The general consensus in today’s enterprise software space is that Software as a Service (SaaS) and cloud computing are the waves of the future. Industry analysts and vendor sales reps are proclaiming that SaaS ERP systems are cheaper, faster, and easier, while traditional ERP vendors are doing what they can to not be perceived as “Big ERP” solution providers.

But perhaps the biggest impact of the SaaS movement is that it is enabling the next wave of big ERP deployments.

There, I said it. Yes, SaaS and cloud software vendors are doing very well in this economic environment and the movement is here to stay. Indeed, SaaS ERP vendors such as Salesforce, Workday, and NetSuite are growing at a much faster pace than the overall ERP industry. However, I’m not ready to pronounce the “other” side of ERP dead just yet.

For years, ERP industry trends have swung like a pendulum back and forth between SaaS/ASP/best-of-breed and on-premise/big/complex ERP, and for good reason. As outlined in the table below, the reason big ERP didn’t die 20 years ago is because of the cyclical and perpetual nature of these competing trends. Just as companies grew tired of issues resulting from a complex, cumbersome, and costly ERP implementation, companies will eventually tire of SaaS issues related to less flexibility, less control, and more complex integration.

Perpetual Cycle of SaaS and On Premise SoftwareIt’s helpful to first understand how we got here in the first place, starting at the top of the graphic and moving clockwise:

“Big” ERP’s crisis of flexibility, cost, and overhead. Many journalists and analysts have covered in great detail the troubles with large, on-premise ERP systems: they can be cumbersome, cost too much, and create an IT overhead burden on the organization. Especially in this economy, companies are risk adverse and are less likely to bite off more than they can chew. Therefore, many companies are addressing this crisis by looking at smaller SaaS and cloud point solutions that they can implement in smaller chunks as their IT budgets and risk appetites allow. This leads us to the bottom of the graphic: the movement toward SaaS, cloud, and best of breed solutions.

The SaaS crisis of control, standardization, and integration. Moving clockwise from the bottom of the graphic, you see that eventually organizations using SaaS point solutions will face a crisis of flexibility, standardization, and integration. Companies grow, acquire other companies, expand into new territories, and globalize their supply chains, which strains their disparate enterprise systems’ environments. Having separate SaaS solutions to address various business functions and locations becomes less efficient as companies grow and change, forcing the second crisis. Suddenly, CIOs look for ways to standardize and consolidate their global systems to gain consistent business processes, IT efficiencies, and better visibility into their diverse operations.

Then the cycle repeats itself, just as it has multiple times since I’ve been in the ERP consulting space. It is important to note that not all companies go through the various stages of the cycle at the same time – smaller firms will often stay in the SaaS stage until they have grown to the point where their complexities are no longer supported by cloud solutions, while larger firms often engage in M&A activities and expand internationally, causing them to more naturally hover in the on-premise space for longer periods.

Of course, there are a few potential game changers that could break this cycle. First, if SaaS solutions evolve into true fully integrated enterprise-wide applications rather than primarily point solutions as they are now, then this would disrupt or hinder the arrival of the next crisis. Second, more robust development and integration tools within SaaS solutions could mitigate some of the current flexibility advantages of on premise ERP. Third, if the economy continues to languish as it has in recent years, it may be a bit longer before the next shift in the cycle. And finally, developing and emerging economies will provide a robust global SaaS market, even as some economies begin to mature and face the first crisis resulting from SaaS offerings.

Eventually, companies will move beyond CRM, payroll, and financials in their adoption of SaaS ERP. And the cloud is definitely here to stay. However, at least for the foreseeable future, there will also be a need for ERP systems built to automate large, complex, and diversified organizations.

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