Posts Tagged ‘SaaS’
CFO InvolvementThirty years ago, managers didn’t need to know how to operate a keyboard. There were secretaries to type letters and agreements that formalized phone conversations. Times have changed. In addition to understanding business, today’s managers need to develop a working knowledge of the software tools that are designed to make their job easier. The CFO is not exempt. Over a quarter (27%) of CFOs say they’ve become more involved in their company’s operations over the past three years, and 15% say specifically that they’ve become more involved in IT according to a recent report by Robert Half Management Resources survey of 1,400 CFOs. There has been plenty of information and hype about cloud computing with a strong shot of technical jargon thrown in.
Cloud Software, IT, and the CFOSome IT professionals are threatened by the perceived notion that the cloud will make their jobs obsolete. The reality is that IT jobs will change, but will not be eliminated. IT personnel will become more involved in the business and less involved in the day-to-day management of servers and software updates. Some CFOs are worried that the Cloud limit the control they have over data. As the steward of the organization’s financial well-being, the CFO has the responsibility to understand the current transformation in IT and provide guidance. With a predicted increase in IT spending of 7.1 percent over 2010 (worldwide IT spending is forecast to total $3.67 trillion in 2011) according to Gartner’s 2011 Q2 update, there is a lot at stake. Just as IT needs to understand more about the business, CFOs and COOs need to understand more about software options available to them. Getting smart about the cloud is becoming easier with a proliferation of objective articles and white papers. Some ERP Cloud News articles discuss ERP cost comparisons, security issues, and 2011 predictions.
More Information for CFOsRecently the ERP Software Blog published a white paper targeting CFOs who want to get smart about the cloud. This paper gives CFOs the foundation ask educated questions and lead discussions about moving ERP software to the cloud. You can read the white paper on the ERP Software Blog at www.erpsoftwareblog.com/cloud-erp.
“It’s time for companies to move on. To eliminate these massive shackling on-premise systems that have been inhibiting growth and creativity for so long. Stop pushing aside innovative projects because they simply can’t be done under SAP. It’s time to get creative again, fuel growth and create the jobs that our country and others desperately need. SAP’s efficiency allowed companies to cut jobs and costs. The cloud will maintain that efficiency but re-integrate the level of creativity that these great companies once thrived on.”The Cloud delivers many benefits to ERP software designers. Access from anywhere, scalability, reduced IT costs, pay-as-you-go, and elimination of client software are among many benefits. Building Cloud ERP systems as web-based applications, delivers even more benefits as discussed in a previous ERP Cloud News posting. However, the claims made in the aforementioned article are exaggerated and require some clarification.
A Rebuttal, a Clarification, and Support for Cloud ERP
Rebuttal: SAP in the CloudAlthough not mentioned in the article, SAP has demonstrated that it is taking the cloud seriously through the launch of Business ByDesign as well as their work on a cloud-based platform. SAP might be too expensive. SAP might be too big for mid-sized businesses. SAP might be process driven. But I wouldn’t call SAP inflexible. If your business has a healthy budget (read millions) and large volumes of transactions to automate, then you can make SAP do just about anything. See sidebar “ERP and innovation.”
Clarification: Some Clouds are More Rigid than On-PremiseThe his article, Mr. Yarnold states “the dominant rigidity of on-premise ERP systems appears to be evaporating with the advent of more flexible cloud-based applications.” Clarification: Multi-tenant cloud-based systems can be more rigid than on-premise deployments. With multi-tenancy, you gain some efficiency, but you lose control of the source code because it is shared by many users. I’ve worked with many multi-tenant applications (ERP, CRM, marketing automation) that allow you to define variables, parameters, and custom work flows – so I would not call them inflexible. If you can accomplish what’s needed with configuration (not customization), then the cloud will save you time and money. The key is knowing what you can accomplish with configuration. If your process requires core logic changes, then you will get faster results with an on-premise vendor.
Flexible Cloud ERPThe best of both worlds is an on-premise cloud implementation. On-premise clouds are more flexible and much less expensive than a client-server deployment. Modern development tools with web-based APIs eliminate client software and deliver robust applications to a web-browser. Since these applications are managed centrally, they can be designed and deployed faster and cheaper than client-server software. Unlike multi-tenant cloud applications, on-premise clouds provide access to source code. Before starting your customization, make sure that the vendor protects your customizations during software upgrades. Otherwise, you will have to reinstall or redevelop your customized code during each upgrade cycle. A single tenant application will also allow you to upgrade your application at a time that is convenient for you. The multi-tenant upgrade will occur automatically, but at a time specified by the vendor.
