Differences between On Premise ERP and Cloud ERP

What are the Differences between on-premise ERP and cloud ERP

Many managers and IT department staff may be considering migrating their systems from on-premise ERP to cloud-based ERP. They cannot make a decision due to the lack of understanding of the differences between the two. 

This article introduces the differences between on-premise ERP and cloud ERP and key points on how to choose an ERP product.

Table of Contents:

• What are the differences between on-premise ERP and cloud ERP?
• How to choose between cloud ERP and on-premise ERP
• Summary

What are the differences between on-premise ERP and cloud ERP?

ERP supports the line of business of the enterprise with a system. There are two types of ERP systems: on-premises ERP, which installs equipment in-house and customizes settings, and cloud ERP, which provides billing-based services on the cloud without installing its own servers. Compare the two differences in terms of deployment, operations, security, and customization.

Implementation cost

The cost of ERP has an initial cost and a running cost, and the running cost is the license fee for both on-premise and cloud computing.

The difference is the initial implementation cost. On-premise ERP requires the preparation of hardware.

On the other hand, cloud ERP, which uses services over the Internet, does not require hardware, servers, or implementation costs. In many cases, implementation support and training costs are optional. Some products have no initial installation costs at all, only running costs. Many of the plans are pay-as-you-go, which is an advantage for small and medium-sized companies that want to keep implementation costs low.

Speed of implementation

On-premise ERP requires starting from scratch, including servers and other equipment selection, installation, software installation, and configuration of each device. It generally takes more than a year to complete the process, and if system development is required for customization or functional expansion, it also takes days. On the other hand, cloud ERP does not require the construction of a system, so there is almost no troublesome work, and the implementation time can be greatly reduced.

With a public cloud ERP where you can choose the services provided by each vendor, all you have to do is to select the plan that best suits your company. Cloud ERP includes private cloud ERP owned in the data center and hybrid ERP that migrates on-premises ERP to the cloud by utilizing the conventional on-premises ERP. 

Operational resources

On-premise ERP does not end with the installation but requires the appointment of IT system staff, either in-house or outsourced, to monitor the system and perform management tasks such as operation and maintenance.

You must upgrade the software and back up all your data in-house, and in the event of a system failure, you must also respond to problems in-house. In addition to the labor costs involved in server maintenance and operation, the security and utility costs of the server room cannot be underestimated as the scale of the company grows.

Since the vendor using the cloud ERP performs the necessary operation and maintenance tasks, companies do not need to allocate personnel to inspect the equipment and monitor it regularly, thus avoiding the problem with low operational resources.

It also reduces costs such as server OS upgrades and guarantees maintenance and upkeep.

It is safe because it responds to system failures and disasters and often has double-triple measures such as backup power supplies and backups at multiple locations.

Security Management

On-premises ERP can increase confidentiality by selecting security technicians in-house and operating the system in a local environment that does not connect to the outside world. However, depending on business types, it may be difficult to have a locally connected system environment.

In addition, the level of security depends mainly on the operation and maintenance of the company’s own environment, and it must constantly deal with external security risks.

Cloud ERP has an infrastructure in data centers and other facilities owned by the vendor and protected by the latest security measures that are constantly updated.

Each vendor has obtained many security certifications, which does not hinder the use of the system. However, because the service is on the Internet, it cannot be said that there is no 100% risk of information leakage.

When choosing a cloud ERP, you should also check the high level of security.

Customization difficulty

On-premise ERP has a high degree of customization flexibility because the implementation cost allows you to configure and upgrade the servers and hardware to suit your company.

You can also extend the functionality with add-on development if necessary and at a cost. However, it is not suitable for flexible changes to the configuration, such as increasing the number of servers or changing the specifications.

Cloud ERP is based on choosing and using the features provided by each vendor.

Therefore, it tends to be hard to customize the infrastructure system that is best for you.

Choosing a product that uses a package standard will force you to tailor your work to the package standard system instead of customization.

It is also difficult to expand the functionality by developing new add-ons. 

However, you can flexibly change the number of users, increase or decrease in capacity, change settings, etc.

How to choose between cloud ERP and on-premise ERP

In recent years, customer needs have shifted from ownership to usage, and ERP tends to choose the cloud over on-premises. However, some companies may find on-premises ERP a good fit. This section explains how to choose between cloud ERP and on-premise ERP.

Judge by the cost-effectiveness of system implementation

ERP, which makes corporate line-of-business into IT systems, is characterized by its easy-to-measure effectiveness in business efficiency.

ERP mainly enables the centralization of information, data and content, and the automation of routine tasks.

For example, by centralizing the various vouchers that used to be managed by each employee’s local PC with ERP, it is possible to save time and human resources by eliminating the need to exchange voucher information.

In addition, manufacturers can shorten the lead time for procuring raw materials and reduce procurement costs by semi-automating inventory adjustments. 

It is also possible to accelerate the construction of IT infrastructure when expanding overseas at a low cost.

Before implementing on-premises ERP or cloud ERP, you must calculate the benefits of such an implementation.

In addition to software license fees, system construction, maintenance/operation costs, and renewal fees that have been paid so far, human resources are also costs.

It is important to measure the cost-effectiveness of each implementation cost against the effectiveness of implementing on-premise ERP or cloud ERP in your company.

Determine if your system implementation objectives can be achieved

ERP implementation is a major company-wide project. Usually, it is often once every ten years, and as a result of the management’s high ideals, the system may become unusable in the field operations.

Because of the large scale of the ERP system, it takes a long time to become fully operational, especially when building on-premises, and the implementation itself often becomes an end in itself.

First, it is necessary to set the objectives of the ERP implementation and aim for a state where the implementation will enable the business to be carried out.

Carefully perform a Fit-Gap analysis to analyze and evaluate the degree of fit or misalignment between the other systems to be implemented and your business processes. Create a process where the business operations implemented in on-premise ERP or cloud ERP can proceed properly.

Summary

The cost, speed, operational resources, security, and customization of ERP differ greatly between on-premise and cloud. When implementing ERP in your company, it is important to clarify the purpose and be aware of the cost-effectiveness of the implementation.