Will businesses opt for SaaS in next ERP lifecycle?

As companies weigh up options for enterprise resource planning (ERP) replacement in the current upgrade cycle, should businesses opt for SaaS-based or on-premise ERP? Jenny Williams reports

As ERP systems near the end of a current lifecycle, CIOs are assessing upgrades or replacements. With firms such as Salesforce.com, NetSuite and RightNow offering alternative software-as-a-service (SaaS) ERP systems, should businesses move to the cloud?

The short answer is that on-premises ERP is not going away. Srinivas Anne, head of the upgrades centre of excellence for SAP practice at Infosys, says: "SAP is a large packaged ERP software which cannot be replaced by SaaS services. SaaS services are appropriate for small transactional operations and not for ERP."

Amitava Sharma, global head of SAP Services at Wipro Technologies, says the Indian IT service provider has experienced an increase of SAP upgrade enquiries during the past few months.

"Customers feel that ERP is too mission-critical to be on a SaaS platform, which is not proven to be reliable and secure yet," he says.

This means businesses are continuing to invest in ERP, according to Denis Pombriant, CEO at Beagle Research Group.

"We are in the middle of an ERP system replacement cycle, when systems installed at the turn of the century to deal with four-digit dates are ageing and being replaced by newer, more robust and less expensive solutions," he says.

Roger Newman, senior vice-president at Mahindra Satyam, says customers on earlier versions of SAP that lack third-party application integration or SAP support are now resorting to complete upgrades.

Newman believes more customers, particularly consumer-facing companies, are using SaaS-based products to extend ERP applications, for example CRM, SCM, enterprise mobility and analytics.

Using ERP SaaS to complement on-premises ERP

A recent Forrester survey of 2,403 IT decision-makers showed that only 15% of organisations plan to implement ERP SaaS before 2013. Two-thirds (10%) of planned implementations will use ERP SaaS to complement existing ERP on-premises services.

Similarly, Gartner says on-premises spending was still 8.5 times higher than spending on SaaS in 2010, although the compound annual growth rate (CAGR) for the SaaS enterprise application market is expected to be 15.8% by 2014, compared with growth of 5.3% in the overall software market.

Ray Wang, CEO at Constellation Research, says the adoption of SaaS offers companies the chance to refresh legacy software, which would otherwise require additional resources and support systems.

"Typically, large organisations are trying out ERP in particular divisions or departments as two-tier ERP. This often becomes a conversion piece, with the two-tier becoming the first tier," he says.

Zach Nelson, CEO of on-demand enterprise resource planning (ERP) software firm NetSuite, admits SaaS is still only a small percentage of the overall ERP market, but he believes NetSuite can still entice new business customers to completely migrate from SAP, Microsoft Dynamics GP and even Salesforce.com.

Making the conversion to cloud-based ERP

Nelson believes businesses are ready to make the shift from traditional to cloud-based ERP systems. He says there has been a "mass migration" among large enterprises with ctionomplex businesses from legacy Microsoft Dynamics GP and SAP to NetSuite.

The company has increased subscrip and support sales by 20% since last year, to reach $45.8m in the first quarter of 2011.

"This is not a green field industry. Everyone has an ERP system so we are always replacing something," says Nelson.

"We cannot do a 50% off ERP software deal and get people to move. Instead, CEOs are looking inside their firewall and looking at how they run their business. Companies realise the way they are running their business is a pre-internet model, which does not work well in the internet age," he says.


Case study: How figleaves.com uses RightNow's CRM system 


Lingerie e-retailer Figleaves.com chose RightNow's CRM system to bring its contact centre back in-house after previously outsourcing its customer services.

"With an outsourcer, the turnover of staff is quite high, so you need to train the new people coming in all the time, and this did not fit with our idea of having experts on the products and the website," says Sarah Arnold, Figleaves.com's customer service manager.

RightNow Web Experience provides automated responses to 80% of customer questions, while 30 in-house agents deal with the remaining queries over the phone, by e-mail or via RightNow Chat.

The retailer found that 50% of the 5% of customers using RightNow Chat made an immediate purchase.

"Our staff are the experts. They are not call handlers, they are personal shoppers with deep knowledge of all the products," says Arnold.

"I have had many conversations with customers moving from SAP or Microsoft Dynamics GP as this stuff was designed before the internet existed," he says.

