by Michael Nadeau

ERP heads for the cloud

Sep 20, 2016
CIOCloud ComputingEnterprise Applications

Cloud-based ERP will eventually rule, and on-premises software is destined for legacy status. How can IT ensure a smooth transition?

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The cloud is making on-premises ERP implementations an endangered species. This is a big change from just a few years ago, when cloud ERP was met with skepticism, particularly among large companies with big investments in on-premises systems. Attitudes have changed as IT and business management have come to understand the cloud’s capabilities and value proposition.

Cloud-based ERP platforms rely on hosted internet services, rather than an on-premises networked server infrastructure, to deploy core enterprise systems such as financial applications, human resources (HR) tools and supply chain management (SCM) software. The original advantages of cloud ERP were faster deployments, immediate enterprise-wide availability of the latest versions of applications, less need for on-site support and simpler pricing. Later systems featured greater ease of use, mobile-enablement of applications and easier integration with outside data sources. Today, the most up-to-date cloud-based ERP systems have internet of things (IoT) and machine learning capabilities.

With cloud-based ERP offering so many pluses, why even consider an on-premises option? Even market leaders SAP and Oracle admit that few companies are deploying new on-premises ERP systems. Research firm Gartner predicts that the cloud will become the default option for software deployment by 2020. The writing is on the wall: Cloud will rule, and on-premises ERP is heading for legacy status.

Changing ERP attitudes

Two barriers to cloud ERP adoption had been security concerns and resistance to change among IT leaders. The latter is understandable, considering the investment made in the software, training and support infrastructure of on-site systems, not to mention the risk associated with replacing any core business system. The security concerns were tied to the belief that remotely hosted systems were inherently at greater risk than on-site deployments — especially if they were housed in multitenant public cloud setups where a single instance of application code serves many customers.

Those areas of cloud’s perceived weakness are now seen as strengths. For example, with on-site IT infrastructures, security degrades over time as upgrades are skipped and new software with additional risks is integrated. With cloud-based ERP, the latest security updates are always deployed, and it’s easier to maintain the integration points to keep up with security for apps outside the core system. “Security seems to have been solved,” says David Linthicum, senior vice president at consultancy Cloud Technology Partners. “The sky hasn’t fallen.”

While IT teams might get attached to systems they know, they hate the constant update/upgrade cycles, the database maintenance, the training requirements and the customization needed to keep them running. For example, Oracle customer HSBC opted to move to the cloud when it was looking at an 18-to-20-month upgrade project for its on-premises ERP deployment, says Rondy Ng, senior vice president of applications development at Oracle. In contrast to a year-and-a-half upgrade, the cloud migration took about six months: “They started [with their cloud implementation] in October last year and went live with Oracle ERP Cloud applications in April,” Ng says.

Cloud ERP “lets you redirect IT to value-add activities,” says Gartner analyst Mike Guay. “Even if you adopt cloud ERP to redirect IT resources, if you don’t replace everything with cloud, someone still has to manage the infrastructure remaining.”

The ease of scaling cloud-based systems has won over many companies, especially those looking to drive growth with their first ERP systems. “Capabilities like usage-based billing, elasticity and self-provisioning allow companies to grow without a lot of pain,” says Linthicum. This has expanded the market for ERP. Companies that have never had an ERP system before are now implementing them at a rapid rate. Oracle, for example, reports that half of its nearly 2,600 Oracle ERP Cloud customers are new, many of them smaller, growing companies.

One of those companies is The Rancon Group, a Southern California real estate business. “We had an outdated accounting system and were looking to make a big leap forward in terms of better reporting and improved functionality across the organization, says Steven Van Houten, Rancon’s CFO. The company needed a system “with more horsepower” but didn’t want to make a big investment, he explains.

Rancon chose Oracle ERP Cloud because of its project management capabilities, and because being in the cloud makes it more secure. “[Oracle] will always have higher security capabilities than we as an independent organization could ever do on our own,” says Van Houten. Rancon supports its Oracle system internally with two power users, so it hasn’t had to add support staff. An Oracle partner and Oracle itself provide additional support when needed. Now Rancon is looking to move other manual processes to the cloud.

