Cloud computing: More IT leaders turn to SaaS ERP

In 2006, Epec Engineered Technologies found itself in a situation familiar to many in corporate IT. With a series of business acquisitions behind it, the New Bedford, Mass.-based manufacturer of printed circuit boards, battery packs and other electronic components needed to replace multiple ERP systems with a single platform capable of supporting the entire organization.

How Epec ultimately accomplished that task, however, was a bit more unusual at the time. Rather than standardize on one of its existing on-premise ERP applications or replace them all with a different locally-installed product, the company migrated everything onto a software-as-a-service (SaaS) system from NetSuite of San Mateo, Calif.

"We were probably taking a chance going with that type of solution five years ago," concedes Rob Forand, Epec's director of administration. But cloud-based ERP offerings like NetSuite's came with a key capability that on-site alternatives couldn't match.

Specifically, a cloud-based ERP system would support Epec's many remote employees. By choosing a SaaS ERP application, Epec could give all of them easy access to financial and inventory data from any device with a Web connection and a browser. "It was a good fit with our business model," Forand says.

Other IT executives are starting to reach the same conclusion. Businesses have been using SaaS solutions for years, but most have balked at putting that most mission-critical of mission-critical business applications -- their ERP system -- into the cloud. Now, however, the barriers and fears that have kept many CIOs away from SaaS ERP products appear to be slowly but steadily eroding.

Faster and Easier

To be sure, on-premise ERP systems still overwhelmingly dominate the market. At present, SaaS solutions account for just two percent of global ERP revenue, according to Forrester Research. Still, Forrester expects worldwide spending on Web-based ERP software to rise about 21 percent annually through 2015, versus low-single-digit growth for ERP products overall. Spurred by numbers like that, established ERP vendors such as SAP, Oracle and Epicor have all introduced on-demand products of their own to counter cloud-only competitors like NetSuite.

The momentum behind SaaS ERP is easy to understand in light of the benefits it offers. Chief among them is the ability to turn software acquisition from a cash-intensive capital expenditure into a more manageable operating expense. "That's what's made SaaS so attractive," says Kevin Prouty, research director for enterprise applications at analyst firm Aberdeen Group. Businesses also appreciate the way on-demand ERP applications rid them of hardware procurement and support costs, he adds.

Furthermore, no hardware to install means faster and easier rollouts. That was certainly true for Epec. Not having to beef up its inventory of servers, routers and other gear enabled the company to complete its ERP consolidation and shift focus to other important IT projects sooner. "It allowed us to do a lot more in our organization a lot quicker," Forand says. "We would have been looking at six months of building out a network infrastructure to support the type of ERP solution we wanted."

Companies with global operations, meanwhile, increasingly view SaaS ERP as a cost-effective option for branch sites and other facilities with limited IT staff. For example, while Anritsu Company, a maker of communications test and measurement products, has long used on-premise ERP software from Santa Barbara, Calif.-based QAD Inc. at its headquarters in Morgan Hill, Calif., its Mexican subsidiary now uses QAD's on-demand solution, and its Brazilian office will soon follow suit. "I don't have to have a support presence in those remote locations," observes Paul Mayer, Anritsu's director of information systems. "The on-demand model just made sense from that standpoint."

Waning Anxieties

Of course, technology decision-makers have long been familiar with the arguments in favor of using cloud-based ERP systems. The difference now is that common arguments against using them are losing their potency as other forms of on-demand software rapidly enter the mainstream. Indeed, Mayer partially credits Anritsu's willingness to adopt an on-demand ERP product to its successful prior use of SaaS applications for supervising HR, calculating sales commissions and managing engineering projects.

Experiences like that are easing CIOs' anxieties about the security hazards of storing sensitive data outside the corporate firewall and transmitting it over the Internet. "I tend to think it's overblown," says Mayer of that concern. Few people hesitate to do their banking or shopping online these days, he points out, so why assume running an ERP application that way is any more hazardous? Organizations should evaluate a potential SaaS ERP provider's security practices carefully, but there's nothing inherently risky about using their products.

Prouty agrees. "The security issue is more of a perception issue than it is a real issue," he says. Indeed, he continues, on-demand ERP systems are often less vulnerable than on-premise environments, in no small part because SaaS vendors understand the danger a break-in could pose to their continued existence.

Concerns about customizing SaaS ERP products are waning as well. "That was an issue maybe one or two years ago," Prouty argues. "Some of the more recent SaaS ERP releases we've seen allow for significant customization."

In fact, Epec has added some 200 fields and 15 record types to its NetSuite implementation. Integrating SaaS ERP deployments with other applications has grown easier in recent years, too. Epec, for example, has linked its ERP system with external sales quoting and e-commerce solutions using NetSuite's Web services API. "It's working very well," Forand says.

Mayer, for his part, initially worried about another common anxiety regarding SaaS ERP: sluggish performance over long-distance Web connections. That fear too, though, proved to be misplaced. Though the QAD data center nearest to Anritsu's Mexican and Brazilian offices is located in Denver, Colo., Mayer's IT team has all but eliminated latency issues using Web acceleration software from Citrix Systems. "The speed of access is just as good as our local system right here in California," he says.

Weighing the Alternatives

Still, SaaS ERP solutions aren't without their drawbacks. For one thing, businesses with on-premise ERP software generally have more control over how and when they modify the application. "I can pick up the phone and have a change made fairly quickly," Prouty observes. They also have more say over upgrades. Though SaaS ERP vendors spare companies most of the heavy lifting involved in rolling out updates, they tend to put limits on how long users can wait before switching to the latest release.

In addition, Prouty notes, paying for an ERP solution out of the operating budget has its downsides. Yes, you conserve capital in the short term but all those recurring fees you dole out can eventually add up to more than the price of an on-premise deployment. "A common sense assumption would be that over a ten-year period you're probably going to spend more money," Prouty says. What's more, he adds, at the end of that decade you'll have no ownership stake in the licenses you've been using because you essentially leased rather than purchased them.

That's one reason some organizations are going with "hosted" ERP solutions instead of SaaS. Such offerings let businesses run traditional on-premise ERP software on infrastructure owned and managed by a third-party data center, enabling them to enjoy the control and flexibility of an on-site deployment without the steep hardware acquisition and maintenance costs. That's often a good deal for larger companies with complex requirements and enough cash on hand to cover the ERP vendor's upfront licensing charges, Prouty says.

Mayer, however, is happy with the job SaaS ERP is doing at Anritsu's overseas sites -- happy enough, in fact, to consider using a cloud-based product at the home office someday. "I'd have to take a look at what we could gain from that, but that's certainly on the table," he says.

For increasing numbers of IT leaders, betting the business on a SaaS ERP system is no longer quite as preposterous an idea as it might have been just a few short years ago.

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