Ian McCue | Sr. Associate Content Manager
SaaS ERP is an enterprise resource planning (ERP) system that runs in the ERP vendor’s data center, rather than on the purchasing organization’s servers and infrastructure (known as on-premises ERP), allowing the company’s end-users to access the software over the internet.
IDC’s latest SaaSPath Survey shows an overwhelming preference—as in 74% of ERP customers among 1,915 organizations responding—for an integrated suite of applications that eliminate the care and upkeep of on-premises systems.
Enterprise resource planning software delivered in an as-a-service model answers that call. SaaS ERP software is managed by the software vendor and hosted in the cloud. Compared with on-premises ERP, it can reduce IT costs and overhead while keeping all users on the latest version of the software.
What is ERP?
Enterprise resource planning (ERP) systems became popular in the 1990s and 2000s as businesses realized they could increase efficiency through automation and improve decision-making by providing organization-wide visibility.
Today’s ERP systems integrate and automate essential financial and operational business functions and provide a single source of data insights from sources including general ledger (GL), accounts payable, accounts receivable, payroll and financial reporting. Modern ERP systems also deliver inventory, order and supply chain management and help with procurement, production, distribution and fulfillment. Companies may choose to include human resource management software (HRMS) and customer relationship management (CRM) and eCommerce capabilities.
Now, the real-time reporting and analysis capabilities ERP provides are critical to the success of businesses of all types.
Types of ERP systems: Today, there are two primary deployment models for ERP. On-premises ERP software is hosted on private servers and managed by dedicated IT resources. Cloud ERP, a category that includes SaaS, is the fastest-growing deployment type, according to IDC, and comes with a number of advantages.
What is Cloud ERP?
Cloud ERP is any implementation hosted remotely in a commercial provider’s data center and delivered over the internet. As with other cloud services, users access cloud ERP software via a web browser.
Cloud implementations can be single-tenant or multi-tenant. In a single-tenant model, a business has its own, separate instance of the software running on dedicated hardware, giving it more control over customization and upgrades. However, the owner is responsible for setup and maintenance, and it’s expensive.
With a multi-tenant cloud model, many companies share the same instance of the software and infrastructure, though each customer’s data is stored and secured separately. Multi-tenant cloud ERP gives all users the same functionality, and all customers receive updates and upgrades simultaneously. It’s generally more affordable, allows for easier integrations and requires minimal management by a company’s IT team.
What is SaaS ERP?
SaaS ERP is a subset of cloud ERP, though the terms are sometimes used interchangeably.
Cloud software products, when implemented as a multi-tenant system, are said to be software-as-a-service. Like other SaaS products, SaaS ERP is managed by the software provider. It primarily uses the multi-tenant model, meaning a vendor’s customers share one instance of the software and use the same infrastructure
When deciding which model is best for your situation, leaders from finance and IT, and potentially sales and HR, should sit down and do an analysis. Here are factors to include.
SaaS ERP Cost
As the name suggests, SaaS ERP is a subscription service, and providers bill customers on a monthly or annual basis.
Technology spending is lower with SaaS ERP. In addition to savings realized by not purchasing hardware to run a private instance of the system, a business doesn’t need a large IT team to maintain and secure the software or a data center in which to host it.
Many SaaS ERP vendors charge per user, while others have tiered pricing based on company size and the resources required. Either way, the cost of use will typically increase as an organization grows or adopts more modules.
Analysts suggest that the SaaS versus on-premises TCO trendlines cross in three to five years, but that’s highly variable. There are a number of online total cost of ownership calculators that can give you a pretty accurate snapshot.
Another major consideration is speed to use.
Implementation of SaaS ERP
Generally, a SaaS ERP system will be up and running more quickly versus starting from scratch with on-premises software. There’s a shorter implementation checklist, largely because there are no servers to set up nor configuration of computers and smartphones necessary to access the ERP. Additionally, integrating complementary systems, like CRM, is much easier if those solutions are cloud-based, and even more so if they are from the same provider.
Still, no matter how you cut it, data migration will be a challenge. That’s so whether implementing a new SaaS ERP system, moving between SaaS systems or integrating on-premises software with a cloud ERP. Unless you’re a startup with minimal customer and financial data, expect to invest time and effort. If you plan to connect disparate systems, ask about available APIs.