Vendor strategies and customer options

Cloud ERP vendors generally fall into one of two categories: Cloud natives, such as Workday and NetSuite, whose systems were developed for the cloud from the start, and traditional ERP vendors like Oracle, SAP, Infor and Microsoft, which have developed cloud offerings and whose products offer continuity and familiarity to their existing on-premises customers and appeal to new users who want to deploy in the cloud. SAP has hedged its bets by acquiring cloud ERP natives SuccessFactors and Ariba, and Oracle has announced plans to buy NetSuite for $9.3 billion.

A key difference between cloud natives and traditional vendors is in the infrastructure used to support and deliver the services. Cloud natives rely on third-party cloud infrastructure providers such as Amazon Web Services (AWS) or Microsoft. Traditional vendors mostly develop their own cloud infrastructures; the exception is Infor, which partnered with AWS.

“Oracle and SAP have complete control of their stack,” says Guay. This allows them to better optimize performance, but Guay wonders how that model will scale as cloud customers start to outnumber users of on-premises systems. “Will they be able to support [that many customers]? How bumpy will the road look?” he asks. He says he expects those vendors to master the learning curve, but adds that they may have to consider outsourcing to an infrastructure partner.

Cloud natives branch out

Until recently, it was hard to find Fortune 500 companies that had moved core business processes to cloud-native services, which they considered limited and untested. The idea that cloud-native systems had limited capabilities arose from the fact that the vendors typically started by focusing on a single type of application, often financial systems or HR tools, and then slowly built out their suites.

“When companies like Chiquita and Flextronics signed up [for Workday], it turned people’s heads,” says Dan Beck, senior vice-president for product marketing and technology strategy at Workday, whose customers now include Bank of America, Unilever and AstraZeneca.

Workday started with an HR tool that it offered through a software-as-a-service (SaaS) model, and then moved into financials. It has added new point solutions to that core and has been developing industry-specific options.

Most Workday customers use the company’s HR application. They can start with core HR or financial systems and layer on point solutions such as recruiting or planning tools, Beck explains. As they add more Workday functionality, they can shut off redundant on-premises systems.

AstraZeneca, for example, replaced its outsourced HR system with Workday’s Human Capital Management product a year ago. The goal was to have a single global HR system for its 65,000 employees, according to David Smoley, global CIO at the pharmaceutical company. “There was too much pain [with the older system]. We had payroll issues, usability issues, processes we were not able to get to work,” he says. “We tried for a long time to put a fix in place.”

At the root of the trouble was the outsourced system’s inability to handle all of the country-specific requirements that a multinational enterprise has to deal with. Each exception required customization of the system. Workday was able to meet those requirements. Smoley says that AstraZeneca felt confident going with Workday because “it was easy to find Workday customers of equal scale and global breadth.”

AstraZeneca’s approach is to evaluate cloud-based point solutions as business needs arise, but it will still consider on-premises options. “A lot of best-in-class tools happen to be cloud,” says Smoley. “That doesn’t mean all the best tools are in the cloud.”

Multiple constituencies, multiple offerings

Traditional ERP vendors have a dilemma in that they must continue to support their large bases of on-premises users while offering similar capabilities via the cloud. Moreover, their cloud products need to provide clear migration paths for existing customers in addition to standing on their own for new customers.

For new customers, traditional ERP vendors offer a greater scope of cloud-based offerings, particularly in what’s considered the core ERP application suite: financials, SCM, procurement, project management, enterprise performance management (EPM), and governance, risk and compliance (GRC). The challenge for them is to package their offerings in a way that’s digestible for companies of all sizes, across all industries.

SAP’s strategy is to offer three options: HANA Enterprise Cloud, cloud-native systems such as SuccessFactors and Ariba, and a platform-as-a-service (PaaS) offering called HANA Cloud Platform.

