Different Models Of ERP Implementation And Their Pros And Cons

On-Premise Model

Discuss About The Disruptive Technology Enterprise Software.

ERP systems and software accounting packages whose main purpose is to automate the business process in organization and making them more focused on their core activities and leave the supporting functions to ERP has gained a lot of popularity in this age of digitalization. It is because digitalization has opened the new doors and also promoted globalization. Today, organizations can have access to the suppliers worldwide and also their customer base has also expanded from domestic to worldwide.  As a result, organizations have much larger operational work, non -value added activities, redundant data entry, multiple entry of data, silos of department. As a result of this, ERPs have become the need of most of the business organisations today that have globalized operations. During the 1990s, ERPs systems were implemented by only the larger organizations as these systems were quite complex and often requires change management and has inherent risk. Due to their massive cost structure, the return on investment (ROI) also take long duration. However, these dynamics have completely changed today. Due to the popularization of smart phones, Internet and technology, e-commerce and e-business have become quite common today and many organizations conduct significant part of their business using internet. Though cloud computing has become a buzz word today, it has its roots in 1950s. The idea of selling computers like electricity by leveraging sharing of resources has already been developed by compute visionaries like John McCarthy and the APRANT project has also been started for today. However, Amazon web services take this to another level today. There are large number of software, ERPs that leverages amazon web services in creating their cloud based product. Also, Cloud based ERPs come with a far less hassle as compared to traditional on premise model and also quite cheaper and return on investment is also very good.  Though, Cloud computing has quite higher acceptance among small and medium scale enterprises, Large enterprise are still hesitant to opt for cloud computing because they have already established huge sum of money to implement the on premise systems and also over-customized their ERP systems. There is also a middle path between the on premise ERP and cloud computing ERP models which is called as hosted or hybrid ERP. In this model, while companies purchases the licenses of the ERP themselves, they do not buy the storage and server themselves and instead use the services of IAAS (Infrastructure as a Service) Vendors.

Case Study: Nestle’s SAP Implementation

The purpose of this paper is to critically analyse the different models of implementing ERP and their pros and cons. It will also take examples of main ERPs like SAP, Oracle, Microsoft, Infor and Epicor that captures majority of the market.

There are different models of ERP implementation like on premise or cloud. There is no best or worst system as it depends on the objectives of the organization. The organization that wants to save cost usually follow cloud based system and the organizations that want high security of data would follow on premise system. The bottom line is that the choice of ERP system should suit the organization and it should gel with the business objectives of the organization. These different types of implementations can be discussed in detail as:

On premise is also known as the traditional method of implementing ERP in which the organization buys the software, storage space as well as server and maintain the server at their end. Thus, organizations also need to create their own internal IT team on a permanent basis to maintain and monitor the server and database. Also, when organizations buys these complex ERPs, there is often large changes occurs in the organization like business process change, change management so as to motivate the end users to use the new product, testing of the various configurations and thus also requires an implementation consultant. There are organizations like Deloitte and Accenture that provides the implementation guidance to the organizations. This model is used widely by banking organizations and the organizations in financial sector. For example, ANZ bank, Citi Bank, etc. use on premise installation as security is their prime concern.

There is no dearth of case studies and examples of companies that have reported huge improvement in their businesses after implementing ERP on premise. Nestle has started their SAP implementation project in 1997 and choose IBM as consulting partner. After implementation and go live of SAP ERP, Nestle USA has already accepted it achieved a significant return on investment in less than 2 years of time. It is able to reduce the inventory and redistribution expenses and also improved forecasts. It also uses the best of both the worlds. For instance, nestle uses some of the best industry practices of ERP and also wherever it find that its business processes are better than the industry standards, it customized the ERP package.

Advantages of On-Premise Model

On premise systems allows the organization to retain their key business processes by providing customization solution of ERP packages. Also, these systems are quite secure because they can be accessed only from the organization network as they are deployed behind the organization’s firewall and not from outside system (Haddara, et al., 2015). Also, organization has total control over the future releases and updates in this deployment option.

