On-Premise vs Cloud ERP: Key Differences to Consider for Your Business

Key takeaways

• On-premise ERP requires a higher initial investment and in-house IT management.
• Cloud ERP offers greater scalability and flexibility.
• Maintenance and updates are managed in-house for on-premise but handled by the provider for cloud ERP.
• Technology investment and updates for “future tech” such as AI, integration and automation are heavily focused on cloud ERP solutions. 

Defining the models

When choosing between on-premise and cloud-based ERP systems, understanding their definitions and how they operate is crucial. Each model has its unique structure, deployment and maintenance requirements.

What is on-premise ERP?

On-premise ERP software is installed directly on your company's hardware and servers. This means your organisation controls the entire infrastructure and its security. With this setup, you incur a significant upfront cost for purchasing hardware and software licences.

Maintenance and updates are your responsibility, often requiring dedicated IT staff. On-premise solutions offer more customisation options, allowing you to tailor the system to your specific needs. However, this flexibility can come at the cost of longer implementation times and higher long-term maintenance expenses.

Access to on-premise ERP is usually restricted to company premises, limiting remote work capabilities. For industries where data control and compliance are critical, on-premise ERP can provide a sense of security and control over data, as everything is managed internally.

What is cloud-based ERP?

Cloud-based ERP, also known as Software-as-a-Service (SaaS), is hosted by cloud providers on their servers. Your employees can access the system from anywhere via the internet, making remote work more feasible. Cloud ERP typically follows a subscription model, spreading costs over time rather than requiring a substantial upfront investment.

The cloud provider handles updates, maintenance, and security, freeing your IT team from these tasks. This model ensures you always have access to the latest features and improvements without the need for significant internal resources.

Public cloud services offer scalability, so you can adjust your usage based on your business needs, potentially saving costs in the long term. Hybrid cloud solutions also exist, allowing a mix of on-premise and cloud infrastructure, providing flexibility.

Cloud ERP allows for quicker implementation and easier adjustments to your setup. This can be particularly beneficial for fast-growing businesses or those looking to streamline operations with minimal IT overhead.

Initial and ongoing financial implications

When deciding between on-premise and cloud ERP solutions, it's important to consider the financial aspects. This includes the initial investment, ongoing costs, and maintenance expenses. Each solution has its own financial profile, impacting your budget differently.

Upfront investments and costs

Choosing an on-premise ERP involves a significant initial financial outlay. You need to purchase hardware, software licences and other necessary infrastructure. This often includes servers, networking equipment and dedicated workstations. On top of this, you may incur installation fees and costs for customising the software to fit your business needs.

In contrast, cloud ERP solutions typically have lower upfront costs. With these, you avoid the large capital expenditure associated with buying and maintaining hardware. Instead, you pay a subscription fee that covers the software and its operation.

Subscription costs versus capital expenditure

On-premise ERP systems are characterised by a one-time capital expenditure. This means you purchase the software and hardware outright, and there are no recurring subscription fees. However, this can be a hefty initial cost which may strain your budget.

Cloud ERP, on the other hand, operates under a subscription model, often referred to as Software-as-a-Service (SaaS). With this, you pay a recurring fee, usually monthly or yearly. The subscription cost varies depending on the number of users, transaction volume, or data usage. This spreads the expense over time but can add up in the long run.

Maintenance and operational expenses

Maintaining an on-premise ERP involves ongoing costs. These include IT staff salaries, server maintenance, energy consumption and physical space for your infrastructure. You are also responsible for software updates and security patches, which can be both time-consuming and costly.

Cloud ERP systems reduce the burden of maintenance. The service provider handles updates, security and server maintenance, which is all included in your subscription fee. This leads to lower operational expenses and frees up your internal IT resources for other tasks. What’s more, your team can access the ERP system from anywhere with an internet connection, enhancing flexibility and productivity.

Understanding the financial implications of these ERP systems can help you make an informed decision to meet your business goals.

Deployment and control

When considering deployment and control for ERP systems, it is important to understand the differences between on-premise and cloud solutions. This section covers how each model is deployed and the level of control and customisation you can expect.

Deployment model and time

On-premise ERP systems are installed locally on your company's servers. This setup usually takes more time compared to cloud ERP, as it requires purchasing and installing hardware, setting up infrastructure and configuring the software.

Cloud ERP, or Software-as-a-Service (SaaS), is hosted by a third-party provider and accessed via the internet. This model is typically quicker to deploy because it doesn’t involve extensive hardware setup. You can start using the software almost immediately once you subscribe to the service.

