Earlier this month, Salesforce hosted Dreamforce, its annual conference for cloud ERP vendors. The event drew over 45,000 participants this year, underscoring the significance of the company in the ERP space, and more importantly, the significance of cloud and Software as a Service (SaaS) based ERP solutions.

Dreamforce also featured the launch of Kenandy, a Silicon Valley startup focused on SaaS ERP solutions for the manufacturing industry vertical. While ERP vendors such as Salesforce, Plex, and Epicor already provide SaaS manufacturing ERP systems, this particular industry has been sorely lacking the software options required to give most manufacturing executives the choice and comfort required to fully embrace the SaaS model. Kenandy’s launch, which is backed by over $10 million in venture capital funding, helps mitigate these concerns.

Don’t get me wrong: the SaaS and cloud trends are very real and are quickly changing the game for ERP vendors and their customers. Despite the relatively low market adoption rate, SaaS acceptance is still growing incredibly fast, up from 6% to 16% adoption between 2009 and 2010. In addition, ERP vendors such as Salesforce and Workday are providing best of breed point solutions in the CRM and HR arenas, which are more likely to be embraced by manufacturing executives. However, when it comes to fully integrated solutions that tie together a manufacturer’s data and business processes – ranging from financials to inventory to manufacturing workflows – into a single system, SaaS ERP systems have been lacking, with only a handful of solutions providing the truly integrated processes desired by most manufacturing and distribution companies. With each new company like Kenandy and Plex, executives in this industry vertical will become more comfortable and more likely to adapt the SaaS model.So does this mean that traditional manufacturing ERP systems are obsolete, only to be replaced by SaaS options like Kenandy? Not quite yet. Although many industry analysts strongly disagree with my lukewarm opinion of SaaS solutions, I still feel as if we are still three to five years from seeing widespread adoption of SaaS enterprise solutions in the manufacturing industry. Indeed, our most recent research – as outlined in our 2011 ERP Report – indicates that only 16-percent of organizations that implemented ERP systems in 2010 had adopted SaaS-based solutions. Despite the hype and long-term potential, the fact of the matter is that SaaS and the cloud have not yet quite killed traditional enterprise software.

In addition to more options, here are a handful of things that need to happen before manufacturing executives fully embrace the SaaS model:

1. More breadth and integration. The complexity of most manufacturing companies makes SaaS adoption more difficult, resulting in a lower adoption rate here than in other industries.While SaaS CRM or HR options from Salesforce or Workday can be effective solutions to address specific and relatively vanilla functional areas, most SaaS ERP systems do not provide the breadth of functionality and business processes required to address manufacturers’ business requirements. Companies such as Netsuite and Plex are changing this, but the maturity and breadth of fully integrated manufacturing ERP processes are not quite there yet.

2. More robust development and integration tools. One of the shortcomings of the SaaS model is the relative lack of flexibility compared to traditional, on-premise solutions. Since SaaS options typically entail multi-tenant delivery models, they are inherently less flexible to customize. Granted, they still do allow tailored changes to basic configuration and set-up, but they do not allow heavy customizations. While customization is generally viewed as a negative thing, it is often required to help organization’s maintain and automate their competitive advantages. In fact, according to our research, only 15% of ERP implementations involve no customization, so it is something that is clearly desired by the market. Until SaaS solutions further develop their tools to allow the flexibility that most executives are looking for, they will always play second fiddle to traditional ERP solutions.

3. Concerns with security and data ownership. I spoke at a manufacturing ERP conference in Chicago last month, and executives at the event demonstrated common concerns with security and data ownership. The reality is that SaaS and cloud providers build their entire companies around providing secure solutions – while manufacturers aren’t generally focused on doing so – so they can quite frankly provide more security and stability than any internal IT department would ever be able to. Similarly, manufacturing companies that service aerospace and defense, food, and the government, have concerns about controlling or owning the data, which is a concern addressed by most effectively negotiated software contracts. However, SaaS ERP vendors don’t seem to be doing enough to address these concerns. Until software companies do a better job of selling their capabilities in these areas, manufacturing executives are going to remain skeptical.

Once these three areas are addressed, manufacturing companies will more fully embrace the SaaS model. In the meantime, executives are going for a sort of hybrid approach, where they purchase traditional ERP solutions while having them hosted in the cloud. This often provides companies with the potential benefits of SaaS while maintaining the flexibility they are looking for in their ERP systems.

Learn more (and follow links to all of our related material) on the SaaS page of our ERP Software section.

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