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Cloud technology has revolutionized most industries; enterprise resource planning (ERP) is no exception.

By allowing companies to break free from clunky legacy systems, cloud ERP is making enterprise resource planning more accessible, scalable, and affordable than ever before.

But what is cloud ERP, exactly? And what types of companies should be investing in it? 

What is an ERP System?

Enterprise resource planning systems are comprehensive business intelligence tools that seek to help organizations:

  • Manage their resources,
  • Store data and extract insights,
  • Increase productivity,
  • Reduce risk,
  • Centralize operations,
  • Reduce information siloes,
  • Store data, and
  • Provide organization-wide analytics.

While most business areas have dedicated software solutions, ERP aims to bring it all together under one roof to create a single source of truth for companies.

What is a Cloud ERP System?

The term "cloud ERP" refers to an ERP system that's digitally hosted by an ERP vendor and accessed online by customers.

This differs from traditional ERP as cloud ERP does not have to be installed and managed locally by your company.

By being digitally connected to all internal systems, your company can ensure the information you get from your ERP is current at any given moment; no more "let me double-check that they're still available" delays.

This way, the decisions about how to use your key resources — people, materials, capital, equipment, and more — are made with the most current information available.

Cloud ERP Terminology

If you're new to the world of ERP, there can be a bit of confusion around the terminology. Here are some of the concepts you're going to hear and what they mean.

On-Premises

An ERP system installed and operated from a company's own servers and infrastructure. This requires upfront investment in hardware and software.

Hybrid

An ERP system that combines cloud-based and on-premises solutions, allowing businesses to enjoy the benefits of both models by hosting some applications in the cloud and others on local servers.

Deployment Strategy

The plan for how an ERP system is implemented and managed, choosing between cloud-based, on-premises, or hybrid models based on your needs.

Hosted ERP

ERP software that is installed on third-party servers and accessed remotely. This deployment strategy is most often used by companies that have outsourced their IT operations; if you're looking to keep things in-house, you needn't worry about it.

End-to-End Security

Comprehensive security measures that protect all aspects of an ERP system, from data entry to transmission and storage, against cyber threats.

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Subscription Licensing

A payment model for ERP access based on regular subscriptions, covering software use, maintenance, and updates.

Cloud ERP vs SaaS ERP

The difference between a cloud ERP and a SaaS ERP system is simply how you pay for it; the functionality is the same.

“Cloud ERP” can be used to refer to any cloud-based ERP software or system, regardless of the billing structure. The term "SaaS ERP" is a bit more specific.

  • SaaS ERP refers to systems offered in exchange for a monthly subscription fee.
  • Cloud ERP platforms can be paid for in this way but can also be offered in exchange for an upfront licensing fee (complete with remote hosting and continuous updates). 

Types of Cloud ERP Systems

I hate to hit you with more definitions if you're new to the concept; however, if you're serious about getting a cloud ERP system, you'll need to know which type you're after.

The most common types are:

Multi-Tenant SaaS

Multiple businesses share the same infrastructure and software but with separate, secure databases. This typically optimizes resource use and reduces costs.

Single-Tenant SaaS

A single business has its own dedicated infrastructure and software instance. This offers higher customization and control.

Public Cloud

Cloud resources (like servers and storage) are owned and operated by a third-party provider and shared across multiple organizations over the internet.

This option is typically the most scalable and cost-effective.

Private Cloud

Dedicated cloud infrastructure exclusively used by a single organization, providing enhanced control and security for sensitive business operations and data.

A good option for those in particularly sensitive industries, like healthcare or banking.

What Makes Cloud ERP So Special?

Cloud ERP can offer you:

  • Cost savings
  • Scalability
  • Flexibility
  • Better communication between teams & departments
  • More accurate information about your business

Traditionally, ERP systems were deployed "on-premises". This means that the technology was hosted on a company’s servers, rather than hosted (and maintained) remotely by the ERP provider. 

This was slow, expensive, and cumbersome.

Cloud systems help speed up ERP implementation - which can often take months to years and require a dedicated ERP consultant - as you don't need to think of every feature you'd ever want when you purchase one; you can add and change as needed. 

