What is Cloud ERP and how does it work?

Cloud ERP is a type of enterprise resource planning software that runs on a provider's cloud computing platform, rather than on premises in an enterprise's own data center. ERP is a modular software system designed to integrate an organization's business processes, such as accounting, HR, inventory management and purchasing, into a unified system. Before the popularization of modern cloud computing in the late 1990s, ERP systems ran inside the owner's facility, or "on premises." The cloud ERP era began in 1998 with the debut of the first ERP system to be delivered over the internet, NetLedger, later renamed NetSuite.

Components of cloud ERP software

Both on-premises and cloud ERP systems have a centralized database for storing information about business transactions so it can be easily accessed and shared among modules. Having one version of a purchase order, for example, helps ensure consistency of the information across modules and departments, minimizes errors and facilitates reporting.

The only module that is common to all ERP systems, regardless of deployment model, is the one for basic accounting and finance functions, as well as related processes such as financial management, analytics, forecasting and reporting.

Most ERP products also have modules for human capital management (HCM) and customer relationship management (CRM). In both on-premises and cloud ERP systems, modules for procurement and order management are also used widely, since those functions are common to all types of industries and businesses regardless of whether their product is a tangible or intangible good or a service.

On-premises ERP vs. cloud ERP

The breadth and depth of available modules can differ significantly between on-premises and cloud ERP products. In the early years of cloud ERP software, cloud versions usually had far fewer modules than their on-premises predecessors. The gap has narrowed as ERP vendors have shifted most of their development effort away from on-premises versions to the cloud, and today many cloud ERP systems include the broad range of functional modules that are available on premises.

However, vendors still struggle to deliver comparable features in their cloud ERP offerings, and on-premises ERP outsells cloud by a wide margin.

There are other important differences. SaaS ERP can't be customized, for the most part, which is a serious drawback for companies that spent years customizing on-premises ERP to meet their unique needs. (SaaS proponents claim this is a plus because it helps enforce industry best practices, reduces IT costs and makes the ERP system less prone to bugs and crashes.)

On-premises ERP usually has high upfront costs, including a large payment for a multiyear license, while SaaS typically comes as a monthly, per-user subscription, though some vendors offer pricing that combines the two models. SaaS ERP requires less investment in IT staff and infrastructure. Despite these differences, debates continue to rage about which deployment model is cheaper for ERP buyers in the long run.

Cloud ERP, because it's accessed remotely over the internet, may seem more vulnerable to public network outages, and some companies might be uncomfortable trusting software maintenance to an outsider. On the other hand, internal networks are also susceptible to outages, and companies may lack the expertise to keep their ERP software running. As for security, early fears about the safety of sensitive ERP data stored in the cloud have subsided as companies have come to realize their own data centers may be less secure than those of cloud providers.  

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