Traditional vendors of IT products and services sometimes argue that systems deployed on premise are more cost-effective in the long run than their cloud-based counterparts. Licensed software may have higher acquisition costs, but they’re amortized over a fixed time period.
In contrast, software-as-a-service (SaaS) subscription fees—which continue for the life of the offering—take the form of recurring per-user fees. So, would SaaS enterprise resource planning (ERP) save money for your organization?
Cloud ERP providers argue the upfront savings are significant, and the real benefits of SaaS aren’t in direct cost savings, but in strategic advantages. The cloud reduces the effort needed for ongoing support, and users can devote a higher percentage of IT spending to new initiatives.
For organizations to make intelligent decisions regarding the cloud, it’s important to understand the relative costs of SaaS versus on-premise systems.
Below is an outline of the strategic benefits of cloud computing beyond cost savings—supported by analytics from a 2016 NetSuite survey—and recommendations on developing a road map for migration to the cloud.
In a recent report, NetSuite asked 13 respondents with an annual revenue between $40 and $2.5 billion to survey their industries and cloud portfolios.
By comparing their high-level IT spending metrics against standard industry benchmarks, NetSuite found that organizations which fully or largely migrated to the cloud saved an average of more than 20% in IT spending as a percentage of revenue. Savings measured on a per-user basis were 16%. These savings came not only from a reduction in data center spending, but also from lower IT personnel costs.
On average, cloud users spend 21% less on IT as a percentage of revenue and 16% less on IT on a per-user basis than other organizations in their sectors.
To better understand the savings, NetSuite compared the line-item mix of IT spending for cloud users against a mix of industry benchmarks.
Data Center Spending
Cloud users showed a significant reduction in data center spending. The industry average shows 11.7% of the IT budget was allocated to data center spending, while cloud users only spend 7% of their IT budget on data center infrastructure.
Cloud providers can deliver these services less expensively because they pool computing resources for many customers and realize economies of scale that few organizations can attain on their own.
More Efficient IT Personnel
Cloud users also achieved significant savings in IT personnel expenses.
IT staff compensation was the largest line item in the IT budget at 42.3%, but cloud users only allocate 30.9% of their IT spending to personnel. These savings come primarily from reduction or elimination of data center staff and improved productivity of application personnel who can work with more productive application platforms.
SaaS also minimizes the burden of version upgrades; application personnel are more productive and able to focus on higher-value activities—for example, implementing new functionality and business process improvement.
Cloud applications may lead to lower overall IT spending because organizations tend to customize cloud systems less often than they do traditional licensed software.
NetSuite found that for the median cloud respondent, custom software comprised 13% of the application portfolio, while the industry median for this metric is typically 20%.
Modern cloud applications generally provide capabilities for the customer or implementation partner to tailor the software to specific customer needs. In some cases, customers can build extensions or entire custom applications using the vendor’s platform-as-a-service (PaaS) capabilities. These customizations or extensions generally carry forward with new versions of the system. They don’t drive the same level of support requirements as modifications to traditional on-premise software.
Investing in Innovation
Cloud users spend a greater percentage of their IT budgets on new initiatives and less on ongoing support of existing systems.
NetSuite found organizations across all industries currently spend about 80% of their IT budget on ongoing support leaving only about 20% for new initiatives. Cloud users, on the other hand, only allocate about 69% of their IT budget for ongoing support, leaving about 31% for deploying new systems and capabilities.
Not only do cloud users spend less on IT overall, but the amount they spend is more heavily weighted toward innovation.
The implications of this finding shouldn’t be underestimated. Few organizations can provide their IT department with a blank check. Yet, user demand for new systems and IT capabilities continues to increase. In addition, business leaders demand new systems, better analytics, mobile deployment and a host of capabilities to make the organization more competitive.
If IT budgets are limited, where can IT leaders find resources to satisfy these demands? The IT department can become more efficient in how they support existing systems with cloud computing.