Conclusion: Cloud ERP helps drive Efficiency and InnovationDavid Yarnold’s article endorses modern cloud ERP software. But the article goes too far by saying all cloud systems are more flexible than on-premise systems and misses the fact that SAP is pursuing cloud strategies. I would not blame job loss, lack of creativity, and the demise of some US manufacturing sectors on ERP software. ERP software is designed to make business processes (sales, orders, manufacturing, accounting, invoicing, etc.) more efficient. The cloud accomplishes this by offering rapid scalability, pay-as-you-go pricing, and eliminating the burden of client-software. When choosing a cloud solution, the ability to customize and connect with other systems is critical. Core accounting processes are rules-based and need to be flexible and open, but not innovative. ‘Creative accounting’ usually leads to big problems and falling stock prices. However, inaccessible and unconnected accounting systems are just as dangerous. Innovative manufacturing processes, line-of-business applications, support processes, and other business advantages need to be easy to plug-in to the core accounting, ordering, inventory, and management processes offered by the ERP system. ERP systems should make businesses more efficient and provide them with the tools to innovate. Cloud and web-based systems offering SaaS and on-premise deployments provide the flexibility and efficiency required to reduce the cost of innovation. This allows new ideas to be implemented faster and sooner than legacy software solutions – making Cloud ERP systems both efficient and innovative.
Changing Role of the ERP ManagerIn a traditional ERP deployment all ERP related tasks are performed in house. In this case the ERP Manager is responsible for a team of employees that can manage servers, update software, configure the application, oversee data backups, and other system related tasks. All of these tasks will take a considerable amount of time and money. The organization must consider the cost of employing and training this team to oversee the ERP system that they are going to be implementing versus outsourcing this to a company that specializes in configuring and maintaining ERP systems. In many cases companies split responsibilities by keeping some in-house and outsourcing others. Software as a Service (SaaS) frees the organization from the responsibility of maintaining servers and performing most IT related tasks. The responsibilities that fall under an ERP Manager in a SaaS environment include managing internet access and helping users understand how to use the system properly. This challenges the ERP Manager to become more involved in understanding the business and less involved with routine information technology (IT) tasks. The ERP manager will need to be capable of carrying out tasks across several different departments that an ERP system can carry out. This will ensure that the manager is able to take appropriate action if something goes wrong with the system.
Don’t Underestimate the ERP Manager’s RoleAll operations within the company must be monitored and the ERP Manager must ensure that all potential problems within all departments are dealt with in a timely fashion. If a mistake is entered into the ERP system, it will spread throughout the company since an ERP system brings together all the different departments within an organization and it will be the ERP Managers responsibility to track down the source of this mistake and to put it right.
Some Tasks Remain the SameAn ERP manager managing a traditional, in house ERP system will be required to report to the companies’ investors and must therefore possess a professional attitude with good communication skills in order to instill confidence in the people who the manager will be reporting back to. Similarly a SaaS ERP Manger will be required to report to the company. Finally, like all managers, an ERP Manager must take steps to improve the morale of all the staff that the manager is responsible for namely, all the people that will be maintaining the ERP system. The ERP manager would need to ensure that all staff are assigned tasks that are fair and should receive useful advice when they have professional, work related problems. An ERP Manager with poor people skills will affect the attitude of the staff; this will result in them not working to their full potential and ultimately making them incapable of bringing out the full benefits of the ERP system.
ConclusionSoftware as a service is a positive development for ERP Managers. SaaS technology creates IT efficiencies that allow ERP Managers to spend less time on repetitive tasks and more time interacting with business people and becomming involved with core business processes. Tasks such as maintaining servers, doing data backups, and updating software can be outsourced to highly specialized cloud providers while investigation of new technology, advanced system configuration, and training can be kept in house. - – - – About the Author: Rashed Khan has a Msc in Software Engineering and regularly guest blogs on business and technology related topics. Rashed is currently blogging on behalf of ERP Systems experts Epicor.
Good Clouds and Bad CloudsRecent weather events including flooding along the Mississippi and Missouri Rivers, tornados from Northern California to Oklahoma, thunderstorms from Illinois to New York, and heat alerts in the Southeast have demonstrated the impact of ‘bad clouds’ on business and data availability. I’ve often heard the phrase “you have to fight fire with fire.” Today many businesses are fighting clouds with The Cloud. In the case of one Oklahoma manufacturing firm, the solution to business problems involved using the Cloud to centralize data in a secure location that is impervious to the impacts of local disasters. By using the Cloud, DDB Unlimited (www.ddbUnlimited.com) was able to automate financial processes, streamline operations, eliminate accounting costs, and process orders faster.