HANA Enterprise Cloud is a managed cloud service that allows companies to move their existing SAP ERP systems to the cloud-enabled S/4 HANA application suite. The PaaS offering, HANA Cloud Platform, provides an infrastructure on which to build cloud applications. SAP also offers a version of S/4 HANA that’s scaled for small and midsize businesses, as well as industry-specific versions.

Oracle also has PaaS and SaaS offerings based on its infrastructure and ERP application suite. In an effort to accommodate customers of all sizes, the company takes a modular approach that makes it possible to scale its systems up or down without compromising functionality, according to Ng. For example, smaller companies might not need GRC or SCM functionality; they may start with, say, financials, procurement or project management tools and add more applications as they grow. “We’ve made it simple, creating rapid Oracle ERP Cloud implementation models for fast-growing companies,” says Ng, noting that Pandora deployed Oracle ERP Cloud with that approach.

Infor has chosen an industry-specific approach to the cloud, with offerings hosted on AWS infrastructure. “Many customers start small with sales or expense management,” says Lisa Pope, global head of cloud sales and strategy at Infor. “Then they quickly add two or three more apps, and then their core apps.” New customers, particularly small and midsize operations, tend to have all-cloud strategies.

In March, Microsoft released a product called Dynamix AX, which was designed for, and built on, its Azure cloud platform. Like other traditional ERP vendors, Microsoft offers industry-specific versions of its applications, but it seems to be focusing on the user and customer experience as its main selling points. That means emphasizing ease of use, mobile access and real-time intelligence capabilities on the front end and scalability, security and lower maintenance needs on the back end.

Traditional ERP vendors have developed a wide range of industry-specific on-premises offerings that have preconfigured processes and workflows and might also be able to handle needs unique to an industry. They have extended that strategy to the cloud, and cloud-native vendors have followed suit.

“Setting up ERP is a long, complicated journey,” says Prakash Darji, senior vice president and general manager for PaaS at SAP. “Industry-specific applications make it easier for new customers to get started on the ERP journey.”

‘Business enablement’

The deciding factor for companies evaluating cloud-based ERP systems boils down to the value added and practical considerations like cost, ease of implementation, level of support and issues related to legacy systems. “Sometimes it’s about business enablement,” says Beck. That enablement might be providing mobile access to remote staff or deeper, faster analysis and reporting.

“Savings in hardware and operating expenses are not enough,” says Darji. “[Customers] need to shift to something significantly better, not the ERP of yesteryear.”

Pope says that Infor does an assessment with cloud customers that weighs benefits against ongoing overhead such as hardware, database maintenance, labor and applications, as well as the costs associated with upgrades. “The savings are usually about 20 percent, but it varies by industry and customer. Even if the costs are close, senior management can make the decision [to go to the cloud based on other benefits],” she says.

“Companies need to do an ROI analysis to know the costs and risks to migrate,” says Linthicum, adding that they will need to decide which elements to replace, refactor or retire. The risks and costs will be higher for companies that have built their business around processes specific to an on-premises ERP system, especially if they’ve done a lot of customization in that system’s proprietary language. “The cloud has always been hyped as cheaper, but that’s not always the case,” he says.

Many companies are taking a cloud-first approach to ERP and the ancillary software that connects to it. This means that their preference is to use a cloud-based option if it makes sense. This strategy will eventually wean the company off of its on-premises systems without the disruption and risk of moving everything to the cloud at once.

In the meantime, these companies support hybrid cloud/on-premises setups, and that can present challenges. Oracle customer GE, for example, has more than 300 ERP instances globally. “Because of the size and customization, GE can’t rip and replace them,” said Ng. GE’s strategy is to use the cloud for its fast-growing businesses that might be hampered by its legacy systems.

Greater ease of use and accessibility

Integrating applications and data that live outside a core ERP system has always been a nightmare. Interface connections need to work with every version of the ERP system across the enterprise. APIs often don’t exist, and building connections to tie everything together might require using a programming language that’s proprietary to the vendor of the on-premises system.

