On-premise and SaaS ERP model to coexist

by Sohini Bagchi    Aug 06, 2013

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As organizations are looking for agile methods to serve their customers better, they are re-evaluating their enterprise resource planning (ERP) strategy. Many business leaders believe that the traditional on-premise ERP model that are more costly and cumbersome can be replaced by the more flexible cloud based, preferably a SaaS model. However, SaaS is also a relatively new player in the ERP market that is only now beginning to gain traction. Till the time it gains full maturity and earns the trust of business and IT leaders, analysts believe both the models can co-exist and therefore, in the current scenario, the right approach for businesses would be to adopt a hybrid model that can offer the best of both world.

SaaS ERP gaining ground

There is no doubt that SaaS ERP is gaining a lot of momentum, as Tien Tzuo, founder and CEO of Zuora who was earlier with Salesforce.com declared thatERP’s days are numbered”. He says that’s because of a fundamental shift that is taking place regarding how people consume products and services driven by the massive growth of the cloud itself.

In India for example, SaaS ERP is expected to grow at a compound annual growth rate (CAGR) of 28%, states research firm Gartner. “Businesses in India will increasingly deploy SaaS ERP because of the benefits of faster deployment and enhanced cost effectiveness,” Sunil Padmanabh, Research Director Gartner says in a statement. He mentions for organizations looking for solutions that can scale up as their businesses grow, SaaS seems like a good option.

Proponents of SaaS ERP believe that the implementation time of the project is much faster than an on-premises ERP system. Besides, it offers greater flexibility and reduced TCO. The increased interest in SaaS ERP is prompting ERP vendors, resellers, and solution providers to position their products and services as SaaS or cloud enabled.

On-premise not dead

Despite the shift, analysts point out several loopholes in the SaaS ERP model that are deterring its high pace of adoption. As the Gartner report points out at present SaaS ERP is gaining grounds in the SMB segment but large enterprises are still apprehensive to fully replace on-premises apps with SaaS or move their core businesses in the cloud. “There are challenges in a complete SaaS ERP environment. Besides integration challenges, there are problems with flexibility in customization, issues with data security and network,” says Shrawan Kumar, General Manager – IT, Allahabad Bank. There is also a limit to how much an SaaS system can be customized prompting CIOs to adapt their business accordingly.

Meanwhile, another Gartner reports suggest that on-premise ERP market in India is expected to touch USD 538 million by 2017 from USD 178 million in 2013, growing at a CAGR of 17%, suggesting that on-premise ERP is very much here to stay. In India, China and several other emerging countries, SaaS-based ERP has not yet been widely adopted for mission-critical operations, verticals that are heavily regulated like banking, telecom and public sector, or in specific manufacturing operations that tend to be too sensitive to be shared with a third-party organization.

Currently, SaaS ERP applications in India and China constitute less than 5% of the overall ERP market in India and China. Today, SaaS ERP adoption is clearly in the SMB segment, but for large enterprises, the shift will be gradual, says Padmanabh adding that however, the shift is possible only through a rapidly evolving vendor-partner ecosystem as well as a wider choice of solutions in the market.

Hybrid ERP on the rise

As on-premises ERP becomes an expensive option for enterprises and pure SaaS ERP takes time to mature, experts believe the hybrid ERP model will be the dominant one for some time to come. “Larger firms are moving to a hybrid ERP solution, where cloud applications are used at the divisional or business unit level, with corporate headquarters retaining on-premises applications,” mentions China Martens, senior researcher at Forrester. The research notes that companies can use on-premises ERP for most functions while some branch offices or minor functions can run on SaaS. According to her, Hybrid deployments would allow for an optimal mix of the major ERP delivery models and is a great way to explore the cloud in an iterative, risk-adverse approach. 

Although there may be certain initial integration challenges, the greatest value of a hybrid ERP solution is the additional flexibility it can provide customers to support business processes. A hybrid ERP allows the customer to easily migrate from one delivery model to another without losing data or functionality. As martens opines, as CRM on-demand and other SaaS models mature, co-existence with on-premises software - not its end - will be the dominant model in the coming months, paving the way for hybrid ERP model.