The biggest disadvantage of this deployment option is its costs. Apart from license cost, there is cost of consulting company and infrastructure costs. As a result, return on investment can be seen only in long term. Also, there is continuous expenditure in terms of maintaining internal IT team that will monitor server’s performance and all. ERP vendors also releases the future updates and ask for additional cost to use their latest functionalities. Though on premise deployment option has the choice to go for upgrade or not but the choice is only for short time (Johansson, et al., 2015). After some period, ERP vendors discontinue the support for their older versions in order to reduce their costs and as a result, all the organisations are forced to switch their systems to upgraded version. Total cost for nestle implementation is 210 USD million which is a significant amount. There is also case study of company Fox Meyer drug that went bankrupt in process of implementing their ERP systems.

Not only this, this is the digitalized society and people prefers to work on the go from distant locations. On premise ERPs systems do not allow them as then can be used only in the organizational network.

Also, there are so many stakeholders in ERP projects that it is often difficult to make them agree on a same page and there are lot of conflicts and delays. Apart from this, end users also resists the new products creating chaos. Though, Nestle was able to go live its systems in 2003 after 6 years, but there were so many challenges that the implementation project was stopped after 3 years and scrapped. It was restarted again with a different approach and change methodology.

On premise model also has the option of customization. Though customizations are good when they provide competitive advantage but some companies overlook the costs of customizations and users keep demanding the exact workflow as they were doing in legacy systems and in this process, company ends up in over customizing its ERP systems which is expensive in long term. These customizations are not supported by ERPs vendor and in case of issues or bugs, they again have to take the services of consulting partner.

Disadvantages of On-Premise Model

In this model, organizations takes the infrastructure on a rent from a 3^rd party IAAS vendor and deploy their purchased ERP licenses on that infrastructure. This approach offers the best of both the worlds and has become quite popular these days with the popularization of IAAS vendors like Google, Microsoft and Amazon. This also requires the 3^rd party implementation consultant but it do not requires permanent internal IT team because organization has outsourced their server maintenance to specialists (Chandrakumar, & Parthasarathy, 2014). Also, each of these 3 vendors are best in class technology giants that constantly upgrade their servers and also uses the advanced ways to take care of security aspect. There are large number of organizations particularly medium enterprises that have deployed their ERP licenses on the external infrastructure and focussing on their core business without worrying about day to day activities of monitoring servers. The organizations that have just enough money for ERP and the organizations whose risk taking capacity is less would use hybrid approach. For example, organizations in oil industry, like Shell.

There are large number of advantages that this model offers by combining the best of both the worlds. For instance, as licenses are owned by the company, it can have the flexibility of customizing the standard ERP packages to suit the business needs and at the same time, it provides its employees the flexibility of working remotely which is very much needed in this globalized world where organizations operate from large number of locations. Each of the IAAS vendors are specialist and continuously research and upgrade their infrastructure to provide the secure environment. Apart from this, IAAS vendors have the subscription based model where company can choose to pay for the number of users and thus it is easily scalable and as the company grows, it can increase the number of licenses without worrying about increasing the size of its database. These vendors also offers high performance by using load balancing, auto scaling and many other such techniques (Snellman, 2017). They are also highly reliable because there are maintaining multiple backups and copies and thus able to provide the accessibility round the year and even if there is downtime required, it is communicated well in advance. It is flexible as the organization has the choice of programming language to customize as well s full choice of software (Ramasamy, & Periasamy, 2017). Thus, this model is highly cost effective and the organization has the option of switching to another vendor or stop taking the services as the contracts are not very long term.

Cloud-Based Model

This model allows the users to access data and application remotely also and this raises several questions on security front. As the responsibility of the operating systems and software related stuff lies with the organization, it has to ensure that its users accessing application remotely also has the latest configurations and patches and anti-viruses. For instance, if all the users are part of organization network, organization can easily control system settings, software update settings at an organization level but it cannot control them on a remote systems.

