Is Cloud Computing a Viable Option for SMEs wishing to implement an ERP Solution?

[Former Member]

This document has been written in association with Neetu Ganapathy and Chirag Ghiya. Neetu Ganapathy has fifteen plus years of experience in academics and industry. Her teaching and research interests include Enterprise Resource Planning (ERP) Systems, Knowledge Management, E-learning, Managerial Communication and Resonant Leadership. She is currently a professor of Systems at SDMIMD, Mysore. Chirag Ghiya currently holds the account manager position at TE connectivity.

Abstract

Cloud computing based ERP delivery empowers enterprises to achieve a rapid implementation of key applications and then add additional functionality as needed. Unlike the on-premise model of ERP implementation, cloud computing requires less capital to be invested upfront and also reduces the maintenance efforts to be expended by the organization as the service provider undertakes it.

While the number of ERP system implementations across the world, and in India, has gone up substantially in the last few years, not many of them have explored the cloud computing mode of ERP delivery. Often without the time and resources to fully explore this new technology, many SMEs do not realize the benefits of cloud computing for them. Many SMEs prefer to stay away from ERP systems because of the high capital investment required.

This case study seeks to answer questions related to the use of cloud computing by SMEs. It examines the pros and cons of cloud computing and tries to identify the challenges that SMEs are likely to face on adopting this technology.

Keywords: Cloud Computing, ERP, SMEs

1. Introduction

In today’s highly competitive market scenario, SMEs are seriously considering ERP solutions to give them an extra edge in the business environment. They can increase their profit margins by using modern technologies and business practices that the ERP software provides. However, ERP has been viewed typically as a system meant for large organizations, potentially with hundreds or even thousands of employees or users. This is because traditionally the cost to purchase, deploy and support ERP systems was expensive and therefore exclusive to an elite few. Furthermore, ERP systems contained many features and functions that were not of any value to many smaller companies. Many vendors attempted to address this by scaling down their systems to meet the needs of the SMEs but this resulted in a solution that was compromised.

The SME segment has become an attractive option for IT investments due to their immense contribution to a country’s economy. Hosted ERP, cloud computing, SaaS models have been promoted by almost every ERP vendor with the primary aim of attracting clients from the SME sector. These models do away with most of the worries that SMEs have regarding ERP implementation and cost. The availability of top ERP solutions in such models has been a major factor that has played a role in making ERP popular in the SME market.

Cloud computing is an emerging trend in technology for information processing and management, with tremendous potential for growth in the future. In cloud computing, the idea is not to own hardware and software but to hire them and operate them through the Internet. The client will only have to pay for utilizing the software, hardware, data storage and processing, and information management services from a Service Provider through high speed broadband Internet connection, only to the extent and proportion of utilizing them, similar to paying electricity bills. Alternative payment models similar to monthly subscription (like subscription to a printed magazine) or even fixed monthly charges (irrespective of usage) are also available as options.

2. Small and Medium Enterprises (SMEs)

There is no standard definition for Small and Medium sized Enterprises (SMEs) that is accepted worldwide. In some countries SMEs are defined in terms of the number of employees (Employee strength) while in others they are defined based on annual turnover. Sometimes a combination of employee strength and turnover is used to define a SME and sometimes a SME is defined based on investment in plant and machinery (excluding land and buildings).

Most large companies have either implemented ERP or are in the process of doing so. With the near saturation in the large enterprise market, ERP vendors are looking to tap the potential in the SME segment. ERP vendors like SAP, Oracle, Microsoft, Ramco etc. are all trying to increase their customer base in the SME segment and have products specifically designed to cater to the needs of SMEs.

Do SMEs need ERP?

Given below is a list of questions and the answers, which SMEs might be seeking ^[1]:

• Isn’t ERP for the LEs (Large Enterprises)? When ERP was initially introduced, it was meant for the LEs. Lately, ERP applications are gaining traction among entrepreneurs who need real-time insight into sales patterns, inventory availability, cash flow etc. According to the industry analysts, more than a million SMEs worldwide have implemented an ERP system in 2006. Though the initial ERP solution demanded a hefty-price tag with painful 2-year implementation, today’s ERP solution has become extensively smart in terms of sliced deployment time which is between few weeks to a month and with an affordable TCO (Total Cost of Ownership).
• Does the ERP really help SMEs in growing the bottom line?: SMEs are typically successful because of their founding father’s individuality & their agility. And as the company grows, spreadsheets are not enough to meet their needs. SMEs need to decide which business problem they are trying to solve. The uniqueness of their requirement should drive what ERP they need to go for.
• How long will it take to implement ERP?: SMEs have limited resources in the form of time, cash, IT & business staff. ERP for SMEs can be implemented in a matter of days – going from a week to a month. The smart implementation planning could lead to zero downtime.
• Can ERP help SMEs strategically also?: Traditionally most SMEs use ERP for cost management and control. Smart SMEs will not see cost reduction and revenue generation activities as mutually exclusive. They will strive towards all rounded operational excellence across the customer, design, and supply chains – resulting in higher revenues from improved customer experience; and more innovative, higher quality product/services.

