommend limiting customization as much as possible and adopting ERP best practices where it makes sense.
The amount of customization you need often depends on your industry. For example, healthcare providers that maintain large amounts of confidential data might be hesitant to share files on the cloud. As such, they may need to purchase customizations and add-ons to ensure ERP security.
Companies undergoing business transformation may also need a significant amount of software customization as these companies often must focus on business process reengineering before evaluating ERP functionality.
4. Additional Products
The cloud is designed to ensure seamless interoperability. This means it can accept new ERP applications as your business requires them. Even if you begin with a simple setup, you can grow that functionality over time.
Integrating new applications with a cloud ERP system is less expensive than installing add-ons to an on-premise system.
However, additional functionality still means additional costs, so make sure you’re only purchasing what you need. You can always buy more functionality in the future to realize more benefits of ERP.
5. ERP Implementation Activities
Total cost of ownership includes more than just the cost of the software. It also encompasses the pre-implementation phase as well as all implementation phases. Together, these phases can last years and include activities such as data migration, end-user training and communication planning.
Many of these activities fall under the umbrella of organizational change management. Any company that has implemented an expensive ERP system only to see low user adoption can vouch for the importance of change management.