One of the downside of this model is that even if the organization decided to stop taking services from the IAAS vendor due to any reason, there is always a risk of its data present in their servers. It is because they have multiple copies constantly taking back ups and stored across the world. This data can be misused also (Chaudhary, 2017). Take example of Google and digital marketing is one of their main divisions and thus data is quite critical to that company and there is always risk of using the infrastructure.

In this model, organization just take the services from the ERP vendors and need not worry about anything else like software, hardware, software upgrade, anti-virus, security, data storage, server, infrastructure and all. ERP vendors can use its own infrastructure to deploy their software or they can also take the services of IAAS vendors but managing IAAS vendors will entirely be their responsibility. For instance, Microsoft dynamics uses their own internal infrastructure, Oracle uses its own infrastructure however Salesforce takes the services of amazon for infrastructure. This model has grew at 20% CAGR in 2014-2018 and has similar forecasts for the coming years. The cost-effectiveness and ease of managing is the main attractiveness of this model. If there is a small organization that has started recently and is not sure if it will be successful or not, it can take cloud services for a temporary basis (Elazhary, Morelli, & Porkert, 2015). On premise solutions do not have this option as they come permanently with high costs. SAP and Oracle that have their offerings in all these models have established clients on all 3 models. Apart from this, oracle has confirmed that many of its clients that were using traditional ERP systems have confirmed to switch to cloud systems at least their HCM solutions. It is because HCM solutions are quite standard and do not need much customizations. Also, ERP vendors like SAP, Oracle Microsoft support all these deployment models but there are new vendors that are purely based out of cloud and do not support any other deployment model like Salesforce. Salesforce also has expanded very fast and most of the fortune 500 companies are using Salesforce due to ease of using it. However, they have to integrate it with their ERP systems to support seamless process flow. The small organizations, retail stores like Seven-Eleven would use the cloud based model as cost is very less with this model.

Advantages of Cloud-Based Model

There are numerous reasons of choosing cloud solution over the on premise and hosted solutions. First, vendor management becomes easy because organization has to sign contract with only 1 vendor to deal with everything from hardware to software. With no multiple contracts, there is less work of renewals, no payments to multiple vendors and thus it is like streamlining the IT department of the company (Ramasamy, & Singh, 2017).

Software upgrades, releases will automatically be upgraded and company always have the access to the latest up to date system. These systems are quite flexible and can be accessed from any location and thus helps the organization in their work life balances initiatives. There is lower costs of using such solutions and also lower cost of switching.For instance, if the organization has deployed on premise Oracle ERP and realised that SAP will be more suitable for its business processes, then process of switching on premise ERP will be nightmare for the company however this switching is complex in cloud but not as much as in on premise deployment model (Dwivedi, & Sharma, 2016). Return on investment can be seen in a quick time. Also, there are numerous examples of companies that took 5,6 years in implementing on premise ERP systems. In a fast paced world of today where competition is quite intense and technology is evolving so fast, it is difficult for the organisations to wait for this duration before seeing the results, Cloud solutions have very less implementation time and thus provide better return on investment.

Common problems like scalability, cost effectivity, dealing with mergers and acquisitions can easily be solved by using this deployment model. Also, technology is evolving at a rapid rate and thus it does not makes sense for the organization to commit itself for long period of time by implementing on premise deployment model. Cloud model is best in such changing times as organization do not have much higher investments in their IT systems and paying just based on subscriptions every month and thus it is easy to move to future technology without much pain. 

This deployment model is also not free of flaws. Loss of control is the biggest reason that hinders the organizations to use this model. For instance, software and applications will automatically be upgraded as soon as new version is released. Thus, this again will require end user training (Peng, 2015). Though, it is not a major thing for small releases for handling bugs but it can be quite significant if the organization is releasing its major release.

