The Pros and Cons of Using an On-Premise Solution vs Cloud Solution for ERP Systems

“A Cloud or On-premise ERP system should be a part of an overall Technology Strategy.” - Major Williams

The Pros and Cons of Using an On-Premise Solution vs Cloud Solution for ERP Systems

Enterprise resource planning (ERP) systems are software applications that integrate various business functions such as accounting, inventory management, human resources, customer relationship management, and more. ERP systems help businesses streamline their processes, improve efficiency and reduce costs.

However, not all ERP systems are created equal. There are two main types of ERP systems: on-premise and cloud-based. On-premise ERP systems are installed locally on a company’s own computers and servers, while cloud-based ERP systems are hosted on the vendor’s servers and accessed through a web browser.

Both types of ERP systems have their advantages and disadvantages, depending on the needs and preferences of each business. In this article, we will compare them in 10 key areas:

• Deployment and pricing

One of the biggest differences between on-premise and cloud-based ERP systems is how they are deployed and priced. On-premise ERP systems require a large upfront investment in hardware, software licenses, installation, and customization. They also entail ongoing costs for maintenance, upgrades, support, and security. On-premise ERP systems are generally considered a capital expenditure (one large investment upfront).

Cloud-based ERP systems have a lower cost of entry as they do not require any hardware or software purchases. They are priced under a monthly or annual subscription fee based on the number of users or features used. They also include maintenance, upgrades, support and security as part of the subscription fee. Cloud-based ERP systems are typically considered an operating expenditure (an additional overhead cost that continues to pay).

Over time, however, the total cost of ownership (TCO) of both types of ERP systems tends to converge as cloud-based ERP systems may have higher recurring fees than on-premise ones.

• Security

Security is often the top concern for prospective ERP buyers as they store critical information such as company financials, trade secrets, employee data, and customer lists in their ERP system.

On-premise ERP systems offer more control over security as they are managed by the company’s own IT staff who can implement their own security policies and protocols. They also have less exposure to external threats such as cyberattacks or data breaches as they are not connected to the internet.

Cloud-based ERP systems rely on the vendor’s security measures which may vary in quality and compliance standards. They also have more exposure to external threats as they are connected to the internet and share servers with other clients (although data is kept separate). However, cloud-based ERP vendors usually invest heavily in security technologies such as encryption, firewalls, and backup systems to protect their clients’ data.

• Scalability

Scalability refers to how well an ERP system can handle changes in demand or growth without compromising performance or functionality.

On-premise ERP systems have limited scalability as they depend on the capacity of the company’s own hardware and software resources which may be costly or difficult to upgrade or expand.

Cloud-based ERP systems have high scalability as they leverage the vendor’s cloud infrastructure which can easily adjust to changes in demand or growth by adding more servers or resources without affecting performance or functionality.

• Customization

Customization refers to how well an ERP system can be tailored to fit the specific needs or preferences of each business.

On-premise ERP systems offer more customization options as they allow businesses to modify their source code, add custom features, integrate with third-party applications, or hire consultants to create bespoke solutions.

Cloud-based ERP systems offer fewer customization options as they limit businesses to predefined configurations, features, and integrations offered by the vendor. Some cloud-based ERPs may allow some degree of customization through APIs, but this may require additional fees or technical expertise.

• Accessibility

Accessibility refers to how easily an ERP system can be accessed by users from different locations or devices.

On-premise ERPs have limited accessibility as they require users to be physically present at their workstations where the software is installed. They may also face issues with compatibility, network connectivity, or bandwidth when accessing their data remotely.

Cloud-based ERPs have high accessibility as they enable users to access their data anytime, anywhere from any device with an internet connection. They also provide consistent performance, user experience, and data synchronization across different devices.

• Reliability

Reliability refers to how consistently an ERP system performs its functions without errors or failures.

On-premise ERPs have lower reliability as they depend on the company’s own IT infrastructure which may be prone to power outages, hardware failures, software bugs, or human errors. They also require regular backups and disaster recovery plans to prevent data loss or corruption.

Cloud-based ERPs have higher reliability as they leverage the vendor’s cloud infrastructure which is designed to provide high availability, redundancy, and fault tolerance. They also offer automatic backups and disaster recovery options to ensure data integrity and continuity.

• Maintenance

Maintenance refers to how much effort and resources are required to keep an ERP system up-to-date and running smoothly.

On-premise ERPs require more maintenance as they involve managing hardware, software, networks, security, and support issues by the company’s own IT staff or external consultants. They also require periodic upgrades and patches which may disrupt business operations or cause compatibility issues.

Cloud-based ERPs require less maintenance as they are managed by the vendor who takes care of hardware, software, networks, security, and support issues on behalf of their clients. They also offer automatic upgrades and patches which are seamless and transparent to users.

• Innovation

Innovation refers to how quickly an ERP system can adopt new technologies or features that can improve business performance or competitiveness.

On-premise ERPs have slower innovation as they are limited by the company’s own IT capabilities and budget constraints which may hinder their ability to adopt new technologies or features that can enhance their ERP system.

Cloud-based ERPs have faster innovation as they benefit from the vendor’s R&D investments and expertise which enable them to offer new technologies or features that can improve their ERP system on a regular basis.

• Compliance

Compliance refers to how well an ERP system adheres to the legal or regulatory requirements that apply to a specific industry or region.

On-premise ERPs have more compliance challenges as they require businesses to ensure that their ERP system meets the legal or regulatory standards that apply to their industry or region. They also have to deal with multiple versions of their ERP system which may have different compliance levels.

Cloud-based ERPs have fewer compliance challenges as they are managed by the vendor who ensures that their ERP system meets the legal or regulatory standards that apply to their industry or region. They also offer a single version of their ERP system which is updated regularly to comply with the latest requirements.

• Vendor dependence

Vendor dependence refers to how much a business relies on its ERP vendor for the quality and continuity of its ERP system.

On-premise ERPs have less vendor dependence as they own their ERP software and data and can switch vendors more easily if they are dissatisfied with their service or performance. They also have more bargaining power with their vendors as they can negotiate better prices or terms.

Cloud-based ERPs have more vendor dependence as they rent their ERP software and data and may face difficulties in switching vendors if they are unhappy with their service or performance. They also have less bargaining power with their vendors as they are locked into long-term contracts or subscription fees.

As you can see, there is no clear-cut answer to which type of ERP system is better for your business. It depends on various factors such as your budget, security needs, scalability requirements, customization preferences, accessibility expectations, reliability standards, maintenance efforts, innovation goals, compliance obligations and vendor relationships.

The best way to decide is to evaluate your business needs and objectives carefully and compare them with the features and benefits of each type of ERP system. You can also consult with an ERP expert or a trusted vendor who can guide you through the process and help you make an informed decision.

Until Next Time…