Level of control and customisation

On-premise ERP systems give you more control over your data and infrastructure. Your IT team manages the servers, which means you can customise the system to fit your specific needs. This might involve tweaking the software's code or integrating with other internal systems.

Cloud ERP provides less control over the infrastructure since it is managed by a third-party vendor. Customisation is usually more limited, often restricted to what the vendor allows. However, updates and maintenance are handled by the provider, reducing the burden on your IT staff.

By understanding these differences, you can better decide which strategy aligns with your company's needs and resources.

Scalability and flexibility

Choosing the right ERP system is crucial for meeting business demands and adapting to growth and change. It's essential to understand how on-premise and cloud ERP systems compare in these areas.

Meeting business demands

Cloud ERP solutions offer instant scalability to meet fluctuating business demands. You can easily increase or decrease resources based on need without major investments. This allows for flexibility in handling seasonal peaks in demand, such as during holiday seasons or special promotions.

On the other hand, on-premise ERP systems require additional hardware and software purchases to scale up. This often involves lengthy installation processes and higher upfront costs. Hence, reacting swiftly to changing demands can be challenging with on-premise systems.

With cloud ERP, third-party providers handle maintenance and updates, ensuring your system always runs optimally. On-premise solutions, in contrast, require in-house IT teams to manage these tasks, which can divert focus from core business goals.

Adapting to growth and change

As your business grows, your ERP system must adapt. Cloud ERP systems are designed to support business growth with minimal disruption. You can easily add or remove users and adjust storage capacity as needed, without significant upfront investments.

Scaling an on-premise ERP system is more complex. It often involves physical upgrades and longer implementation times. Adapting your system to new business processes or integrating new software can also be more difficult and costly.

Cloud ERP systems offer flexibility for businesses that may expand to new locations. Employees can access the system from any device with an internet connection, making it easier to manage and collaborate across different offices.

Investing in on-premise ERP limits this adaptability. You may face challenges in extending the system’s capabilities across multiple geographic locations. The need for consistent updates and maintenance can also strain your resources as you scale.

Maintenance and updates

Choosing between on-premise and cloud ERP affects how you handle maintenance and updates. On-premise solutions require more internal management, while cloud-based ERPs offer automated services and support from the provider.

Responsibility for upkeep

With on-premise ERP, your IT team handles maintenance and support. This includes managing hardware, troubleshooting technical issues, and ensuring software security. You need skilled staff and may need to hire additional members to keep the system running smoothly.

For cloud ERP, the vendor is responsible for upkeep. They manage the servers, store data securely and handle technical issues. This lowers your burden and lets you focus more on business operations rather than technical maintenance. Cloud ERP often has a support team on call, which can quickly address any problems.

Frequency and management of updates

On-premise systems require manual updates. Your IT team will need to schedule and install updates out-of-hours to avoid disrupting business activities. These updates can be infrequent but are typically more complex and time-consuming.

Cloud ERP offers automatic updates pushed by the vendor. These updates happen regularly and are often during off-peak hours to minimise any disruption. Your system always runs the latest version, enhancing security and functionality without your effort. The vendor tests updates extensively before release, reducing risks and ensuring smooth integration.

Security and compliance

When considering ERP solutions, security and compliance are key factors. Ensuring data security and meeting regulatory standards are crucial for protecting your business and customer information.

Data security concerns

When evaluating ERP options, data security is fundamental. On-premise ERP systems host data within your company’s infrastructure. This gives you full control over security measures but also requires robust internal IT support. You are responsible for hardware maintenance, software updates, and implementing security protocols.

Cloud ERP, on the other hand, relies on data security managed by the provider. Vendors employ advanced security measures, including encryption and multi-factor authentication. They also monitor servers continuously to detect and address threats. This can be a significant benefit if your internal team lacks the resources for round-the-clock security.

An aspect to be aware of is data breaches. Whether on-premise or cloud, it's critical to conduct regular security audits and train employees on security best practices. Ensuring data integrity and protection against cyber-attacks must be a priority.

Adhering to compliance standards

Meeting compliance standards is essential for many industries. On-premise ERP solutions offer the advantage of customised compliance measures. Since your company manages the servers and the data, you can tailor security protocols to meet specific regulatory requirements. This can be crucial for industries with stringent compliance needs, such as healthcare and finance.

Cloud ERP providers often adhere to standard compliance certifications like GDPR, ISO and HIPAA. This can ease the burden of compliance on your business. The vendors typically offer documentation and support to help you understand how their system meets various regulatory requirements.

However, you must ensure that the cloud provider stays up to date with changing regulations. Regular compliance reviews and audits by your business are recommended, even though the vendor manages a significant part of the compliance. This ensures that your use of the cloud ERP continues to meet your industry’s regulatory demands.

