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Malcolm Roach, Open Door Technology Inc.

The Cost of Cloud ERP vs. Cost of In-house ERP


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Cost of the Cloud for ERP

Have you heard that the Cloud is a cheaper option for installing ERP software? This is certainly how it has been sold by a number of people, while the critics claim it is significantly more expensive, especially in the long term. So who is right? The correct answer is that both groups are right as long as you understand the underlying circumstances where each makes sense.

Situations where Cloud computing is cheaper than purchasing in-house software licenses include start-up organizations, upgrades under true Cloud computing (which I will explain later), seasonal businesses, and organizations with minimal investment in IT, whether a deliberate decision or lack of capital.

Cloud computing  allows startup companies to minimize upfront software and hardware investment by paying for software licenses on a per user basis, usually monthly. There are numerous advantages to this offering including minimal hardware investment. A small company can quickly gain access to sophisticated software without having to invest even in a computer server.

Upgrades can be significantly cheaper for true Cloud options, which allow the software vendor to update online software in the background with a relatively easy transition of organization data. Most Cloud options today are really hosted monthly software licenses that still need to go through a traditional upgrade model.

For seasonal organizations, as the entity grows or scales back, user licenses can be easily scaled up or down to match demand, which can greatly reduce the overall cost of the monthly software licenses and avoids having to purchase licenses for the maximum number of possible users.

If your organization does not already have a professional IT support group and does not want to build one, suddenly the Cloud model, which eliminates the need for a sophisticated in-house IT group makes much more sense. The professionalism of most Cloud service centers typically far exceeds the quality of firewall protection, software patching, and backup services provided by in-house resources. In some cases, the Cloud service offers superior integration to other business software such as Microsoft Office or SharePoint.

So let’s consider possible cost advantage of the Cloud model where it makes sense. On the negative side, monthly payments that never go away can seem very expensive after a few years. On average, monthly payments for two or three years match the cash outlay of a system purchased upfront for in-house installation. For start-up companies, the investment in new computer hardware can easily cost into six figures out of your capital budget. Salaries for hard to find IT staff could easily be $15-20 thousand per month. These are ongoing costs as the hardware has to regularly be updated. In addition, there will be other costs such as a server room, utilities, backup tapes, etc. With twenty Cloud ERP users generally costing around $4,000 per month, you can see that just the cost of adding IT staff will far exceed the monthly cost of any Cloud users you may need.

Upgrades to ERP databases can be very expensive. If you can live with the compromise that true Cloud solutions may be able to process upgrades in the background but severely restrict or eliminate your ability to configure or customize the system to meet your specific requirements, then there are opportunities for savings here every few years.

The supposedly higher monthly costs of the monthly user licenses can be much lower for organizations with seasonal fluctuations. For example, an organization with operations in one half of the year, can cut back on those users license. For field service or even some entertainment organizations, those cuts could be more than half the total number of users.

There are certainly other considerations when trying to decide whether Cloud computing makes sense but in this blog I am only trying to communicate some of the more obvious economic factors.

There are circumstances where Cloud computing is generally more expensive and they are generally the antithesis of the reasons stated earlier.

The temptation is to view Cloud offerings as a finance contract, but in truth we are talking about apples and oranges. As mentioned earlier in this article, the out of pocket payments for monthly ERP Cloud licenses generally equals the upfront purchase cost plus annual enhancement after two to three years. If your organization is committed to having a highly professional in-house IT group and abundant server resources and this situation is likely to continue, the cost advantages of Cloud computing seem less clear.

There can also be technology or security reasons why your ERP database should be in-house and Cloud computing is not a viable option. Many organizations are still uncomfortable about having physical access to their data outside their control. In some cases, organizations operate in an environment without reliable Internet access, which eliminates the ability to work with remote databases.

We have seen organizations in a rapid start-up mode who sign up for Cloud licenses so they can quickly scale up without needing to make additional capital or people investments and then purchase in-house software licenses when their situation stabilizes or the investment funds become available.

So, in conclusion, there are many factors in play here and they are usually unique to each organization.

Malcolm Roach, CEO of Open Door Technology, Microsoft Dynamics NAV Partner

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