There is much hype in the ERP marketplace regarding the strengths of SaaS (Software as a Service) relative to traditional on premise ERP software solutions. To be sure, several SaaS and cloud computing vendors are growing quickly and giving traditional ERP vendors a run for their money. Salesforce, Workday, and Netsuite are some of the SaaS vendors receiving much attention and business success in recent years.

However, as with any enterprise software option, SaaS has its pros, cons, and tradeoffs. While software as a service vendors would have you believe that their offerings are superior to traditional ERP in all instances, there are also distinct disadvantages and challenges to consider.

For example, choosing between SaaS and traditional ERP solutions often depends on the following variables:

  • Complexity of your business
  • Size of company and number of employees
  • Stability of your business model and processes
  • Your business growth level
  • Scope of your enterprise software needs
  • Need or desire for flexibility to change software to accommodate your business needs
  • Level of integration required with third-party enterprise software applications
  • Sophistication of your internal IT skills and infrastructure
  • Your need or want to control your IT systems in-house
  • Sensitivity to initial capital outlays vs. ongoing operational costs

We often find that SaaS solutions are very viable for our smaller to mid-size clients (SMBs). On the other hand, our larger clients generally find that SaaS does not adequately accommodate their enterprise software needs. Moreover, the SaaS delivery model is often more suited for vanilla and narrowly defined business functions, such as customer relationship management (CRM), human resource management (HRM), or supply chain management (SCM); broader or more differentiated functions can be more difficult to accommodate.

Choosing between SaaS and traditional ERP isn’t always cut and dry. Many of the traditional software vendors are providing hybrid options that combine the best of both worlds by offering customers a single instance with the flexibility of traditional ERP, but hosting those solutions externally to accommodate the desire to outsource their ERP infrastructure.

Finally, any ERP implementation is challenging.  Whether it is SaaS, on premise, or something in between, implementing the software is the easy part.  The hard part is defining your new business processes, ensuring the system is aligned with your operations, training employees, and defining roles and responsibilities in the new system.  Even the simplest technology won’t eliminate the need to address these areas.

In short, software as a service can provide a very compelling solution for many organizations. In fact, our 2010 ERP study (to be published later this month) shows that 13% of companies under $100M in revenue are choosing SaaS options, which is a marked increase over previous years.

However, SaaS or cloud ERP software isn’t for everyone. It is important to carefully consider your spectrum of ERP software options, as there are countless possibilities.

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