INSIGHTS
A discussion on ‘Does cloud computing payback?’
Another in Inecom’s series of Insight white papers to help
improve your business process
One of the issues with discussing ‘cloud solutions’, is trying to find a definition that everyone can agree on, as the term means different things to different people, often being used loosely, leading to confusion when a white paper such this addresses the subject. For the purposes of this paper we will use the following definitions;
• SaaS – a turnkey service with application, presentation, data tiers and all associated ser-vices in a single service that can be accessed and provisioned over the Internet. Offered on a subscription basis with the application and the database hosted in one server with other customers.
• Private Cloud – where a company’s database is hosted in a 3rd party datacentre either in a dedicated server or a partitioned server. The hosting partner provides all the associated man-aged services for that server and its connectivity in order for the application to operate. • On-premise – where a company manages its own database and its own server in-house on which their application is installed. Therefore all activities to maintain the server and database are carried out by an internal team.
When SaaS applications were offered as an alternative to On-premises deployments, which was over 14 years ago, they were not readily accepted by IT organizations. SaaS applications were most successful at first in contained organizational/functional areas where the line-of-business (LOB) buyer controlled the budget and could make the decision independent of IT or at least with little IT involvement.
As a consequence, companies such as Salesforce.com emerged offering CRM functionality in the cloud or Success Factors for HR performance Management. Concerns over readiness of these relatively young SaaS solutions to offer core ERP systems and the cost of the technol-ogy projected over 3-5years, meant that companies were reluctant to change wholesale to a SaaS based model.
An alternative hybrid of On-premise and SaaS deployments for ERP systems emerged; Private Clouds. Private cloud offered many of the advantages of the SaaS model, outsourced man-agement of servers and accessible applications on the internet, but also the reassurance of-fered by On-premise solutions, with established mature ERP systems still being able to be de-ployed. The economic benefits were less pronounced but the option filled the gap between the concerns surrounding the SaaS model and the limitations of the status quo of On-premise solutions.
To date however, the uptake by the market for both SaaS solutions and Private Cloud deploy-ments has been underwhelming, and far below analyst expectations. What this paper aims to establish is whether the time is right for companies to move to a Cloud Solution, through either model, and what the expected payback of making the move is?
The situation today
On premise deployments have been the standard choice for the last 30 years of ERP solutions, for that reason the majority of current worldwide sites are On-premise, some 79% of the large enterprises, 77% of medium businesses and 59% of small businesses. However what is interest-ing to observe is the penetration of Private cloud and SaaS deployments across the different business types. The following statistics came from an Aberdeen study “SaaS and Cloud ERP Observations”.
These statistics highlight the prevalence of SaaS solutions in small businesses, where it has had the most impact. In 2012 there was an increase of 53% of SaaS use by small businesses. This mirrors Inecom’s belief that the first organizations to adopt cloud solutions will be Small Business, who are able to make strategic decisions quicker. These businesses will enjoy the advantages of Cloud solutions faster due to having less resources and investments tied into existing On-premise solutions.
While SME’s have been the most prevalent users of Cloud solutions, there has been a general movement towards cloud deployments at some level of almost all organisations. In fact, in a recent IDC survey for a paper published in December 2013 called ‘ERP in the cloud and mod-ern business’, it stated that over 60% of all the companies surveyed reportedly were already using or had firm plans to use cloud services.
It is clear that cloud computing has become an established technology, however, cloud ERP systems lag somewhat behind ‘cloud computing’ as a whole in the famous technology adop-tion curve first published by Joe M. Bohlen, George M. Beal and Everett M. Rogers of Iwoha State University in 1957 (please see below). The theory and established belief is that new tech-nology is first adopted by those looking to create an advantage over their competitors. Upon proof of the benefits of the technology and reassurance over its safety, more and more com-panies adopt the technology; this is called the early majority phase. The rate of adoption quickens during this phase as the technology moves from niche to the industry standard. Inecom believes that cloud ERP solutions have indeed crossed from early adoption to the start of the early majority phase. While the market standard remains On-premise deployments, more and more companies have turned to Cloud or intend to turn to Cloud solutions, either SaaS or Private Cloud, and the rate of adoption is quickening.
SaaS
Private Cloud
Large enterprise
4%
9%
Medium
5%
5%
Reason to go to the cloud
According to a report by Gartner and Mckinsey, ‘Winning in the SMB Cloud’, the benefits of cloud computing for Small and Medium Enterprises’ can be understood from two perspectives: “First, from a capability standpoint, cloud computing allows SMBs to gain access to technolo-gies (infrastructure, platforms, and software) that they might otherwise need sophisticated IT support to obtain. For example, few small businesses have the knowledge and expertise to perform ongoing management of dedicated servers, and storage in order to run commercially available ERP or CRM packages. By leveraging cloud-based IaaS and SaaS solutions, these companies can stop worrying about the details of installing and running infrastructure or sophis-ticated software packages and instead simply contract for these offerings as services.”
“Additionally, by making use of the cloud, SMBs can gain access to service levels (especially with respect to reliability and performance) that are much higher than they would be able to provide with a typical on-premise installation. In short, leveraging cloud solutions in a service-oriented manner allows SMBs to focus their efforts on the most important aspects of running their businesses, and it allows technology to be simply one of many actors that support the company.”
The benefits are of course not limited to SME’s, by moving ERP systems to the cloud, all compa-nies can gain an assortment of technological and business benefits, including:
• Easier deployments.
• A Pay-for-Use model that offers greater flexibility.
• Shifting of IT investments from the capital budget to the operating budget to closer align business benefits with cash outflow.
