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Finance glossary

What is cloud ERP? Types & benefits

Bristol James
6 Min

Cloud ERP – or cloud enterprise resource planning – refers to the deployment of ERP software on a cloud platform.

ERP software allows businesses to manage various resources (such as capital and staff) or integrate different departments (such as sales or accounting) through a single application and interface.

Many cloud ERP systems run on a cloud platform operated by the vendor. This enables the business to avoid the hassle of on-premise solutions and instead access key ERP functions over the internet.

The history of cloud ERP

Cloud ERP is common practice today, but the concept of enterprise resource planning itself has existed since the 1960s.

At that time, tractor and construction machinery maker J.I. Case worked with IBM to develop an early prototype of ERP known as a material requirements planning (MRP) system.

MRPs evolved over subsequent decades but were mostly confined to manufacturing companies or those with large budgets.

In the 1990s, renowned research firm Gartner coined the term “enterprise resource planning” to reflect the framework’s growing popularity in other industries.

ERP systems quickly followed, with each business running premise ERP software on its own infrastructure.

So what constitutes an ERP system?

Essentially, an ERP system is a unified and integrated database for information related to key business functions such as:

  • Accounting
  • Sales
  • Human resources (HR)
  • Finance, and
  • Inventory management

The first cloud ERP systems

NetSuite (now Oracle NetSuite) was the first to offer a cloud-based ERP system in 1998. In the process, it enabled clients to access critical data on any device with an internet connection.

With no need to maintain hardware or employ qualified staff, ERP systems became available to smaller companies who could not afford a more expensive on-premise option.

Cloud-based ERP advanced in the early 2000s after they were able to incorporate data from other applications such as supply chain management (SCM) and customer relationship management (CRM).

Gartner called such systems “ERP II” to herald a new era where the internet could facilitate the sending and receiving of information between various applications.

This was an important milestone for cloud ERP. With more data added to the system, businesses could better resolve issues and identify areas for growth.

As the barriers to cloud-based ERP have lowered, the rate of adoption has increased. B2B software firm G2 predicts that the global ERP software market will be worth USD 78.4 billion by 2026 with a CAGR of 10.2%.

Today, there is no aspect of a business that an ERP system can’t analyse, automate, integrate, or provide intelligence on.

Various applications are available depending on the industry and business model, and machine learning (ML) now plays an increasingly important role in identifying data patterns to predict trends and eliminate manual tasks.

Cloud ERP categories

Cloud ERP can be categorised as either software-as-a-service (SaaS), private cloud, or hybrid.

Let’s take a look at each.

SaaS ERP

As the name suggests, this type of ERP is offered by a software vendor as a service.

Since providers establish and manage the servers themselves, SaaS is an attractive option for businesses that lack the necessary capital or know-how to manage their own ERP systems.

With that said, there are two different architectures to be aware of:

  1. Multi-tenant – where the architecture relies on the shared resources of multiple customers. Each customer shares a single database and application such that all receive patches and upgrades.
  2. Single-tenant – where one customer is supported by one instance of the software and architecture. Here, the customer may take some responsibility for software maintenance and upgrades. But there are obvious benefits to data security, data isolation, and performance.

ERP SaaS vendors charge a monthly, quarterly, or annual fee for their services, with that fee dependent on the number of desired users and features.

For example, Oracle’s Fusion Enterprise Resource Planning Cloud Service has a monthly cost of $625 per user (minimum of ten users) and a contract length of at least three years.

Different types of cloud ERP
The different types of cloud ERP (Source)

Private cloud ERP

Private cloud ERP requires the business to deploy, secure, and maintain an ERP system that is located on-premise. The business will also be responsible for costs related to support, software upgrades and employee training.

Unlike the SaaS model which utilises a subscription model, the private model utilises perpetual (full purchase) pricing. Businesses must pay a one-time fee upfront, and since this fee is often substantial, it can preclude organisations with smaller budgets.

Despite the high up-front cost, the private option affords complete control over the cloud ERP system. This extends to anything from industry-specific customisations to new APIs and eCommerce functionality.

Hybrid ERP

Hybrid ERP utilises a mixture of on-premise and cloud ERP systems. It is often favoured by companies with an existing on-premise solution that want to expand functionality via the cloud.Within this approach there are also two common arrangements:

  1. Two-tier ERP – a business may run its core functions on-premise, but add cloud-based ERP systems for different geographic locations or business units.
  2. Business function support – this arrangement tends to occur if a business determines that certain functions can be better supported by a cloud ERP provider.

Benefits of cloud ERP

Here are five key benefits of cloud ERP systems for businesses.

Continuous innovation

Some businesses opt for cloud ERP software to improve outdated business models, while others do so to improve operational efficiency or institute new processes and capabilities.

Lower costs

Cloud-based ERP systems are cheaper than on-premise solutions for two primary reasons.

For one, the business does not have to spend capital on upfront purchases such as software, hardware, services and associated facilities. It also avoids several IT-related maintenance costs since these are absorbed by the provider.

Simplification

Related to innovation and reduced costs is simplification.

Cloud ERP systems not only standardise existing and new applications, they also integrate them.

These systems further increase efficiencies across the organisation via process automation and the elimination of disconnected systems.

Customisation

Customisation is a benefit that is perhaps more applicable to SaaS ERP solutions.

While on-premise ERP systems can be customised, any product updates or enhancements are lost once IT upgrades the software. To avoid losing their customisations, many businesses will thus operate out of date technology

ERP vendors like Oracle, on the other hand, ensure that businesses retain their enhancement as the software is continually updated.

Security

Vendors also tend to employ the best data security available, with most breaches in medium and large companies associated with on-premise solutions.

In the event of natural disasters, system crashes, or accidental data deletion, providers offer off-site backups to protect data and use it to restore the system.

Cloud ERP systems are less vulnerable to attack, but they nevertheless remain a target to malicious actors since all business data and information is located in one place. To protect this, the system must adequately address infrastructure, network, operating system, and database security.

Summary:

  • Cloud ERP refers to enterprise resource planning (ERP) software that is hosted on remote servers and accessed via the internet. It is an integrated suite of applications that help businesses manage core functions.
  • Cloud ERP was first offered by NetSuite in 1998, with the utility and effectiveness of ERP systems increasing once they could incorporate more data from other applications.
  • Cloud ERP may take the form of a SaaS offering, private cloud, or hybrid approach. In the first option, a software vendor sells ERP as a service and takes care of security and maintenance. In the second option, the company hosts ERP functionality on its own cloud server and may be responsible, at least in part, for some of its maintenance and security.
  • Some of the key benefits of cloud ERP systems include continuous innovation, lower costs, simplification, customisation, and enhanced security.

References

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