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Can cloud-based ERP buy you business agility?

Enterprise applications has evolved into silos of software systems. The cloud is now offering a different approach to ERP

For the IT department, and users of their systems, seamless integrated access between various applications has never been straightforward.

The cost and complexity of integrating heterogenous systems has given the prominent providers of commercial off-the-shelf enterprise systems an opportunity to offer vertically integrated enterprise application stacks.

CIOs generally prefer to buy everything they need from a single supplier, but the individual systems tend to run in silos, with no hard linkage between them.

According to analyst 451 Research, businesses now need a greater degree of automation and consistency across entire buying cycles.

In its 2016 Trends in business applications report, the analyst group says the need for consistency across the buying cycle puts pressure on the links between line-of-business applications that were never designed to be operated in this manner.

Moving to a joined up co-existence

In the report, Alan Pelz-Sharpe, research director at 451 Research, says: “First-generation business applications that were designed to do one or two specific jobs in isolation are now making the move to a ‘joined up’ co-existence. It is a fundamental shift for business application suppliers.”

The supply chain should be linked together at each point, from customer prospecting to manufacturing to fulfilment and the associated financial transactions. “Realistically, even though progress is already under way, it will be a decade or more before the supply chain becomes truly dynamic and fully integrated,” he says. The challenge for many organisations is line-of-business enterprise applications having proved inflexible and costly.

Read more about cloud ERP

Oracle’s third-quarter results for fiscal year 2017 show 2% growth in overall revenue, with cloud representing 13% of the total. Executives are bullish on cloud ERP growth prospects.

While cloud-based enterprise resource planning applications are more widely adopted in the Asia-Pacific region, some companies are still hanging on to on-premise systems that remain core to their business.

Forrester’s 2016 Global business technographics software survey reports that out of 1,350 decision makers in organisations with 1,000 or more employees, 75% cited improved business agility as the top reason for moving to cloud-based enterprise resource planning (ERP), while 74% rated faster deployment as a major benefit. Many regard cloud-based ERP as cheaper than on-premise systems (73%), while 71% said cloud-based ERP would be easier to maintain.

Enabling agility for growth companies

In Forrester’s Vendor landscape for cloud ERP report, principal analyst Paul Hamermen says: “Applications built for SaaS [software as a service] tend to be quicker to deploy and easier to configure, accelerating time-to-value and enabling agility for growth companies.

“In addition, several SaaS ERP products – for example, FinancialForce, Oracle cloud ERP and Oracle NetSuite – offer a native extensibility environment – such as platform as a service (PaaS) – to enable customers and partners additional flexibility to customise the applications.”

Cloud ERP is often used to enable businesses to launch new ventures rapidly and support country expansion. “SaaS ERP is often used to support foreign subsidiaries cost-effectively – a strategy known as two-tier ERP. SaaS ERP enables rapid implementation without the technology management costs of standing up an internal technology infrastructure to support the applications.

Forrester’s research has shown the traditional ERP companies have been slow to adopt cloud ERP.

Hamerman believes most traditional players have been slow to move because they want to preserve the valuable stream of maintenance revenue.

He says this is the principal reason why few on-premise ERP providers are building and offering SaaS-only ERP products.

“Co-existence between SaaS and on-premise (or hosted) versions could allow a customer to switch deployment modes in either direction, and avoid a disruptive migration,” says Hamerman.

For instance, Oracle now offers a SaaS-only ERP product thanks to its acquisition of NetSuite, while SAP has its own internally developed SaaS ERP offering, Business ByDesign.

“Your incumbent on-premise ERP supplier may offer an attractive migration path to SaaS, but take care to understand the benefits and costs of such a project – and whether the new SaaS offering delivers relevant architectural, flexibility and usability advantages similar to products natively built for SaaS,“ says Hamerman.

Cloud ERP is not necessarily a single product or service available via the cloud. Analyst Gartner identifies a new era of ERP it describes as “postmodern ERP”.

It defines postmodern ERP as a strategy that automates and links administrative and operational business capabilities (such as finance, HR, purchasing, manufacturing and distribution) with appropriate levels of integration that balance the benefits of supplier-delivered integration against business flexibility and agility.

In August 2016, Gartner published its You do not need cloud ERP to solve your ERP challenges! report. The analyst report notes that some capabilities within on-premise ERP megasuites - such as human capital management and indirect procurement - are now dominated by SaaS.

However, Gartner points out that other capabilities - such as operational ERP and enterprise asset management - are still largely on-premise or hosted.

“Many organisations hope they can just ‘lift and shift’ their entire current on-premise landscape to the cloud, but this is insufficient in the world of postmodern ERP,” says the report’s author, Christian Hestermann.