SaaS ERP Advantages
There’s a reason why SaaS ERP has spiked in popularity—it offers the benefits of cloud ERP discussed above and more. Advantages of SaaS ERP over on-premises or single-tenant cloud ERP include:
- Out-of-the-box functionality for key business functions like accounting, inventory, orders and customer records management.
- No need to configure servers or invest in additional infrastructure as the business grows.
- Automatic upgrades by the vendor (usually multiple times per year) that keep all users current with the latest features.
- A more modern and user-friendly interface.
- A security and performance model that ensures a good user experience while guaranteeing privacy.
SaaS ERP disadvantages
There are limitations of SaaS ERP compared with on-premises or single-tenant cloud ERP that could be drawbacks for some companies, like:
- Vendors handle data security, which may not meet some organizations’ needs, especially those with stringent regulatory or compliance standards.
- There’s less opportunity for customization to address unique business needs.
- Monthly subscription costs add up over time and will increase as the business grows and adds more data and seats. On the upside, these costs are opex (operating expenses) and predictable as long as the company has a process to control usage.
SaaS ERP vs. On-Premises ERP
Though on-premises and SaaS ERP differ in many ways, they have the same goal: Create a single, unified database with the entire company’s information and processes. Depending on the business, an ERP could pull data from applications for accounting, human resources (HCM), supply chain management (SCM), engineering, e-commerce, sales and marketing and customer relationship management (CRM).
Or, some or all of these functions may be part of the SaaS ERP system itself.
On-premises ERP software is installed on servers a company owns. Customers generally pay a large, one-time licensing fee at the time of purchase plus yearly maintenance fees instead of a recurring subscription bill. The company is responsible for maintaining the supporting infrastructure and configuring and updating the software, which could require paying the vendor or a third party for setup and maintenance services.
A SaaS ERP solution, on the other hand, is hosted and managed by the software provider.
Some companies blend aspects of cloud and on-premises ERP. These hybrid ERP setups can be complex and require custom integrations. “Hosted ERP” refers to a single instance of the on-premises software that runs on remote servers owned by a third-party vendor and housed in a third-party data center; the customer is responsible for upgrades and most maintenance. A hosted ERP instance runs on a private cloud, while SaaS uses the public cloud.
Some SaaS ERP vendors offer a single-tenant option that gives a client a dedicated instance of the software. This gives businesses more control—they can decide if and when to upgrade and how to manage security and the infrastructure. However, they give up the benefits of multi-tenancy, which we previously discussed.
Which is Best for Your Business?
A major driver behind the growth of SaaS is that it puts small and midsize companies on an equal playing field with enterprises when it comes to high-quality, feature-rich business software. A company that wanted ERP once needed an IT staff, a data center and a chunk of cash for subscriptions. No longer. Upfront costs are lower—sometimes dramatically lower—than on-premises ERP.
SaaS ERP is ideal for companies that:
- Don’t want to spend time, effort and money on upkeep and upgrades and either don’t have a large IT staff or simply prefer to use that team for other initiatives.
- Want low upfront costs and a relatively quick path to use.
- Don’t need extensive system customization and are comfortable with the security offered by the public cloud provider hosting the service.
Hosted or on-premises ERP may make sense for companies that require considerable customization due to a unique business model, have extensive homegrown software or other specialized needs. This could also be a better option for organizations, like government agencies, that must have physical control over their data and cannot entrust storage to a third party—internal or regulatory rules may require that an organization keep the data on its own servers. But businesses that go this route need the significant internal expertise and capital to support not only implementation, system modifications and upgrades but security. Cloud providers have the scale to deploy cutting-edge systems wielded by large security teams, an expensive proposition given a persistent global shortage of cybersecurity expertise.
Hosted ERP or single-tenant SaaS ERP makes the most sense for companies that want the control and security of an on-premises solution while also achieving flexibility and reducing IT staffing costs.
Finally, single-tenant SaaS ERP is built for reliability and physical security, potentially easing concerns about data control while providing many of the benefits of a managed solution, including dedicated staff for maintaining the facilities. However, customization may be more limited with single-tenant SaaS than with an on-premises system due to the constraints and requirements of the cloud provider hosting the software.