5 Advantages of Cloud ERP

I've mentioned a few of the ways that cloud ERP trumps on-prem solutions already but I wanted to dive deeper into a few of them, including:

1. Cost-Effectiveness

Cloud ERP systems are almost always more cost-effective than on-premises solutions (as much as 50% cheaper, according to Hurwitz & Associates). 

Plus, a quality ERP system can often replace several dispersed tools for cheaper than their total cost. For instance, firms may be able to cut costs by eliminating subscriptions to disconnected accounting, inventory management, and CRM platforms. 

Finally, costs are far more spread out with a cloud rollout (at least when it comes to SaaS ERP products).

On-prem systems often have huge upfront costs for a perpetual license, integration support, and other startup expenses; cloud platforms with SaaS billing models spread costs out in a more even, predictable manner (and don’t require you to get as much buy-in on the rollout).

The potential dark side of cloud-based billing

Regularly occurring cloud computing costs can negatively impact EBITDA, as cloud computing costs are treated as operational expenses, rather than capital expenditures.

 

This isn’t necessarily good or bad, but worth consideration.

Investors reward commitment issues

Sound crazy? I promise it's true.

With a cloud rollout, there will be little to no hardware costs. On an operational level, this is good; it provides IT managers with more wiggle room in their hardware budgets and CFOs with more flexibility in terms of hard costs. 

After all, reducing capital expenditures on things that can be easily replaced with software subscriptions can free up cash for higher-value initiatives… and the market tends to reward it.

There’s a very strong correlation between return on invested capital (ROIC) and valuation in both public and private markets. 

Correlation between ROIC and Valuation study by McKinsey
Here's a graph from McKinsey, depicting the positive correlation between ROIC and valuation. It makes sense considering the fact that people like their investments to return positively, and quickly.

Subscription Model

Cloud ERP solutions are generally offered on a subscription/SaaS basis, which means consistent monthly expenses that are simpler to budget for — and generally, create no surprises when it comes to spend management

2. Scalability

SaaS products are, by definition, highly scalable. Most providers offer multiple predefined service tiers, along with a high level of customization options to suit the needs of differing businesses. 

Providers like SAP and Microsoft Dynamics have packages custom-built for SMBs and Fortune 500 firms alike. Plus, these products are continually updated — with no need for companies to pony up for upgrades and update expenses. 

3. Data Accessibility

Cloud ERP systems offer real-time data access for enterprise-wide operations. This means your organization's managers and finance leaders have immediate access to up-to-date financial reports and other metrics, across all branches of the organization. 

Unlike on-prem systems, stakeholders don’t need to be at the physical office to access key data (so long as they have the appropriate access levels for the software). 

4. Real-time Analytics

With real-time data comes the opportunity for real-time analytics. I know that was like the lame version of “with great power comes great responsibility”, but it’s true.

Teams can use cloud ERP software (and the data and analytics tools it provides) to inform decision-making in real time. 

For example, a regional sales manager could use the cloud ERP system to monitor sales performance data across all branches in real time, allowing for more nimble resource allocation and pricing pivots. 

5. Improved Decision Making

The data and (increasingly AI-driven) analytics provided by ERP systems can inform better decision-making at both executive and departmental levels. 

For instance, you or your CFO could quickly and easily analyze real-time sales data to identify trends in each geographical area the company operates. This could inform top-level strategic decisions on everything from hiring to marketing. 

3 Disadvantages Of Cloud ERP

It’s not all sunshine and rainbows. There are some legitimate concerns and potential disadvantages when it comes to cloud ERP. 

1. Data Security Concerns

By definition, data in a cloud ERP system is stored remotely, which creates the potential for data breaches.

While certainly a consideration, data security concerns can be mitigated with proper procurement procedures: Namely, choosing a trustworthy vendor that takes data integrity seriously. 

Companies large enough to invest in private cloud infrastructure can also reduce the risk of data security breaches — but these days, even public cloud services are very secure. 

Highly sensitive industries

Companies in particularly sensitive industries – healthcare, personal finance, banking, etc. – may be more at risk here and may wish to choose industry-specific providers.

 

PS: If you aren’t convinced of the safety of your data, don’t risk it. There are always other options.