Benefits Beyond Cost Savings
There are significant cost savings from moving an organization to the cloud, but there are also strategic advantages. We’ve outlined four of the strategic benefits of SaaS beyond the obvious reduction of IT infrastructure.
Speed of Implementation
SaaS eliminates all upfront activities for installing hardware and software, and it allows customers to begin configuring and focus on business process design immediately.
In addition, the vendor assumes all responsibility for applying patches and fixes required during the course of the implementation.
Resource pooling and rapid elasticity are essential characteristics of cloud computing. These allow cloud applications to scale instantly to meet both short-term and long-term increases in transaction volume, storage requirements, and network bandwidth.
Few internal IT organizations can afford to maintain excess computing capacity to accommodate variability in demand, or as a contingency, for future needs. Cloud computing ensures that, from the standpoint of computing resources, the customer will never outgrow the system.
Ease of Upgrades
With on-premise software, many problems arise from customers using different versions of operating systems, databases, and middleware. In some cases, customers have modified source code which can lead to further complications. When fixing bugs, vendors need to recreate and solve problems for each customer’s specific configuration.
The best-designed SaaS applications have only one version eliminating those problems. Many SaaS providers give customers access to new features without forcing them to go through periodic version upgrades. The minimization or elimination of version upgrades makes IT personnel more productive and allows them to focus on activities that have more value to the business. The best SaaS providers push out new functionality to customers on a more frequent basis, allowing faster consumption, with little or no action required on the customer’s part.
As a result, organizations upgrade their cloud-based systems more often, and rapidly adopt new features from the software provider, potentially leading to further innovation. It also mitigates the risk of the system slowly becoming obsolete due to the customer’s failure to apply version upgrades.
With on-premise systems, organizations may need significant lead time to add a new production facility, enter a new international market, or assimilate a new acquisition. Such changes could require the addition of a new system instance or even the addition of a new data center.
Fast-growing organizations could find cloud-based systems remove impediments to growth. They’re more flexible, allowing new facilities or new international territories to be added without adding new hardware or system instances.
Moving Towards a Cloud based ERP
Beyond cost savings, the strategic benefits of cloud computing—speed, scalability, ease of upgrades and flexibility—argue strongly in favor of SaaS as the center of the IT strategy for most organizations.
Potentially Retaining Some On-Premise Systems
Despite these financial and strategic benefits, there may be cases where organizations need to retain on-premise systems. Examples include situations where the public network infrastructure isn’t reliable enough for remote access, as in some developing countries or even in some rural areas in developed countries.
Concerns about security, privacy, and loss of control—whether justified or unjustified—may inhibit a wholesale move to the cloud.
Most organizations might find moving most, if not all of the organization’s IT systems, to the cloud is justified.
When IT leaders are ready to pursue this strategy, they could consider the following recommendations:
- Get management’s commitment to the cloud upfront before investing effort in cloud migration strategy. It’s difficult for an IT leader to pursue these developments without firm management backing.
- Conduct an application portfolio health assessment. Understanding the priorities for upgrading or replacing existing applications is a critical first step in developing a road map for migration.
- Make cloud the preferred deployment option for new applications. There isn’t a way to move to the cloud if the organization continues to implement new systems on premises.
- Replace problematic applications with cloud equivalents. Most mature organizations have a certain percentage of applications that aren’t satisfying users and need replacement. Replacing such applications with newer cloud alternatives is an opportunity to kill two birds with one stone.
Once the health check is complete and the future of each application system determined, the organization’s long-term IT road map can be refreshed.
The IT strategy will spell out a series of initiatives to replace, upgrade, and migrate each system to the cloud or to other off-premise providers. The good news is that, as our survey shows, the organization should begin to realize cost savings and other benefits of cloud deployment even if some systems remain on premise.
We’re Here to Help
If your organization has any questions about implementing cloud ERP, please contact your Moss Adams professional.