Hybrid Model

Also, many organizations have their customized processes that have evolved over a period of time. These processes are not supported by Cloud ERP deployment model because these models are quite unique and will not fir in its 1 size fits all model. There are numerous organizations that are using one of its kind business processes and the same process is also a reason of their competitive advantage and these organizations will be at a loss if these customized solutions are not supported and Cloud deployment model do not offer the choice to upgrade (Nowak, & Kurbel, 2016). ERP vendor may charge extra money to design app or other application for supporting customization and integrating it with cloud but then there is a risk of security of process.

Security is another major concern. Every organization deals with confidential data like credit card numbers, customer and employee personnel data and any compromise can be very expensive for the organization. Apart from it, moving to cloud applications requires a he transition. Organizations that are quite new and consists of younger workforce will find it easy but the old organisations where people are working on premise solutions from so many years will resist the idea of moving to cloud (Nieuwenhuis, et al., 2017). Thus, moving to cloud may result in the senior people leaving the company which can be quite negative for the company.

Conclusion

This paper discusses about the pros and cons of various ERP deployment options by using various parameters like cost-effectiveness, security, control, customization, ease of changing vendor and so on. Cloud deployment model has seen the high growth and acceptance in recent years however large enterprises that have already invested millions in implementing on premise models are still contemplating their decisions to move to cloud especially when it also do not support their custom business processes. Nevertheless, Cloud deployment option is the best choice for small and medium enterprises.

References

Dwivedi, K. and Sharma, M., 2016. Virtual Investigation of Grouping of on Premise and Cloud ERP. International Journal of Research and Development in Applied Science and Engineering, 9(1).

Ramasamy, M. and Singh, R.P., 2017. BENEFITS, CHALLENGES AND SELECTION OF CLOUD ERP SYSTEMS USED IN SMEs.

Johansson, B., Alajbegovic, A., Alexopoulo, V. and Desalermos, A., 2015, January. Cloud ERP adoption opportunities and concerns: the role of organizational size. In System Sciences (HICSS), 2015 48th Hawaii International Conference on (pp. 4211-4219). IEEE.

Haddara, M., Fagerstrøm, A. and Mæland, B., 2015. Cloud ERP Systems: Anatomy of Adoption Factors & Attitudes. Journal of Enterprise Resource Planning Studies (JERPS), 22.

Chaudhary, S., 2017. ERP through Cloud: Making a Difficult Alternative Easier. International Journal of Engineering Science, 6079.

Ramasamy, M. and Periasamy, J., 2017. Explore the Impact of Cloud Computing on ERP Systems used in Small and Medium Enterprises. International Journal, 5(2).

Snellman, D., 2017. Difference in Cloud ERP Systems: A comparison.

Chandrakumar, T. and Parthasarathy, S., 2014. A framework for evaluating cloud enterprise resource planning (ERP) systems. In Continued Rise of the Cloud (pp. 161-175). Springer, London.

Peng, G.C.A., 2015. Is It Now the Right Time to Migrate Enterprise Systems to the Cloud?. In Encyclopedia of Information Science and Technology, Third Edition (pp. 1070-1077). IGI Global.

Nieuwenhuis, L.J., Ehrenhard, M.L. and Prause, L., 2017. The shift to Cloud Computing: The impact of disruptive technology on the enterprise software business ecosystem. Technological forecasting and social change.

Elazhary, M., Morelli, F. and Porkert, K., 2015. Medium-sized Companies Reaching for the Cloud–A Roadmap and Success Factors using SAP HANA Cloud Platform Integration and Mobility as a Service (MaaS). Prozesse, Technologie, Anwendungen, Systeme und Management, pp.235-241.

Nowak, D. and Kurbel, K., 2016, November. Understanding the Flexibility of Cloud ERP Software. In International Conference on Enterprise Resource Planning Systems (pp. 135-146). Springer, Cham.