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Fast-Tracking Finance: ERP-in-the-Cloud — Look Before You Leap

Cloud computing is on the minds of many CFOs and corporate executives these days, and understandably so, because it could very well change the face of business technology. No matter where you turn, you are likely to hear something about cloud computing — from enterprise strategies for private clouds to fully public cloud offerings. While the economics behind cloud-based computing are extremely appealing to CFOs and CIOs, it is important to understand the advantages and challenges before opting to implement this highly innovative system.

There is a notable advantage to cloud computing. Instead of using local computers to run applications, a network of computers comprising “the cloud” takes care of it. Any computer needs on the user’s end are supported by a third-party data center and the system’s interface software can be run from a web browser.

On the other hand, newer versions of Enterprise Resource Planning (ERP) systems are also capable of integrating all of a company’s departments and functions onto a single computer system to serve all needs. But, generally, ERP is not perceived as innovative technology. At best, most executives view ERP as a double-edged sword — a one-time rite of passage that must be performed in order to remain competitive.

When cloud computing and ERP are combined, though, it is important to conduct a sober evaluation of the costs and risks involved to ensure desired benefits do not go up in smoke.

A New World

Cloud services are the complete antithesis of the brick-and-mortar technology solutions of the past. An organization can essentially pool its demand for IT resources — such as servers, storage or other computing needs — with other companies to take advantage of economies of scale. Cloud services are elastic, multi-tenant, on-demand and usage-based. They promise to shift the burden of software development, maintenance and delivery from the consumer to the producer, freeing up internal staff to focus on higher-value activities. With this freedom, the conventional wisdom goes, you can fast forward your company’s IT capabilities by implementing Software as a Service (SaaS), enabling Enterprise 2.0 collaboration and using open source software. In many companies, the business is already moving forward in this area — with or without internal IT.

When you add the cost and scale benefits of the cloud with the strategic benefits of an ERP system, it provides an even more enticing prospect. Together, they promise to accelerate time to benefit, reduce costs and improve agility.

Emerging Players

The cloud ERP space is still in its infancy stages. The number of proven ERP-in-the-cloud vendors is growing, but the space is not well defined. Unlike popular CRM systems and other SaaS applications, the ERP SaaS market is not yet mature enough for all companies to consider. Currently, there are only a few true cloud ERP providers (e.g., Workday, Infor24, SAP Business by Design and NetSuite). We expect the solution offerings to be refined over time and for more innovation and competition to drive the future of this market. As in the case of on-premise ERP vendors, the usual suspects (SAP, Oracle, Microsoft) will have a major role to play in defining the emerging landscape but, just as importantly, a robust middle market is emerging that will compete based on industry and solution.

Is Cloud Computing Right for Your Business? As the market evolves, there are some key questions an organization must consider before choosing a cloud-based ERP solution. Ask yourself:

How well does ERP-in-the-cloud complement my other applications?
Even mega-vendors now acknowledge that the desire for a single, master system to replace a tangled-web of legacy systems is more of a fantasy than reality. We live in a world of “apps” — where multiple systems are linked together and must be able to “talk” to one another. As such, it is vital to determine how the cloud-based ERP system will integrate with others in your application portfolio. If your primary goal is to create standardized, efficient business processes that are technology agnostic, the cloud-based ERP should enable, not hinder this effort.

Will a focus on service levels lead to a “one-size-fits-all” solution?
Once your ERP is dependent on a cloud service provider, you will gain a new appreciation for terms such as “availability” and “reliability.” Associated service level agreements (SLA) are not mature and may not meet your company’s data recovery or uptime standards. Furthermore, the remedies these agreements offer may not cover the losses to your enterprise in the event of an outage. Service providers may not be interested in lengthy contracting processes, particularly since the “one-size-fits-all” solution offered gives them very little leverage. Your company’s ability to adapt to a new standard may also be challenged by the solution-limiting configuration changes to meet your “unique” requirements.

Am I comfortable being a passenger?
A real concern for most CIOs is the risk of poor performance with the inability to influence outcomes by “throwing more resources” at the problem. The overall nature of the cloud-based ERP service is to be dependent on the network and on the service provider. The service provider must walk you through monitoring, escalation, troubleshooting and resolution processes.

Blanket Security

For those who engaged in the outsourcing debates of the early 2000s, you will find a similar refrain in the existing concerns about data security when it comes to ERP-in-the-cloud. How does the “shared network” impact your data privacy requirements? To alleviate some of these concerns, the service provider must be able to explain the physical location of your data, its security policies and any other partners who have touch points with this data. The service provider should also clarify if your infrastructure resources will be shared and how they segment this usage. Your organization must be able to monitor access and obtain additional capabilities to achieve the desired level of comfort. In today’s regulatory environment of SOX, HIPAA, PCI and other industry-specific requirements, ERP cloud workers will have to provide detailed evidence of compliance and data governance policies.

Finally, the fact that you are using a hosted ERP solution should not give the service provider any added leverage to inhibit your ability to change service providers, if necessary. Many companies face similar issues with outsourced hosting providers. The difference lies in the inability to switch from a true cloud ERP provider, since they are typically the only providers for cloud-based ERP offerings.

The main allure of cloud-based ERP solutions is cost savings and a predictable level of cost on a monthly basis. It is, therefore, imperative that such an effort actually leads to cost savings. Companies known for heavily discounting license fees, but driving a heavy bargain in maintenance and support fees, are likely to push hard to make up for any revenue drainage in a new model. The outdated pricing models of the past must be reworked. Special consideration should be given to upgrades and customizations. If costs go up over time, it can lead to some uncomfortable moments.

An Attractive Option for Some

Despite the emerging nature of the market, ERP-in-the-cloud can make sense for some businesses. Smaller companies can realize significant benefits from bypassing a large ERP implementation for a nimbler version provided by a SaaS solution. For companies facing expensive upgrades to heavily customized systems, they might consider a cloud-based ERP solution, if there is a fit for the business. As long as you can get comfortable with security, data privacy and governance issues, ERP-in-the-cloud can be enticing.

Conclusion

What made an ERP an attractive solution for a company in 1990 still holds true in 2011 — with or without the cloud. It is a strategic investment that can provide your company with a platform for process transformation that will, ultimately, improve operational performance. A successful ERP initiative requires strong executive support, laser-like corporate focus, superior process redesign, the right technology partner and a trusted adviser to help you navigate the process. Cloud-based ERP systems are still in their infancy and must be fully evaluated to ensure they fit your business model and requirements. They hold promise, especially as they continue to mature. The most important consideration must continue to be whether or not a cloud-based ERP solution makes good business sense now and in the future.

Rehan Farooq, Manager, contributed to this story.