Building a Cloud SolutionAIM Solutions in Dallas, TX helped DDB Unlimited, a rugged enclosure manufacturer, take advantage of Cloud technology. The solution was designed to automate business processes while simplifying infrastructure requirements. Prior to moving to the Cloud, DDB Unlimited utilized QuickBooks for accounting and Profit 21 for CRM. Having disparate systems for different purposes created extra work including dual order entry, manual import and export processes, manual accounting, and offline reporting. In addition, the solution was susceptible to local power outages and other issues caused by ‘bad’ clouds. The accounting solution was scheduled to be replaced by a Sage MAS 90 solution, but during implementation, DDB Unlimited noticed that processes became slower and more confusing when using MAS 90. After some investigation, DDB Unlimited determined that the Cloud could unify several operations in a single system. The Cloud eliminated manual accounting practices, providing an out-of-pocket savings of $80,000/year. In addition, the Cloud ERP solution did not require client software so installation was fast and maintenance does not require touching each computer or mobile device. The Cloud solution came with import and export tools so existing data – including the chart of accounts, current account balances, customer, active orders, and much more could be easily imported. The solution was up and running in about one month.
Weatherproofing FinancialsBy replacing papers and forms with electronic orders, businesses such as DDB Unlimited have become much more efficient. However, when installed locally, a computer driven solution is just as susceptible to natural disasters as papers stacked in a filing cabinet. In addition, a faulty hard drive can have the same impact as a tornado when not properly backed-up. The Cloud enables businesses to store their critical data offsite in a fault-tolerant datacenter with multiple sources of power and bandwidth. Data is replicated in different fault zones so a single disaster does not hinder business operations. DDB Unlimited’s manufacturing plant can still be impacted by local weather conditions, but it’s financials and business operating data are secure in a weatherproof electronic vault.
Documents as well as transactionsIn addition to company financials, the Cloud can store critical business documents. Intellectual property, business processes, sales list, and company records can be maintained in a safe location. These documents can be linked to transactions to provide an audit trail and simplify the auditing process.
Don’t wash away the technical expertsThe Cloud does not eliminate the need for technical experts. Access to the Internet and application configuration are still required. The cloud allows technical experts to spend less time managing servers and more time helping solve business problems and analyzing business data. This allows IT employees to shift from being an unwanted expense to become an integral part of company profitability.
Are financials useful if your plant is impacted by a natural disaster?If a natural disaster destroys your plant, does it really matter if your financials survive? The answer of course is yes. Insurance frequently covers your plant and allows you to rebuild in the event of a disaster. Putting a value on your financials, sales lists, customer orders, and critical business data is difficult, so it is frequently not insured. Often this uninsured data is what adds value to your business (many companies are purchased for only their customer lists and intellectual property). By using the cloud, you can effectively “insure” this part of your business. In the event of a natural disaster, you can still access your information using a computer from any Internet connection. Contact us if you want a copy of the 2-page DDB Unlimited case study.
It is exciting to me to see the momentum of the Cloud marketplace. With every study I see, every analysts I hear, every piece of research I read, all are saying the same thing…Cloud is growing! But it is also interesting to me that even though there is growth, there are many in the marketplace who still seem very confused about what Cloud actually is, and its benefits.
What is Cloud?
An example of this would be the recent debate on Focus.com, where a question was given to the visitors of their site, simply asking “Is Facebook a Cloud?” The fact that there was even a debate highly indicates to me that there is confusion over Cloud terms, one-way-or-the-other. As I believe most readers of this Blog know, the Cloud is on-demand computing resources that are available on a consumption basis. The Cloud is enabled by virtualization technology providing hardware and operating system efficiencies, making it easier and less expensive to deliver on-demand computing resources. SaaS, on the other hand, in its most basic form is a delivery model allowing a business (or someone) to access applications on the Cloud infrastructure. This is what Facebook is doing, providing their application to millions of people. SaaS uses Cloud, not SaaS is a Cloud. The Facebook application is written for the Cloud and could be considered a Cloud-based application, but it is not “the Cloud”.
Utilizing Cloud in SaaS ERP
Another example is a company I know about who is currently living with the fact that their well-entrenched, on-premise ERP system was acquired by another software provider, and now, their maintenance has tripled, their support is nowhere to be seen, and they truly believe their product is now a product without future direction (ouch!). Even though it seems like this company would be doing anything it can to abandon their current situation, they are not. The reason, as I understand it, is rooted around the fear of the unknown (alternative solutions), the disruption of a bringing in a new system and the cost that it would take to convert to something new.
