CIO — A recent report from Gartner throws a big bucket of cold water on software-as-a-service ERP hype, especially for larger enterprises. Gartner analyst Denise Ganly writes in the "SaaS Impact on ERP" report that enterprises' dire need for a suite of integrated ERP solutions is not something that SaaS vendors can reliably deliver right now.

"Because of the complexity of ERP suites, SaaS offerings for administrative and operational functions typically have provided functionality that is confined to one domain, such as sales force automation, or one business process, such as payroll," Ganly writes. "Thus, ERP SaaS suite offerings are still immature." (To read about an on-demand ERP provider's nascent efforts, see "PeopleSoft Vets Born Again: Can Two Legacy ERP Guys Get IT Executives to Buy into On-Demand Applications?".)

Some of her other findings include: SaaS ERP suites won't be viable options for large enterprises during the next five years. "Except for use in two-tier ERP deployments," she notes, "large organizations should ignore this space."

What's Stopping SaaS ERP

Ganly notes that despite the hype, there are sound reasons why SaaS ERP suites aren't quite ready for prime-time enterprisewide deployments. (See "Why ERP Systems Are More Important Than Ever" for more on the necessity of integrated ERP software suites.)

First she urges CIOs and business-technology leaders not to be "deceived" by impressive SaaS ERP growth data. "Much predicted growth in this market will be driven by the adoption of human capital management SaaS and financial SaaS point solutions," she writes. "The growth rate for SaaS ERP suites will be a small proportion of the overall market growth, because mature robust solutions are unlikely to emerge by 2011."

Next, Ganly points out that one of the big drivers of SaaS ERP is the extreme IT staff constraints faced by many organizations, and the SaaS model "appeals to organizations because it can free up staff to concentrate on more-strategic, value-adding processes." In addition, many of these organizations believe that SaaS ERP is "instant on," which means that it can be implemented with little or no intervention. "You just turn it on," she writes. "However, the business still must be re-engineered, processes redefined, integration points defined and so on."

In other words, Ganly writes, "The instant-on perception that drives adoption also makes it an inhibitor."

Other inhibitors to more widespread SaaS ERP adoption, Ganly contends, relate to total cost of ownership (TCO). TCO of "SaaS ERP suites likely will be significant and may not compare favorably with on-premises solutions," she adds. This problem applies to vendors as well. SaaS vendors "often have unrealistic expectations of their operating costs," she writes. "The multitenant architecture needed for SaaS ERP suites results in high internal efforts and costs for the initial setup and the ongoing maintenance and upgrade of the system."

Security has also been an issue with SaaS ERP offerings, "especially with regard to financial data and privacy concerns," Ganly writes. "Vendors must prove to organizations that are considering SaaS ERP adoption that their security and privacy concerns are unfounded through super low-cost or no-cost, proof-of-concept trials, encouraging early adoption through value pricing and getting early adopters to share their success stories."

SaaS ERP's Future

Even with the successes that SaaS ERP efforts are having in the SMB space, Gartner Dataquest predicts that SaaS will constitute just 16.7 percent of the total ERP market by 2011.

"SaaS ERP will continue to grow, particularly at the administrative level," notes Ganly. "However, the complexities of integrated ERP suites, along with a lack of credible vendor interest in this segment, means that truly integrated offerings (such as SaaS ERP suites) for large enterprises are unlikely to emerge in the near future."

Ganly recommends that IT organizations must be proactive when it comes to SaaS. "Engage the business before it decides to 'go it alone' on SaaS ERP initiatives," she writes.

In addition, she urges large enterprises to "not consider SaaS ERP suites as viable options in the near term. Although the entry fees for SaaS are much lower than for on-premises solutions, beware of unexpected 'hidden' costs, such as sandboxing, testing and development, storage and integration," Ganly writes. "These may substantially affect the TCO for your SaaS deployment."