Software as a Service, or SaaS ERP as it’s known in industry circles, has been receiving its share of media and business attention in recent years. The allure of SaaS – including potentially lower up-front costs, no software to implement, and relatively easy upgrades – can be enough to convince some CIOs that it’s the right choice for their organizations.

But is it right for everyone? That’s one of the more controversial questions we answer when working with current and prospective clients. If you ask industry analysts, academics, and media types, most will tell you that the future is all SaaS and nothing else. Some have been arguing for years that traditional “big” ERP is dead. In fact, Dun and Bradstreet recently reported Gartner’s estimation that 25-percent of ERP software purchased in 2011 will be SaaS solutions. In addition, SaaS vendors such as Netsuite, Plex, and Salesforce have been aggressively growing while other ERP vendors have struggled.

A couple of counterpoints are always in order when there is this much buzz surrounding an industry trend. First, while 25-percent may seem like a large portion, that still leaves 75-percent of ERP purchases that are of the traditional on-premise flavor. As for the steep growth of SaaS ERP vendors, they have a much smaller revenue base to start with relative to other more established software providers. And it also helps to understand the primary customers of SaaS ERP solutions: our experience and research shows that SaaS customers are disproportionately skewed toward smaller to mid-size companies. Larger and more complex organizations simply haven’t had a compelling reason to switch to these types of solutions.

Since SaaS may be perfect for some companies and misaligned with others, how is an executive team to decide the best fit for their organizations? Here are a few starting points to ask to determine whether or not SaaS is the right option for you:

1. How unique or complex is your business relative to others? The fact of the matter is that SaaS ERP systems are still not as flexible as on-premise solutions. While this may change with the continuing evolution of platform as a service (PaaS) and other development and integration tools, it is generally more difficult to change SaaS offerings to fit your business. If you have a fairly vanilla or less complex business operation, then SaaS may be a good option for you. If, on the other hand, you have unique competitive advantages or otherwise need the flexibility to materially change the software to fit your business, then the ability to heavily configure on premise solutions may make them more appropriate for your organization.

2. Are you more willing to increase capital versus expense budgets to support a new ERP system? Many high-growth companies are cash and/or budget strapped, which can affect the type of software you invest in. Companies with less cash reserves or capital budgets or more likely to invest in SaaS, while those that are more comfortable carrying depreciable assets on their balance sheets are more likely to invest in on-premise ERP. In addition, SaaS customers need to be more comfortable with the possibility that it will cost more in the long-term, despite the lower up-front costs. A realistic and objective business case will help determine a total cost of ownership estimate for either type of solution.

3. How much control and security do you need over your ERP systems? While this question isn’t 100% based on reality, it is based on the common perception among CIOs that SaaS affords less security and control. While SaaS can indeed offer less control (see #1 above), security should not be as much of a concern for most organizations. After all, SaaS vendors are able to provide more world-class security and reliability than most IT departments. However, our government, aerospace, pharmaceutical and other types of clients with sensitive business information are more inclined to retain control via on premise solutions.

While SaaS is a very real emerging trend in the market, like everything, it’s not for everyone. Your specific needs will determine the most appropriate needs more than industry or marketing hype. Learn more about how to evaluate SaaS vs. on-premise solutions by attending our upcoming ERP Boot Camp.

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