So the question is why this company has not considered the SaaS-based direction as a way to escape their current situation. It is simple; they still are not aware of the many benefits of SaaS. This company, like many companies, has not been exposed enough to SaaS and Cloud computing already in order to see it as a viable option. To me, SaaS and Cloud computing would be an excellent alternative solution for this company, and others in the same situation. The benefits of SaaS and Cloud computing, including the speed of implementation and low cost of entry naturally makes it the perfect option (shortest possible route) to something new. With SaaS and Cloud computing they would have new, innovative technology that would lower their current internal IT resources and maintenance costs, and could provide the product support they deserve.
Continuing Cloud Knowledge Building
Though these examples may seem different, they are similar in the fact that they are part of the marketplace that lacks an understanding of Cloud and its benefits. Whether it is the company who doesn’t realize how SaaS can help them, or it is people debating whether something is a Cloud or not, says to me that we still have a ways to go.
Though SaaS and Cloud computing is growing, one of the biggest challenges today is the continued education of these technologies in the marketplace. It is my belief that the recognition of SaaS and the Cloud is typical of any new technology direction however. And like other new technologies before it, it too will come to a point where it becomes a natural option in each case for businesses as their needs change. But for right now, it is important for the marketplace vendors (and even users) to take their part in expanding SaaS and Cloud computing knowledge, not only from their product’s perspective, but from what the technology can provide as overall benefits to every business. With understanding comes even more wide-spread acceptance, so important to not only software providers selling SaaS and Cloud products and services, but to the marketplace in general with particular needs that are best supported by this kind of technology
This article presents costs associated with different ERP software deployment scenarios. The numbers presented in this article have been gathered by averaging quotes provided by 2-3 different ERP and hosting service providers.
ERP Software Purchasing and Deployment Options
The Cloud has inspired a new way of thinking about ERP software deployments. Companies have the option to purchase a license or purchase a SaaS solution. When purchasing a license you own the software and have the ability to deploy it in your datacenter (on-premise) or outsource operations to an external provider (hosting). When you purchase a SaaS solution (sometimes called an on-demand solution), you rent a complete turnkey package that includes software and the entire delivery mechanism.
This article will examine the financial ramifications of these three models on your business.
Small Customer Licensing
With a very small deployment scenario, the cost of licensing the software is $20,000 and the cost of one year of SaaS is $16,000. The resulting chart (on the left below) shows that a SaaS deployment can provide lower costs in year one, but after 2-3 years of service, the hosted model can be less expensive in terms of total out-of-pocket money.
By looking at the graph, you would conclude that you should never purchase a software license and try to build your own infrastructure. However, in some scenarios (for example you are are running a point-of-sale terminal that needs to connect to your server) an on-premise deployment makes sense because you may not want to rely on an external Internet connection.
Mid-Sized Customer Licensing
For mid-sized businesses, we increased the cost of the license to $50,000 and the cost of SaaS to $40,000 per year. The resulting chart (above on the left) shows that the break even point for SaaS versus hosting occurs sooner (around year 2). In year 5 the cost of SaaS approaches the cost of a license plus internal infrastructure. These changes occured because the cost of the fixed license and recurring SaaS payments increased proportionately while the infrastructure cost remained relatively fixed. We observed a proportionate increase in SaaS and license pricing by comparing specific customer proposals from SaaS and license vendors.
Even though we increased the cost of hosting to $500/month, the cost of paying for 1/5 of an IT person to maintain the server, operating system, and software application caused the on-premise deployment to be more expensive than hosting over the long run.
Review of Assumptions
Cloud-based and Web-based Software
As previously reported, there has been significant discussion judging the merits of hosted ERP versus SaaS. In this comparison, we assume that the same software can be run as SaaS or deployed on-premise. This means that we are not considering the scenario where legacy client-server software is being hosted on the web along with VPN software, hosted desktops, etc.
We assumed that the software was web-based so client upgrades are not required.
Relationship between SaaS and License Pricing
The cost of the SaaS annual fee compared to the cost of the software license is critical to the analysis. For this analysis we used the following rule-of-thumb:
SaaS annual price = (2/3) x (Cost of license + One year maintenance)
This approximation accurately represents actual market data provided by SaaS providers and on-premise license providers. In both cases, the cost per user (when applicable) is reduced as more users are added at approximately the same rate. Also in both cases, the addition of modules increases the cost.
- Calculations did not include NPV calculations.
- Hardware and software costs for an on-premise deployment are similar for small and mid-sized customers. This equals approximately $15,000 for the deployments shown. This does not include off-site backup storage.
- Maintenance fees are 20% per year of the license costs. In the hosting scenario, maintenance covers only the application, in the on-premise scenario the maintenance costs cover the application, OS, and database software.
