Revenues for traditional ERP licences have been declining since 2013, and with SAAS revenues on the rise, the gap will only get bigger as the cloud ERP app market matures.
PWC reports that investments in SAAS applications will more than double to $78bn while investments in traditional ERP deployments will decline by more than 30% to less than $15bn in the next year. The rise of SAAS is undoubtedly taking its toll on traditional licencing revenues, and even traditional ERP vendors are seeing their SAAS offerings overtake their traditional ERP sales in terms of revenues.
So is traditional ERP finally broken?
Maybe. What is for certain is that “Hybrid ERP” – a term coined by Gartner, is becoming the go-to standard for many organisations struggling to maintain legacy ERP systems. Sometimes referred to as “two-tier ERP”, Hybrid ERP is a mix of legacy, centralised ERP platforms combined with departmentally focused, cloud solutions; such as SAAS solutions for payroll, invoicing or workforce management. Gartner predicts that most organisations will move away from monolithic ERP platforms to a hybrid ERP approach within the next 5 years, but warns that it may not improve TCO over the solution lifecycle if not managed carefully and integrated into existing systems and working practices.
Organisations are now looking at cloud-based applications to fulfil functionality that would traditionally sit within a comprehensive ERP package, but focus on a single function or department, such as:
- Web and ecommerce platform
- Workforce management
- Invoicing and self-service capabilities for suppliers
The flexibility of cloud is obvious, but why are more organisations really moving away from traditional ERP deployments in favour of cloud based SAAS solutions for parts of their ERP strategy?
- Cost effectiveness
PWC predicts that cloud based SAAS ERP models are 6x less costly to implement, manage and support than traditional ERP deployments, due to the high costs associated with changing large scale, mission critical ERP solutions.
- One size does not fit all
Without heavy customisation and development, off the shelf ERP platforms often don’t fit a company’s operations so hybrid ERP offers an approach for organisations to ‘customise’ their ERP approach by moving to cloud SAAS applications for specific functions whilst leaving the core ERP platform in place.
- Applications can be chosen by departments themselves.
Departments now have the autonomy to make choices about the applications they choose to work with, by bolting on function specific tools to their central ERP system for a hybrid approach to software management. This now means that the payroll application utilised by a payroll department can be chosen by them, rather than dictated to them by a central IT team deploying an organisation-wide ERP solution. This gives department leaders more control over how they run their operations and the tools that their teams work with.
- Hybrid ERP suits companies with diverse locations and operations.
Centralised ERP platforms can work well if there is just a handful of office locations, based in one country. However, once a company has offices in a number of countries, legacy ERP systems struggle to keep up with localisation requirements such as country-specific regulations or financial guidelines. Utilising cloud SAAS solutions to supplement a central ERP system could be a way of ensuring that subsidiaries meet the requirements required locally without impacting the entire organisation’s operations.
- Legacy applications don’t work for the world in 2015
Working practices continue to change rapidly as communications between suppliers, vendors and buyers become near-instant through technology and connectivity tools. This impacts on ERP platforms which can be seen as outdated and slow to react in comparison with modern cloud apps that are being developed with speed and agility in mind. This chasm between legacy ERP and modern working expectations causes organisations to look outside of their onsite ERP systems for a more flexible approach, in order to be more agile for suppliers and responsive to clients.
- Modular approach is the rule, not the exception
The days of making large capital IT purchases for multi-year ERP deployments are nearing their end, as IT and business leaders want faster results from their IT investments, and cannot wait 2 years for a solution to be implemented (and then many more years while the solution is in use) in order to access new functionality. Taking a modular approach where new services are commissioned on demand from the cloud makes perfect sense for organisations experiencing growth; who cannot predict what their organisation will look like five years from now. It’s also more cost-effective and accessible financially for smaller businesses who can’t afford the outlay of a company-wide ERP upgrade.
- User experience is critical
Many ERP programs were originally scoped, designed and delivered by central IT teams with input from department heads on what the business’ requirements were. Tactical SAAS cloud services that are overlaying traditional ERP applications are often chosen by the individuals who will be working in the proposed application, so many are now designed with user experience as the main deliverable, rather than IT teams defining the solution requirement.
Most cloud SAAS ERP solutions have a strong focus on usability, and are often delivered within a standardised web interface for easy adoption. The apps are usually simple to purchase, making it easier than ever for businesses to trial and test solutions and integrate them quickly into operations, compared with a rip and replace of an ERP infrastructure.
- Pay as you go capability
ERP is usually a one size fits all affair, or at most has a “small, medium and large” offering. With a hybrid ERP model, cloud SAAS apps can be purchased on a pay-as-you-go basis, linked to the number of users rather than the size of the organisation. This can prove to be a much more scalable and cost-effective model for organisations who just need tactical solutions to immediate problems, without disrupting their existing ERP strategy.
Hybrid ERP definitely looks set to be a growth area as legacy ERP solutions become less attractive both in terms of cost, ease of deployment and functionality. The key to a successful hybrid ERP deployment will be ensuring that procurement controls are in place for new cloud SAAS ERP apps to prevent sprawl across the organisation and that there is an internal team focused on integration between solutions, building APIs where possible between applications for seamless delivery.
With many cloud apps being delivered from the same public cloud platforms, this process of integration should become easier as the base infrastructure and architecture converges between providers.