2. Potential Downtime

Any SaaS or cloud-based product has the potential for downtime. Depending on the length and severity of the downtime, this can have effects ranging from barely noticeable to significantly costly. 

Again, this is mostly mitigated by proper vendor sourcing. I highly recommend asking potential vendors about their downtime frequency and notification process when evaluating them.

With that said, it may also be worth establishing a continuity plan for key business processes that may be particularly exposed to interruptions. 

3. Customization Limits

Cloud ERP systems can be customized to fit a company’s needs, but the scope of customization is more limited compared to on-premises rollouts, as you’re forced to work within the confines of the provider’s customization abilities. 

Different types of ERPs offer different levels of customization, with Tier 1 ERPs (such as those from SAP, Microsoft, and Oracle) generally being the most customizable. 

Real-World Cloud ERP Case Studies

Here are a few examples of businesses that implemented cloud ERP, as well as what happened: 

Small Business - Fulton & Roark

Small fragrance and grooming products purveyor, Fulton & Roark, implemented Oracle Netsuite Cloud ERP as a way to sync accounting data with inventory management in real time.

Previously, the bootstrapped operation was manually entering inventory data into spreadsheets, while recording transactions in Sage Live. 

After implementing Netsuite, the Fulton & Roark team was able to:

  • Cut down on time-consuming manual data entry,
  • Bring more accounting work in-house and save money on external accountants,
  • Catch and correct bookkeeping errors related to inventory, and
  • Increase sales by 50% year-over-year without any increase in headcount. 

Large Enterprise - Western Digital

In 2018, a cloud ERP implementation helped Western Digital successfully combine operations from 3 distinct firms - Western Digital, HGST, and SanDisk - during a merger.

As you might expect, this multi-phase project took years to fully implement, as combining IT, procurement, and inventory systems from 3 massive companies was no small feat.

The team kept its legacy ERP system in place and slowly rolled out the cloud ERP implementation (and a combination of each firm’s systems) to minimize risk to business continuity. 

The move to Oracle's cloud ERP helped Western Digital:

  • Streamline cross-functional operations,
  • Eliminate information siloes (the original setup had 250 distinct file servers and 15 email systems…), and
  • Unify complex operations across all subsidiaries for greater efficiency. 

Technology moves quickly. Here’s what’s on the horizon for the cloud ERP industry. 

AI and Automation

You probably saw this one coming.

Like nearly every aspect of technology these days, AI is the key buzzword — and usually the key driver of functional changes. 

Cloud ERP systems that have integrated with AI can:

  • Save users time on navigation and system education
  • Improve forecasting efforts
  • Sharpen anomaly detection
  • Automate complex processes
  • And more. The list is seemingly growing by the day

In the rush to stay competitive, many cloud providers are adding AI-backed features to existing products, often without imposing additional costs on customers.

Mobile ERP

As you'll remember, cloud ERP systems are accessible via the internet, which means additional online devices can connect to them.

While full functionality is limited on smartphones and tablets, stakeholders can still access key data when working remotely, traveling, or at conferences. 

Soon enough, with Starlink providing wifi and mobile systems connecting to it, you'll be able to keep an eye on operations from anywhere in the world.

I'll just pretend this won't hurt the already flimsy work/life balance...

Get Your Head in the Clouds

Cloud ERP just makes sense.

ERP systems are transformative for efficient workflows, cross-departmental collaboration, and data-driven decision-making, and cloud-based ERP is even better.

Lower-cost access to the latest technologies, real-time data syncing, more nimble deployment, scaling opportunities... do I need to go on?

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By Simon Litt

Simon Litt is the Editor of The CFO Club, where he shares his passion for all things money-related. Performing research, talking to experts, and calling on his own professional background, he'll be working hard to ensure that The CFO Club is an indispensable resource for anyone seeking to stay informed on the latest financial trends and topics in the world of tech.

Prior to editing this publication, Simon spent years working in, and running his own, investor relations agency, servicing public companies that wanted to reach and connect deeper with their shareholder base. Simon's experience includes constructing comprehensive budgets for IR activities, consulting CEOs & executive teams on best practices for the public markets, and facilitating compliant communications training.