- Configuration, training, and data migration fees are equal across all three deployment models. We used a 1:1 ratio of license cost to consulting fees for this analysis.
- Customization fees are not included, but would be equal across all models.
- Application support is not included, but would be equal across all models.
- For an on-premise deployment, power and replacement server parts were assumed to cost $1,000/year.
When is SaaS Better?
Businesses benefit from SaaS when they do not have IT resources to dedicate to installing and managing applications. Even in the hosted scenario, some level of IT expertise is required to install application upgrades. We assumed upgrades occur two times per year and require approximately 5 hours to install. As a result of this assumption, we budgeted $1,000/year for application upgrades in the hosting scenario. In all cases we assumed that the application was web-based so no client software upgrades were required.
Break Even for Mid-Sized Businesses
By lowering the SaaS cost by changing the SaaS rule of thumb (discussed earlier), we computed a break even point over a sever year deployment. Holding other assumptions steady, the break-even occurred when the cost of the SaaS annual fee is approximately 1/3 of the cost of the license plus one year of annual maintenance. So, if your only concern is out-of-pocket expenses, the option to purchase a $50,000 license + hosting + maintenance is roughly equivalent to a $20,000/year SaaS license.
Adding Cost of Capital
** section added May 2 **
After publishing this article, I received several requests to include the cost of capital in my calculations. Adding a cost of capital has the following impact on the different models:
- SaaS – expenses are deferred, so the model becomes more attractive as the cost of capital goes up.
- Hosted – the license cost is paid upfront, but some costs are deferred, so the benefits are less than with SaaS
- On-Premise – the on premise model contains the most upfront expenses as well as significant ongoing IT expenses that paid over time. As the cost of capital increases, the upfront costs are not impacted, but the impact of the ongoing IT costs is reduced so that the overall benefit is higher than hosted but less than SaaS.
Cost of Capital Impact on ERP Analysis
With ERP software there is a significant amount of upfront analysis, consulting, configuration, testing, and training, so the impact of the cost of capital is less than it would be for simple software applications. The graphs below show the impact of making adding a 3% and a 15% cost of capital to the analysis. This was done by discounting the future payments to reflect the time value of money.
The analysis doesn’t change dramatically for the 3% case, but when the cost of capital is assumed to be 15% and higher, the SaaS solution will always be less expensive than an on-premise solution. At 15%, the breakeven between SaaS and hosted shifts by a few months in favor of SaaS.
** end of May 2 section **
This article addressed costs, but costs are only one part of the deployment equation. Your deployment model should be based on your level of IT expertise, your comfort level with outsourcing, the strength of your Internet connection and tolerance for downtime, and the timing of expenses.
As your business changes, your business requirements change. Company size, IT expertise, legislation, risk, programming requirements, and other factors will influence your SaaS versus on-premise deployment over time. You should partner with a provider that offers a choice of license and SaaS deployments so you can switch your deployment as your requirements change.
Contact us if you would like to receive a copy of the spreadsheet used to generate these graphs.
The Cloud through the eye of a marketerI talk to magazine publishers who want their magazines and websites to be THE source for Cloud stories to their readership. I meet with well-known industry influencers and consultants who are eager to find out more about Cloud computing, so that they can not only talk more intelligently about it, but so they can also be part of this incredible movement. I have had conference calls with companies that produce webcasts only to find these companies are eager to produce webcasts that educate the marketplace on Cloud computing. Recently, I have also been asked by several national wholesale distribution magazines to write about Cloud computing and SaaS, in order to give their readers a better understanding of what it is and how it can be a viable system for their businesses (Acumatica currently has articles in Industrial Supply Magazine and in the coming March edition of The Electrical Distributor Magazine). I have even talked to non-technical people at social gatherings who bring up Cloud computing, wondering what it is, or if they are small business, how it could help them as well. It is also exciting to me to see more and more companies coming to my company with the openness to look at Cloud computing and SaaS as a viable option to the way they run their businesses. And these are from companies who got where they are using traditional on-premise hardware and software in the past.
The Cloud is known and awareness is growingYes, I think the marketplace is taking notice of Cloud ERP. And from my humble perch it appears that Cloud computing and SaaS is definitely getting into the minds of everyday people and businesses of all sizes. And, as several of the major industry companies such as Microsoft and IBM continue to run national ads in prime time talking about “going to the cloud”, Cloud computing and SaaS will continue its rise in visibility and become more and more a mainstream platform for both individuals and companies to accomplish what they would like to do. These are definitely exciting times for this technology and from where I sit, it is fun to watch all that is going in the marketplace regarding Cloud computing and SaaS.