Cloud-based ERP relies on configuration, since the vendor must maintain consistent system code for all customers. That consistency enables benefits beyond the elimination of upgrades. APIs can be standardized, and systems work more reliably and are easier to keep up to date. ERP vendors can build richer API libraries, which broadens the scope of data available for analysis and reporting in the ERP system.

A single code base also brings consistency and flexibility to the user experience. Cloud-based applications raise expectations for ease of use and accessibility. The cloud allows for greater “abstraction from complexity,” says SAP’s Darji. “We are providing a consumer-grade experience [through S/4 HANA]. You can’t expose [users] to the back-end complexity.” What this means is that, rather than using a generic interface that requires users to sort through many options, SAP can simplify user interfaces for specific tasks and specific roles.

“No matter what kind of features the ERP system has, businesses will never derive ROI from it if their employees won’t use it,” says Umran Hasan, a senior marketing manager at Microsoft. Speed to insight from data, ease of use, mobile access and flexibility for employees to get what they want when they need it will increase usage, and all are enabled by the cloud.

It’s even easier to bring the interface down to the individual level — for example, allowing sales reps to see personalized views of their deals in progress and performance. While this is possible to do with on-premises ERP, it requires a great deal of customization.

The capability to create specialized and simplified user interfaces provides the flexibility needed to make ERP applications accessible on different devices, such as smartphones and tablets.

Smarter, more connected

With on-premises ERP, separate tools pull in data to analyze and report on it, perhaps hours or days after the transactions that created that data occurred. This separation of data, transaction and analytics has been responsible for shortcomings in even the most essential reporting areas.

“It’s very common to talk with customers who have never had a single global rollup accounting report that they can depend on,” says Workday’s Beck.

Cloud-based ERP makes it easier to embed the analytics and reporting in the transaction system so users can see reports in real time. Most cloud ERP vendors use an in-memory storage and analytics architecture, which provides the speed to do real-time analysis that traditional server-based storage just can’t match.

The consistency of cloud ERP updates and integration points makes it easier to pull all of the relevant data into the system and report on it at the transactional level, even if that data is outside of core ERP applications.

The level of connectedness and the embedded analytics that cloud ERP offers are opening up new possibilities in two areas. First, it’s now possible to pull in data from outside sources, specifically social media and the connected devices that make up the IoT. Second, those capabilities make it possible to automate decision-making or predict behavior — actions that rely on machine learning, where the system anticipates outcomes based on patterns.

The capability to automate decision-making by predicting behavior can be useful in accounts receivable operations. For example, Workday’s Beck suggests that the system might analyze customer payment patterns to see who is more or less likely to pay their bills, and then make recommendations about which customers to target in bill collection efforts. For large companies, a small improvement in payments could add millions of dollars to the bottom line.

Improved integration of enterprise systems with social media can offer payoffs of its own. For example, Workday’s system can pull information about people with certain skills off of LinkedIn — a capability that could prove valuable for recruiting.

The IoT opens up a lot of interesting possibilities for giving companies deeper, more refined views of their businesses. SAP’s Darji cites asset valuations as an example. “You typically put assets on a balance sheet and depreciate them over time,” he says. “But if you put sensors on those assets, you can valuate them based on utilization instead of time, allowing you to write off underutilized assets.”

Go cloud or go home

More companies are likely to take cloud-first or even cloud-only approaches to ERP as the cloud becomes the dominant means of deploying enterprise software. In fact, businesses may find themselves without a choice in the near future. ERP vendors are pursuing their own versions of cloud-first strategies and are pouring resources into developing their cloud-based ERP offerings. Gartner predicts that 30 percent of the 100 largest software vendors will shift to cloud-only models by 2019. Companies that don’t embrace the cloud may find themselves with limited options — and at a competitive disadvantage.

Michael Nadeau is an analyst and writer in New Hampshire.