There has been a great deal of talk lately about “The Cloud”, but what is the cloud. In loose terms the cloud is any system that is accessed from an offsite location (the user has no hardware requirement.) Using this definition a hosted solution, where you own the software would be cloud based. A system where you don’t own the software and are paying a monthly fee for access would also be considered cloud based, this is typically referred to as SAAS. Which one is better?
It really depends on the software that works best for your company. You should not select a software product because it is cloud based just because it’s cloud based. In order to best serve your business the delivery method of the software should not matter. What matters is whether or not the software provides the features and functionality that will make your business run better.
Looking at the relative costs of SAAS vs. hosted the numbers may surprise you. In a typical hosted environment you pay:
- a fee for user connectivity. This can be a monthly fee based on the number of users you have accessing the system or it can be based on the throughput you generate during a period. The less risky approach is the per user fee. This doesn’t vary from month to month and becomes a fixed fee.
- On top of this you would have the purchase cost of the software. If you take the purchase cost and spread it over three years through a lease you would then have a fixed cost of the hosted solution based on the monthly lease payment. At the end of three years your cost would be reduced as the lease cost goes away.
- Annual maintenance and support would usually be somewhere in the 17% to 20% of the software purchase cost and would be amortized monthly during the life of the software.
There are variations of hosting, but using this type of calculation will give you a good idea of what to expect.
Looking at the SAAS model you would have the monthly fee associated with the modules and users accessing the system. Some are doing it based on named users, where you would pay a fee for reserving the name on the SAAS system, whether the user accessed the system during the period or not. There are no maintenance and support fees or monthly hosting or lease payments. Sounds simple.
When you do the analysis remember that an ERP purchase should be a ten year decision for your company. It’s not something to enter into without a great deal of analysis and research. There are over 1000 ERP systems available in the US market and there is no perfect fit. Some things to consider as you do the cost analysis of hosted vs. SAAS are:
- What is the 10 year cost of each system? Don’t just look at the first three years.
- Remember that no matter what system you select you will have to pay implementation consulting costs. The SAAS and hosting models only provide the framework for the software. They do not provide a panacea eliminating the implementation effort. Just because it’s SAAS or hosted doesn’t mean it implements itself.
- Make sure you select the software because it’s the correct software for you business, not because of the brand or because you like the salesperson. (Once you make the purchase it’s likely that you will never speak to the salesperson again.)
- Get a contract that spells out all of your costs. You may just want to buy a certain module today and then plan on implementing other modules over time. Make sure you know the total cost of implementing the software package, including all modules you plan to implement.