SaaS ERP Use Cases and Capabilities
Many young or fast-growing companies turn to SaaS ERP because it’s less expensive to get started or leadership believes the resource-intensive nature of on-premises and non-SaaS cloud models are not the best use of their resources. It makes sense to focus on improving the product or service and keeping customers happy and handoff managing non-product-related IT systems.
SaaS providers also offer hassle-free scalability as the business grows and modules to meet evolving use cases and needs.
Larger enterprises frequently turn to SaaS ERP as part of a two-tier ERP strategy. Under this model, an organization uses on-premises—and often highly customized—ERP at its main office but puts, say, a subsidiary or international office on a SaaS ERP system. Each model suits the needs of its user base, and information from the SaaS platform can feed into the primary ERP when the two platforms are integrated.
Other companies see SaaS software as the best option for replacing high-maintenance legacy systems. These are usually more mature businesses that have used the same homegrown or aging ERP for decades. SaaS ERP offers these organizations a speedy path to modernization and can reduce IT spend and maintenance headaches.
The Role of Cloud in ERP
Cloud computing has experienced a surge in popularity over the last two decades because of its advantages over on-premises IT, including:
- Greater flexibility since users can log in from any device with an internet connection.
- Reduced upfront costs, as there are no servers or other equipment to purchase.
- Elasticity—a business uses only the resources it needs at any given time.
- Faster and simpler implementations.
- Easier sharing of information with internal and external parties.
SaaS ERP and Digital Transformations
ERP is foundational software for business and essential for data-driven decision-making and automating processes.
Since ERP software is the central source of information for the entire organization, it’s often the system corporations look to upgrade first. Going with SaaS ERP is logical for any business looking to capitalize on technology advancements, become more efficient, improve the customer experience and retire homegrown or outdated on-premises systems.
In June, IDC issued a report predicting that the worldwide ERP software market will reach $32.6 billion in 2024, up from $28.3 billion in 2019. That’s a respectable 2.9% CAGR. But what’s more interesting for companies interested in ERP is that the analyst firm expects the cloud to close the gap with on-premises deployments, jumping from 73.6% on-premises versus 26.4% cloud in 2019 to 51.6% versus 48.4% in 2024—that’s a 16.2% CAGR, driven in large part by what IDC calls the evolution of “any size business ERP products” suitable for smaller firms.
A SaaS ERP system allows businesses to stay on the cutting edge and on par with competitors because all customers are always on the latest version. It also opens the door to integrate with a vast array of other cloud solutions—not just core systems like CRM and HRMS, but data analytics and visualization tools. This is where the power of cloud computing really shines: It puts all these insights in one place, and everyone can see the latest data with any connected computer, smartphone or tablet.
Future of SaaS ERP
Leading ERP vendors are working to expand the capabilities of their cloud solutions. These efforts include process automation, advanced analytics and increasingly user-friendly interfaces that allow for “self-service” insights. When a finance professional can quickly tease out trends without needing help from IT, that’s a win.
Looking further ahead, providers are working to integrate emerging technologies like machine learning, IoT and blockchain.
Software with machine learning, for example, is constantly learning and becomes more intelligent over time. Machine learning enables companies to automate many manual, repetitive tasks related to reconciliation and reporting, saving time and money. This technology can also predict future changes in demand and flag unusual transactions that may be fraudulent.
IoT covers a variety of connected equipment, like sensors, scanners, and cameras, that can relay information back to the ERP system. IoT devices could monitor the status of a piece of machinery or show the location of a truck carrying a replenishment order, for example. When supply chain leaders can see this information in near real-time, it gives them a fuller picture of current operations.
Blockchain can securely store the tremendous amount of information put into the ERP over time, keeping a detailed history of every transaction. A blockchain network can also bring valuable transparency to transactions between companies. For example, if a supplier of components, manufacturer, and distributor all join one blockchain network, each party can track the movement of a part or product and see the chain of ownership. Blockchain opens automation opportunities as well, allowing a system to trigger a shipment when an order comes in or create an invoice once items leave the warehouse.
The potential benefits presented by these and other technologies are a major reason why more companies are moving to SaaS ERP—and why cloud ERP will play a central role in the future of business.