I’m a skeptic of buzzwords, broad over-generalizations, and biased opinions. But it’s time for me to finally admit it: cloud ERP has finally reached the tipping point of adoption.
Over the last several years, I have blogged about how cloud systems are overrated. I wrote about how on-premise still had its place for the foreseeable future. I even pointed to my own research that, up until recently, had shown that most companies were still deploying on-premise systems at a higher rate than cloud.
But those days are over. It’s time to move on.
On-premise systems had a good run, but it’s time to pack it up and admit defeat. RIP SAP R/3, Oracle EBS, Microsoft GP/AX/NAV, and all those other legacy on-premise systems that so many are still using.
To test my hypotheses, I wanted to see what other thought leaders and practitioners in the industry thought. So I posted a simple question to LinkedIn, which generated a firestorm of comments – mostly from software vendors:
You can read the full conversation here on LinkedIn. Please feel free to join in the conversation and comment as well.
The #1 reason for cloud ERP reaching the tipping point: money
My change of opinion, though, isn’t because so many vendors adamantly shared their pro-cloud opinions on my LinkedIn post. It isn’t because I think cloud systems are somehow superior, because I don’t. It isn’t because I think it saves companies money, because it usually doesn’t.
The reason for my change of heart is simple: money favors cloud ERP. Investors simply love the cloud business model too much. The recurring revenue, higher profit margins, and high customer switching costs make cloud ERP vendors an investor’s dream. And they really like that cloud is not just a software solution, but also an infrastructure solution – even further bolstering revenue. This is why investors and shareholders are investing billions in cloud-friendly software companies.
With investors and vendors both investing heavily in cloud, the rest of the ERP ecosystem falls into line. Consultants and system integrators (paid by the vendors) reinforce the vendors’ pro-cloud philosophy. Industry analysts, who are also paid by the vendors, have been touting the death of on-premise for years. The industry has built a fully integrated ecosystem that is crushing on-premise into oblivion as we speak.
Because money and the ecosystem favors cloud ERP, vendors are going to keep doubling down and upping the ante on their cloud investments. Since R&D money is a finite resource, on-premise systems will receive a declining share of R&D dollars until there are no future enhancements. Cloud ERP will soon contain the advanced features and breakthrough technologies, while on premise solutions will survive on life support.
In the not-too-distant future, it simply won’t make any sense to deploy on-premise ERP systems. The last of the holdouts will eventually be forced into adoption. If you are considering SAP S/4HANA vs. Oracle Cloud ERP vs. Microsoft Dynamics 365 vs. other ERP systems, it is important to be aware of the unbiased realities of cloud ERP.
What does this mean for on-premise ERP?
Oracle may say that they have a product roadmap for JD Edwards until 2025. Microsoft may say that they have a roadmap for Dynamics Great Plains until 2030. But, I’m not buying it. There is simply too much investor money vested in seeing cloud ERP dominate at the expense of on-premise systems.
SAP has done a nice job of offering multiple deployment options – including on-premise – for its flagship S/4HANA product. But this is just a stopgap transitionary solution (albeit a smart one). I doubt that SAP will offer on-premise options for much longer.
So you may be able to get by with on-premise ERP in the short-term, but it’s not a viable long-term solution. Those that implement on-premise ERP systems now are much more likely to be looking at major upgrades to the cloud within the next few years.
The risks of cloud ERP
As is the case with any enterprise software or digital transformation decision, every alternative you face consists of pros, cons, tradeoffs, and risks. ERP software vendors, resellers, system integrators, and consultants may not want to admit it, but here are huge risks associated with today’s cloud ERP systems.
Here are a few risks of cloud ERP systems:
- The products are relatively immature compared to more established on-premise systems
- There is great confusion in the marketplace as to what legacy functionality has or hasn’t been migrated to the cloud
- Missing functionality is more likely to require point solutions to address, increasing technical complexity
- Cloud ERP systems generally still cost more than on-premise in the long run (after years 5 or 7)
- Cloud ERP systems are less flexible than on-premise, which means that effective organizational change management strategies are even more important for these types of transformations
- Once you’re on a cloud ERP platform, it can be harder to switch vendors in the future
- Many think that cloud ERP is the same as “easy implementation,” which leads to false expectations
This doesn’t mean you should shy away from cloud ERP options, but you should be aware of these risks in order to mitigate them.
How to mitigate the risks of cloud ERP
The above risks are likely to contribute to the fact that ERP failures are on the rise. The good news is that there are plenty of ways to mitigate these risks. For example, you can:
- Define the best digital strategy for your organization prior to jumping to the cloud, but do so in a completely unbiased and technology-agnostic way
- Make sure that you understand what product you’re buying and what exactly you’re getting within that product
- Invest heavily in organizational change management (one of Third Stage Consulting’s core competencies, by the way)
- If you’re not under time pressure, consider ways to defer a cloud upgrade until the products have matured and have larger install bases (see one of our recent articles about implementation readiness)
- More than ever, transformation success has more to do with how you implement rather than the technology itself. If you are considering Deloitte, Capgemini, Accenture, or other system integrators, choose carefully and wisely.
- Enlist the help of independent third-party consultants to provide implementation quality assurance and organizational change management support throughout your transformation. Third Stage Consulting is an example of one such firm.
This is a unique time for the ERP software industry. Nearly all the ERP vendors are making major changes to migrate their products to the cloud, which provides both opportunities and challenges to potential buyers. It is important to acknowledge and understand these risks before moving forward with what has been a very exciting – and misunderstood – industry trend.