3. SaaS – ERP delivery for SMEs

SMEs need to seek answers from reliable sources such as ERP consultants, industry experts, vendors and from secondary data such as research reports and case studies that would aid them in deciding whether they really need an ERP solution.

If the answer is yes, then is it beneficial to go for SaaS mode of ERP delivery?

Questions that will help SMEs in deciding whether they should opt for SaaS mode of ERP delivery

Due to the recent economic downturn the traditional ERP implementation has become costly for the companies. Few companies feel that SaaS could be the saving grace for the ERP industry. Given below are 4 questions that SMEs need to raise to the reliable sources while going for the Saas mode of ERP delivery. They are :

• What is the implementation cost?: It’s always been a common perception that SaaS is much cheaper. It is not always true. It can be agreed to an extent that, since SaaS does not require a complex internal technical infrastructure to support, it can help reduce costs. However, the ongoing costs are most likely to be significantly higher since one is paying to use the software annually. So, the initial costs may be lower for SaaS, but will probably be higher on an ongoing basis.
• Does SaaS mode provide flexibility?: Since one does not “own” the software on their own servers, there is a less possibility that one can configure and set-up the software to fit the business needs. When it comes to hardcore workflow redesign or customization of software, SaaS is much more limited in its capabilities. There might be a trade-off for the SMEs but for the larger clients this concept might be complicated.
• What is the implementation duration?: A big selling point for SaaS is that, one can set up the system and make it run in a matter of weeks. The problem is that going live has less to do with getting the software up and running than it does with clearly defining business processes, configuring the system accordingly, and ensuring people are well trained in the new process workflows and transactions. In the case of SaaS, it often takes a great deal of time to change the processes of the business to fit the software, which is not officially accounted for by the SaaS – ERP vendors.
• Is SaaS – ERP Secure enough ?: Data generated by companies through their business transactions are vulnerable to security threats. The threats remains, whether such data is stored within a firm's offices, or elsewhere in remotely located data centers managed by a third party services provider.

According to Ramco Systems, it secures data of not only its own business but also that of its customer's business held in its data center.  The data center in Ramco Systems has more than 430+ servers in its data center. These servers hold the worldwide business data of customer projects being executed by Ramco Systems. These servers are also connected to the global offices of Ramco Systems and their customers through high-speed networks and telecommunication systems. To protect the data, Ramco has put in place a comprehensive Information Security System as mandated by ISO27001 standards. The various security aspects handled by Ramco Systems are: Internal theft, Physical Access Control, Physical Access Monitoring, Login Access Control, Audit Trail, Data Transport over Internet, Firewall, Privacy and Fire & Natural Calamities.

4. Conclusion

SMEs have become the major contributors to the employment and the economy of any country. To be globally competitive and contribute significantly to the GDP, SMEs will have to make smart IT investments. One such investment which the SMEs are skeptical about is an ERP system. Common concerns in SMEs like poor productivity, increased expenditure, high employee turnover does not always require an ERP system to be deployed. Before it could even come up with an answer, a SME should be able to answer the basic questions like “Where am I now?”, “Where do I want to be?” and to achieve my goal what is the best enabler.. If the company has plans to make IT investments, SMEs need to seek answers from reliable sources such as ERP consultants, industry experts, vendors and from research reports and case studies to decide whether they really need an ERP solution.

ERP vendors came up with the SaaS mode of ERP delivery, keeping in mind the ignored SME segment and their limitations. The SaaS mode does offer benefits in terms of quick implementation time, reduced implementation cost, easy usage & maintenance. Every technology has a dark side as well. Some of the drawbacks are security concerns, lack of customization, integration issues to name a few. When compared to the on-premise model, both cloud computing and the SaaS mode of ERP delivery, are economically viable options for SMEs. SMEs need to weigh the pros and cons of this mode of ERP delivery before deciding on it.

5. References

1. Nagaraj Bhargava,Vice President, Marketing, Alliances & Operations at SAP India , ERP for SMEs – To buy or not to buy?, ManagementNext, August 2007

2. Ravi Seethamraju, Jaya Seethamraju, Faculty of Economics & Business, The  University of Sydney, Australia, Adoption of ERPs in a Medium-sized Enterprise - A Case Study, 2008

3. http://en.wikipedia.org/wiki/Cloud_computing

4. http://www.visualsoftindia.com/CSIT/Issue/2011_3_March/3_Manoj_Kapil_Review_Article_Mar_2011.pdf

5. http://itrenaissance.com/The%20Case%20for%20Cloud%20Computing-v4.pdf

6. Eric Kimberling, Is SaaS ERP Worth the Hype, http://it.toolbox.com/blogs/erp-roi/is-saas-erp-worth-the-hype-30377

7. Ramco On Demand ERP – White paper on Security, www.ramcoondemand.com

8. Vijay Venkatesh, ERP for SME in SaaS Model, ManagementNext, August 2007

9. http://www.tgiltd.com/erp-software-selection/erp-comparison-list-erp-companies.html

10. www.ramcoondemand.com