• The freeing of valuable resources from maintaining legacy software and infrastructure to focus on higher-value and innovation-driven activities.
• Faster deployments leading to faster time to value and freeing up resources for more strate-gic initiatives.
More and more companies believe that they should be specialising in their actual business and outsourcing IT to service providers, the experts. They don’t want executives’ time saddled overseeing maintenance of in-house IT systems — in fact, statistics regularly show that up to 80% of IT budgets are tied up in routine maintenance. Cloud frees up executives to think and act strategically. IT leaders provide the insights needed to select the right technology resourc-es for the businresourc-ess and align overall businresourc-ess objectivresourc-es with the IT strategy, the IT department become thought leaders rather than administrators.
The benefits extend further, with the organization not having to invest as heavily in internal IT resources with all the tangible costs associated with employment; salary, CPF, Insurance, Medical, Maternity/Paternity leave, office space, telephone bills leave etc. And of course the intangible costs of time spent managing these additional human resources.
In data collected in the Aberdeen paper ‘ERP Selection: Finding the right fit’ it was stated that SaaS in particular, in relation to Return on Investment (ROI) achieved a ROI more quickly than those with On-premise ERP, with faster implementations and reduced internal resources help-ing to achieve that. In the study organizations were also asked to rate the impact that their ERP solution has had on their IT department’s workload on a scale of 1 to 5, with 5 being the greatest impact, in this aspect SaaS solutions also outperform on-premise solutions.
The myth of the Security concern
In the years since cloud solutions and services have emerged there has become a widespread myth that the cloud poses a security concern, that hackers will more likely target these data-centres hosting thousands of customer’s databases with financially sensitive information than they will the SME quietly minding its business with its server in the back of their office. The con-cern is so pervasive that in fact 66% of those surveyed in an Aberdeen study that were unwilling to move to a cloud deployment, cited security as the main reason for that decision.
This however is perception rather than reality, Aberdeen’s report Web Security in the Cloud: More Secure! Compliant! Less Expensive! Found that, on average, On-premise solutions had 11 incidents of data loss or data exposure in the last 12 months, compared to 6 incidents for those that are cloud-based. Additionally, On-premise solutions had 11 incidents of security re-lated downtime, compared to 6 for cloud-based solutions.
This is evidence that the actual impact of Cloud based solutions on security and stability has been communicated poorly. Are On-premise solutions truly as secure as they are believed to be, or is security best left to those organizations (the SaaS ERP vendors and Private Data hosting centres) whose existence depends on their ability to provide safe and secure environments? If an organization is choosing an ERP solution based on its potential security, wouldn’t it make sense to rely on the capabilities of an organization that is committed to providing security rather than on your own internal firewalls, which may be insufficient?
Words of caution
While the benefits of Cloud solutions are plentiful there remain some concerns and risks that companies need to be cognisant of before selecting their solution and infrastructure.
Ecosystem Maturity
For on-premises/traditional applications, it has always been important to associate with a ven-dor that has a complete ecosystem around its products. This requirement does not go away for a SaaS model; in fact, it might be more important going forward. It’s essential to answer
the following questions: How much expertise is available from systems integrators, consultants, and value-added resellers (VARs) to help implement, configure, train, and operate the new system? Is the vendor platform known? Is there expertise to support software extensions, customizations, and custom application needs? A robust ecosystem is a good indication of the health of the solution and the vendor.
SaaS solutions remain relatively new in the ERP market place, consequently many of the solu-tion providers are small with low levels of internasolu-tional coverage and customer sites. This could mean a lack of partner coverage and competition between partners leading to poor stand-ard of implementations and support. Care must be taken to properly evaluate the solution vendors before choosing a SaaS solution.
System Maturity
In addition to the ecosystem, companies need to look at the solution itself. Many cloud applications are on fairly new releases, so care must be exercised to make sure there is a good fit from a function and feature standpoint. The more mature a product, the more likely that it includes the necessary functionality. Beyond maturity though, does the system use modern technology and meet modern standards? The other type of maturity is based on lineage. Is the application/solution based on long-proven features and best-in-class workflow, processes,and functions while adding modern reporting and UI features? Or does it comply with the local statutory and taxation requirements in your country? Long established On-premise solutions tend to tick these boxes.
Of course this issue is redundant when referring to a Private Cloud on which any ERP sys-tem can be deployed. A strong reason for choosing Private Cloud services is that companies are able to select sophisticated, established, on-premise ERP solutions and partners but still outsource the maintenance and support of the chosen solution and its infrastructure to a third party, and still access the system via the internet.
Conclusion
It is obvious that Cloud solutions have crossed the technology chasm that so many new tech-nologies fall into and never emerge. The take up by companies of Cloud solutions is now so significant that the larger players in the ERP industry, such as SAP, Oracle and Microsoft are all attempting to capture the market, a sure sign that SaaS and private clouds are here to stay. A combination of sustained media promotion, lower technology costs and better worldwide connectivity have meant that Cloud solutions are more commercially viable today than they have ever been.
The question over whether Cloud solutions offer an attractive return on your investment (ROI) seems to have been already answered and is constantly improving as technology advances. Technological improvements such as better connectivity with fiber optics and faster process-ing speed with 2nd Generation ERP systems usprocess-ing in-memory processprocess-ing databases, which are constantly lowering the barriers to adoption for all businesses.
It is still difficult to compare the ROI of cloud solutions versus On-premise solutions, since there are too many variables involved, but the benefits of Cloud solutions are obvious and represent a clear alternative to On-premise solutions.
