One frequently overlooked area of ERP projects is whether or not to externally host the ERP solution. Since this is a major item that can significantly affect your project’s ROI, it is a decision that should not be taken lightly. Whether or not a hosted ERP solution is right for your organization depends on your unique situation. Though many readers may not like my “it depends” answer to the question, there are a number of factors that should affect your final decision. Below are just a few of the major considerations to take when evaluating your options.

Advantages of a Hosted ERP Solution

  1. It reduces fixed overhead costs, which is good for companies that are trying to optimize their return on assets or lower their fixed cost
  2. Hosted solutions provide flexibility, which is good for companies that are going through office moves, consolidations, or closures. With hosted solutions, you don’t need to worry about scaling the software to meet your evolving requirements as your business changes. This is also advantageous to companies that have limited IT resources or are in the process of downsizing.
  3. It provides strong disaster recovery processes, which is good for companies that are struggling with Sarbanes-Oxley compliance.
  4. If you purchase the hosted solution from your ERP software vendor, you may be able to use this as leverage to negotiate more favorable terms on the software licenses and/or implementation services. Hosting represents a steady cash flow at a high profit margin for software companies, and you may want to consider using this to your advantage.

However, despite these advantages, there are also some downsides to externally hosted ERP solutions.

Disadvantages of a Hosted ERP Solution

  1. Overall, your costs are probably going to be higher in the long run. Although the initial investment may be lower since you probably won’t have to purchase expensive hardware or infrastructure upgrades, the ongoing annual costs are bound to be higher.
  2. You never really “own” the software or the data in a hosted environment, which makes many business and IT executives very uncomfortable.

Whether or not you choose to host your solution outside your organization is going to depend on these factors. The best thing to do is to develop at least two different scenarios as part of your business case justification: one with an internally hosted costs and benefits and one with an external solution. After looking at the business cases for both scenarios, the most appropriate decision should become more clear and you should be on your way to maximizing the ROI of your ERP project.

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