Support and reliability

When deciding between on-premise and cloud ERP systems, it's essential to understand how they differ in terms of vendor support services and system reliability and uptime. Support and reliability directly impact the consistent performance and overall satisfaction of your ERP system.

Vendor support services

For on-premise ERP systems, support often relies heavily on your internal IT team. You would need skilled staff to manage updates, troubleshoot issues and maintain hardware. This setup can become costly and complex because acquiring and retaining specialised talent can be challenging.

Cloud ERP systems, provided by cloud service providers, usually come with comprehensive vendor support. These services often include 24/7 assistance, regular updates and automatic patches. This support model reduces your dependency on internal IT resources and ensures that your system stays secure and up-to-date. Many cloud providers also offer customer service agreements that guarantee certain support levels, helping you avoid unexpected downtime.

System reliability and uptime

On-premise ERP systems depend significantly on your local infrastructure. If there’s a hardware failure, power outage, or natural disaster, your system's uptime and reliability can be severely impacted. You must invest in robust disaster recovery plans and redundancy systems to maintain high reliability.

Cloud ERP systems, on the other hand, boast high reliability and uptime due to their use of third-party service providers with geographically distributed data centres. These systems are designed to provide constant uptime and robust fault tolerance. For instance, they often guarantee 99.9% or higher uptime, ensuring minimal disruption to your operations. However, it’s crucial to note the potential risk of vendor lock-in, where switching providers might be difficult or costly due to contractual agreements and data migration challenges.

Technology investment

For the last few years, advances in “future technology”, including artificial intelligence, integrated systems and data and automation tools have gone from being aspirational to a reality within products. However, the majority of the investment has been around cloud-based ERP systems that can make the best use of these technologies. This is becoming an increasingly large factor with regard to choosing between on-premise and cloud-based ERP systems. 

Frequently asked questions

This section addresses common questions that arise when comparing on-premises and cloud-based ERP systems. Each subtopic delves into critical aspects like cost, security, scalability and the unique benefits of hybrid ERP solutions.

What are the principal distinctions between on-premises and cloud-based ERP systems?

On-premises ERP systems are installed locally on your company's hardware and managed by your IT team. Cloud ERP, also known as SaaS, is hosted on remote servers and accessed through the internet. On-premises systems offer more control, while cloud solutions provide greater accessibility and flexibility.

How do cost considerations vary between on-premise and cloud ERP solutions?

On-premises ERP systems usually involve a significant upfront investment in hardware and software. Maintenance costs are also ongoing. Conversely, cloud ERP solutions typically operate on a subscription model. This can lead to lower initial costs, but you may incur higher expenses over time due to continuous subscription fees.

What are the security implications of choosing a cloud ERP over an on-premises system?

Security is a major consideration in ERP system selection. On-premises ERP grants you full control over your data and security measures. In contrast, cloud ERP relies on the service provider's security protocols. Some businesses may prefer the control offered by on-premises systems, while others trust the advanced security measures provided by reputable cloud vendors.

In terms of scalability, how do on-premises ERP systems compare with cloud-based alternatives?

Cloud-based ERP systems are generally more scalable than on-premises systems. Cloud ERP allows you to easily adjust resources based on your business needs without significant investment in additional hardware. On-premises ERP, while customisable, often requires substantial changes and costs to scale up or down.

What are the advantages of a hybrid ERP system?

Hybrid ERP systems combine elements of both on-premises and cloud solutions. This approach can offer the control and security of on-premises systems with the flexibility and cost-efficiency of cloud solutions. Hybrid ERP allows businesses to maintain critical operations on-premises while using the cloud for more scalable activities.

Why might an organisation opt for an on-premises ERP instead of a cloud solution?

An organisation might choose on-premises ERP for greater control over its data and customisation options. Companies with strict regulatory requirements or unique business processes might find an on-premises solution better suited to their needs. Additionally, businesses with existing IT infrastructure might prefer to maximise their investment in on-site resources.

What if you have an on-premise ERP system but want to migrate to the cloud?

We have moved from a world that was based entirely on-premise to one where the majority of solutions are in the cloud. However, for companies that already have a system in place that is based on-premise, the last few years have progressed from a general resistance to move to the cloud to waiting until the right time. 

 

There are relatively few companies left with on-premises solutions, and those who are left need to consider the longevity of their solutions. If you have, for example, an on-premise Dynamics NAV/Navision/Business Central solution, we can do a free assessment to determine what is involved and the costs for upgrading/re-implementing to a cloud ERP solution.