Why Cloud ERP Will Dominate The Enterprise

by Sohini Bagchi    Jan 28, 2015

cloud

Cloud ERP has been around for a while, as businesses are looking for greater agility and flexibility in their operations, apart from cost efficiency. Analysts believe it will continue to dominate the enterprise scenario in the coming years.

The hybrid model

A recently published report by PwC predicts that by 2016, investment in SaaS solutions will more than double to $78B while investment in traditional ERP systems will decline over 30 percent to less than $15B, clearly indicating the whopping rise of Cloud ERP in the coming quarters.

The analyst firm shows that of Cloud ERP adoption shows that net new license revenues for traditional ERP systems have been declining since 2013 to a level that has already been surpassed by global revenue from cloud-based SaaS solutions. “To support new business models, enterprises are integrating cloud-based and legacy ERP applications, creating Hybrid ERP systems that can scale to new customer demands,” said the study.

The PwC report is seeing enterprises opt for Cloud-based ERP systems and applications that can scale across human resources, supplier management, e-commerce, customer relationship management, selling, service and many other areas.

Gartner has also predicted by 2018, at least 30 percent of service-centric companies will move the majority of their ERP applications to the cloud. According to the study, hybrid ERP systems are enabling enterprises to make the most of their legacy, on premise ERP systems while scaling their IT strategies to align with and accelerate current and future customer-driven business models.

“While current ERP implementations are not going to vanish overnight, they will need to adapt, Samir Bodas – CEO & Co-founder, Icertis. The concept of a single ERP suite that meets all of an enterprise’s needs is dead, and has been replaced by a hybrid ERP approach that combines cloud point solutions with a smaller “core” of on-premises ERP function, such as financials and manufacturings, he says, predicting that hybrid ERP environments will be the norm within five years.

PwC researchers too state that monolithic legacy, on premise ERP systems have often been designed to match a predictable drumbeat of production. However, that’s not going to work today, because customers are redefining the way businesses are done and non-standard is becoming quickly the new normal.

It’s not cost, but value

PwC’s analysis also shows that ongoing costs for Hybrid ERP systems can often be higher than traditional ERP systems. On the long-run, while hybrid ERP systems can save up to six times the amount of capital invested cumulatively over traditional ERP systems, the study also shows that ongoing costs for Hybrid ERP systems can often be higher than traditional ERP systems. Therefore enterprises getting the most value from Hybrid ERP systems should make them catalysts of strategic change, not just relying on them cost reduction, says the study.

Even Gartner notes that by 2017, 70 percent of organizations adopting hybrid ERP will fail to improve cost-benefit outcomes unless their cloud applications provide differentiating functionality. While Gartner expects that most organizations will shift from monolithic ERP to a hybrid approach, the adoption of cloud services for some components of functionality does not guarantee a reduction in the TCO. On the contrary, there is the potential of actually increasing the TCO. 

“Most organizations still fail to recognize and plan for the total lifetime costs of their ERP solutions, whether on-premises, cloud or hybrid. Moreover, with cloud-based solutions it is much too easy to fall into the trap of taking a short-term, tactical approach — lured by the seemingly attractive low per-user costs,” said Carol Hardcastle, research vice president at Gartner. “Such an approach actually leads to increased total costs once the additional costs for connecting the solutions together are taken into account. Even the direct costs alone can lead to increased TCO, but there are other costs to take into consideration, such as the need to reskill or hire new staff to deal with data, integration and vendor management.” 

There’s no magic formula

While some believe cloud ERP may result into rapid improvement of business outcome, Hardcastle warns that businesses should never assume that adopting cloud applications will magically provide value.

“Too many ERP investments fail to deliver business value and the hybrid approach may further dilute the focus on the value to be driven from such investments,” she says adding that it’s essential to link business objectives to your ERP strategy to ensure value is realized, whether adopting on-premises or cloud applications.

On the whole, placing more focus on implementation at speed rather than long-term delivery of value will lead to greater success of cloud ERP models, believes Bodas. Going ahead, most of the enterprise and consumer applications will move to cloud. Already, productivity apps such as Office365 and Gmail are in cloud. Companies won’t need data centers in next 5 years. There is an inflexion in the market (SMAC) and businesses want to do things differently, he sums up.