Businesses want to move away from on-premise ERP to become more agile, responsive to change and reduce the costs associated with running and maintaining these systems.

However, Hestermann’s research found after implementing and using some sort of cloud-based or SaaS ERP, users and application managers realise many of these promises are not fulfilled or may be harder to achieve than they anticipated.

“While cloud technologies offer choices for how to deploy ERP systems on different layers of the technology stack – infrastructure as a service (IaaS), PaaS or SaaS – they do not transform ERP solutions into something totally different,” says Hestermann. “Cloud technologies alone do not automatically ‘fix’ all of the problems associated with on-premise ERP. In fact, they can create some new challenges.”

Moving customers to the cloud

In a blog post covering the major ERP providers, Frank Niemann, vice-president of enterprise applications and related services at Pierre Audoin Consultants, says SAP has not been particularly successful at getting customers of its on-premise ERP to move to the cloud.

He says its cloud-based product, ByDesign, is not SAP’s top priority any longer. According to Niemann, SAP would rather businesses buy S/4 Hana, which can be deployed both on-premise and in the cloud.

“With Netsuite, Oracle has a clear chance to win market share in the cloud ERP business, as it buys a supplier with existing customers and a partner network,” says Niemann. “With this, Oracle has a clear advantage against SAP.”

This shows in the company’s latest financial results, where Oracle’s first quarter 2017-18 cloud revenue was boosted 51% by NetSuite.

“With SaaS revenue up 62%, our cloud applications business continues to grow more than twice as fast as,” says CEO Mark Hurd.

“ERP is our largest and most important cloud applications business. We now have about 5,000 Fusion ERP customers, plus 12,000 NetSuite ERP customers in the Oracle Cloud. That’s 30 times more ERP customers than Workday,” he says.

Early days for S/4 Hana

Meanwhile, SAP admits it is still early days for S/4 Hana. In a transcript of its second quarter 2017 earnings call posted on the Seeking Alpha financial blogging site, CEO Bill McDermott says: “We are in the early days of the S/4 Hana momentum.

“First of all, if you apply the 80:20 logic, you’d be a lot closer to 15 or 20 than you would be to 80% in terms of penetration. We’re making a bold move into customers that haven’t seen SAP and may not be thinking of SAP in the mid-market. I would call this the earliest possible days of S/4 Hana in terms of the rotation and the real catalyst for continued growth in the company.”

The mid-market is important for SAP and Oracle. “From a functional standpoint, NetSuite is mid-market, but technically NetSuite can scale,” says Neimann.

NetSuite is a viable product to implement in regional sales or services offices in combination with Oracle eBusiness suites for manufacturing facilities. “You may choose to run NetSuite in a new subsidiary,” he says.

Similarly, SAP’s Business ByDesign can be used in smaller subsidiaries to feed into its core ERP.

Infor is another of the major ERP providers moving to cloud. It offers versions on Amazon Web Services as well as a multi-tenanted SaaS variety. Infor has taken a vertical approach to cloud, combining different products for specific industries.

Forrester’s 2017 Vendor landscape: SaaS ERP applications report notes: “Infor is seeing increasing demand for single-tenant ERP cloud deployment, as well as some demand for SaaS ERP. Based on recent financial disclosures, Infor’s subscription revenue now exceeds its software licence revenue.”

Microsoft in the cloud ERP market

Microsoft is also making a big push in the cloud ERP market with its Dynamics 365 for Operations product. This is positioned as a visionary in Gartner’s eponymous Magic Quadrant for cloud core financial management suites.

“Microsoft Dynamics 365 for Operations is still early in its life cycle. Although Microsoft has a comprehensive partner training programme in place, ecosystem skills and knowledge are still developing,” Gartner notes.

Below-average customer feedback

The Magic Quadrant research also notes that Microsoft received below-average reference customer feedback.

“Issues cited by survey respondents mainly related to being early adopters of a new cloud solution that is early in its life cycle,” says the Gartner report.

“Microsoft has not been successful in large enterprises, but plays very well in the mid-market,” says Niemann.

Various studies from the IT analyst show businesses are starting to use cloud ERP.

These products do not necessarily replace all the functionality of existing on-premise software. Some, such as Workday, are only suitable for certain sectors.

For instance, Neimann says Workday lacks support for manufacturing, but it probably has the features a professional services organisation will require.

The general consensus is that cloud ERP tends to be far more flexible and potentially more cost-effective compared to traditional ERP.

As 451 Research notes, they also offer an opportunity for businesses to define new linkages between business processes that previously could not be easily achieved in the on-premise world.

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