Nelson says flexibility is driving SaaS into the enterprise, and not even a cloud outage such as Amazon's will deter businesses from buying into cloud-based applications.

Aside from reliability concerns, Nelson admits lock-in will always be an issue. "With applications, you immediately get lock-in, in the sense that users are trained to use that product and you have to migrate data. It is never easy to switch applications."


Customers can make use of NetSuite's one-year exit clause to switch applications and avoid lock-in.

"The biggest customer concern for NetSuite is a functionality battle. Sometimes [companies] may get so big in an area that we do not have deep vertical functionality," says Nelson.

But Nelson doubts this will be a major obstacle. "The lack of version lock-in, customisation and upgradability are the reasons the cloud will win. "[The cloud's] flexibility means you can change your business on the fly, which you cannot do on a hosted version."


Watch out for additional SaaS costs


However, Sharon Mertz, research director at Gartner, says businesses are currently comparing the cost of on-premises maintenance with SaaS.

She explains that SaaS providers often add on extra storage and additional features costs. "These are nuisance charges. Unless the SaaS solution is strictly a one-off purchase, companies want to integrate it with the back office [which incurs extra costs]."


Benefits and drawbacks of subscription model


Xabier Ormazabal, senior manager of product marketing for EMEA at Salesforce.com, says Salesforce.com is making huge investment into datacentres to allow for "greater economies of scale" and to make storage cheaper.

"Storage for data used to be based on user licences. As we move to cheaper solutions, we can pass [the savings] on to customers to have more storage," he says.

Ormazabal says the company tries to make transparency as important as reliability for its SaaS: "We have made a big effort with trust.salesforce.com to see real-time connectivity problems to identify what the issue is."

Overall, he believes companies can benefit from the SaaS subscription model. "Traditional software is about buying upfront, but a subscription service means growing usage as you need to," he says.


Case study: Why 2Pure UK migrated to NetSuite for CRM, ERP and e-commerce


Brand distribution, wholesale and marketing firm 2Pure UK is using NetSuite's integrated system for CRM, ERP and e-commerce to remove manual processes within its business. The firm migrated from on-premises Sage software.

George Bowie, 2Pure director, estimates that staff have 25% more time available to focus on sales. "Our turnover increased by 95% last year, and NetSuite has been a key component in supporting that growth," says Bowie.

Using NetSuite, 2Pure builds multiple standalone sites, which use NetSuite's single database for all e-commerce data.

"Our separate brands have different audiences and it is hugely important for us to maintain distinct online identities," says Bowie.

As a result, Ormazabal says the company is now actively targeting CIOs on how they can cut application backlog and develop apps five times faster to address "a lack of understanding of what the cloud can provide".But its subscription model does not cover liability for data loss. "In terms of liability, we think the greater liability and business risk of our software is in it being easy to use and data quality," Ormazabal argues.

Rob Desisto, vice-president at Gartner, says even SaaS providers' guaranteed uptime at 99.5% leaves "too much wiggle room" in terms of planned downtime.

"If you consider ERP a mission-critical application, the SaaS provider needs to provide strong service level agreements (SLAs) for uptime and disaster recovery commitments [to meet] recovery point and recovery time objectives - something that most SaaS providers fail to do," he says.


SaaS account managers add value

Other aspects of SaaS are starting to show signs of maturity. CRM SaaS firm RightNow introduced client success managers in 2010 to help customers meet business targets.

"The goal is to provide the same value as a traditional support environment," says David Vap, chief solutions officer at RightNow.

Vap says the company introduced a new cloud services agreement to "push the concept of software as a utility" and allow customers to terminate contracts after short periods of time.

Vap confirms RightNow is making additional investment into new datacentres and thinking hard about how its disaster recovery works alongside its compliance with data governance rules.

Combining on-premises and SaaS ERP during transitional period

In the current ERP replacement cycle, companies have the option to adopt ERP SaaS for the first time. Considering the well-versed CIO concerns of cloud reliability, security and legal liability issues, most companies are likely to opt for a hybrid environment over the next 10 years, using some on-premises and some SaaS before considering a complete migration to the cloud.

As the figleaves.com example shows (see box above), sometimes a business will adopt SaaS if it decides to bring back an existing service in-house. While the experts Computer Weekly has spoken to do not regard SaaS as a replacement to ERP, it is clear that SaaS can supplement ERP systems.

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