The Economics of Cloud ERP Software — What You Need to Know

The Economics of Cloud ERP Software—What You Need to Know

By Paul Johnson
CPA, CGMA, MBA

Know Your Options: Understanding The Economics of Cloud Financial Software

For growing businesses on a budget, the cloud is the place to be for ERP and financial management software. Faster deployment, greater ROI, better security and flexibility, lower maintenance costs—the benefits are nearly limitless. When researching your options, though, it’s helpful to understand the different types of software deployment models, e.g., cloud or on-premises, and the relative costs and benefits of each.

a concept of a man interacting with cloud software, looking at a computer with data rendering

The ABCs of software deployment

Software deployment models have evolved over the years. A whitepaper by Vital Analysis explores this evolution. First came on-premises solutions, where a company hosts the vendor application on its own hardware. Additional investments such as database software, backup and recovery tools, reporting tools, and systems management software are required to make it work. All these take significant upfront costs as well as ongoing maintenance and licensing dollars. Installing upgrades or releases is often a lengthy process of trial and error.

Several on-premises vendors later offered “hosted” versions of their products, in which the software resides on the vendor’s or a third-party’s cloud server. These are offered on a Software-as-a-Service (SaaS) basis through monthly subscriptions, eliminating the need for upfront license costs and maintenance support fees. These solutions are considered “single tenant,” which means each customer has their own version of the software as well their own databases. Thus, companies are still on the hook for software maintenance and upgrades. Costs associated with these upgrades are often as high as their on-premises siblings.

Private cloud deployments are essentially an on-premises solution that is configured to operate as though it were on the cloud, giving customers an online experience while retaining ownership of the computing hardware and licensing the needed systems software. Costs are similar to on-premises solutions, since the customer owns and maintains virtually the same solution in either environment.

The pluses of multi-tenant SaaS deployments

Multi-tenant SaaS deployments are fundamentally different than these other options. They were built from the ground up to be run in the cloud, and they’re multi-tenant, which means all customers simultaneously share a single copy of the software. Each customer’s data is logically separated from the others’, yet they all can live on a single physical database.

As with single-tenant SaaS deployments, users of multi-tenant solutions don’t have to make large, upfront capital expenditures or invest in expensive IT infrastructure. With multi-tenant solutions, however, the vendor—not the customer—is responsible for updating and upgrading the system.
According to Vital Analysis, “this is a significant point because the labor cost to maintain application software is often the single largest cost component of on-premises solutions. In a study completed by TechVentive involving users of multi-tenant application software, customers reported saving between 40-60% by using multi-tenant solutions instead of on-premises applications.”

a man working on his laptop at a high rise window overlooking a city

Following the money

Vital Analysis found that multi-tenant software vendors spend money quite differently than other vendors. For example, they spend only 10% of total expenditures on cloud data center costs. These include hardware depreciation, backup and recovery software, labor costs to operate the cloud center, security systems, and—most importantly—the labor to apply maintenance patches, upgrades, and updates for their customers.

Because multi-tenant vendors operate on a single technology stack and all customers are on one version of the software, maintenance is one and done. The vendor spends less on maintenance, customer support, and other related deployment costs. On-premises vendors, on the other hand, must support multiple code stacks/computing environments, which causes deployment costs to skyrocket.

Overall, Vital Analysis concluded that multi-tenant SaaS vendors offer significant advantages, including:

Greater research and development (R&D) spend efficiency.
More frequent functional improvements to the product.
Lower support costs for the vendor and the customer.
Lower cost testing and debugging environment for the vendor and customer.

Ready to explore the economic and operational benefits of cloud-based financial management/ERP software for your business? Contact Atlasphere Consulting today.

Looking into cloud ERP or financial management software like Sage Intact? Make your best business case with this three-step process.

By Paul Johnson
CPA, CGMA, MBA

The cloud is a highly popular platform for hosting critical business applications such as ERP and financial management. One survey predicts that 83% of enterprise workloads will be in the cloud by 2020. And there’s good reason for that. Software-as-a-Service (SaaS) applications can be deployed more quickly, cost less, can be accessed anywhere/anytime, and have the flexibility to adjust to changing business requirements.

two business partners working on Cloud ERP at a desk on their computer

However wonderful these benefits sound in theory, the hard reality is that companies must build a business case for significant technology investments. Nucleus Research developed a three-step methodology to help organizations do just that—so they can realize the benefits of cloud financial management sooner rather than later:

1. Identify the top areas of benefit

The most successful business cases are built on only two or three major benefits, while most “bad” ones have five or more. The following five factors can be used to rank your expected benefits on their ROI potential:

Breadth
Repeatability
Risk
Collaboration
Knowledge

Breadth and repeatability provide the greatest potential returns from a benefit, according to Nucleus: “We often see this in cloud projects such as [Sage] Intacct, because the usability of the application enables companies to extend its use and function to more employees that weren’t touching financial information before (breadth), and the ability to access from anywhere (including mobile devices) increases repeatability.”

2. Quantify the primary costs and benefits

These can either be one-time or recurring. When gathering and including costs in the calculation, be sure to follow these basic rules:

Do count everything that is directly associated with the project, e.g., annual subscription fees for the software.
Do count infrastructure items that were driven by the project, e.g., extra bandwidth.
Don’t count infrastructure items not associated with the project, e.g., existing Internet connections.

Benefits can be either directly quantifiable or more indirect productivity-based gains. One of the greatest of these is increased worker efficiency. Specific examples of benefits that Nucleus Research has found from cloud financial management software such as Sage Intacct included:

Saved 500 hours a year on manual data entry.
Eliminated $30,000 in annual IT costs, due to moving from an on-premise solution.
Reduced month-end cycle from 8 hours to 6 hours.
Reduced time for monthly reports from 1 day to 2 hours.
Avoided an additional accounting employee.

a database housing a cloud network

3. Assess the financial metrics such as return on investment (ROI) and payback.

To make a solid business case, Nucleus recommends focusing on two core metrics (ROI and payback), and a secondary metric (total cost of ownership):

ROI, which is the average net benefit over three years divided by the initial cost, is the most important metric for choosing an application and prioritizing projects during budgeting.
A key measurement of risk, payback period is the length of time it takes for benefits returned to equal the initial cost of the project.
While total cost of ownership (TCO) provides a good metric for budgeting, it’s not usable for assessing the bottom-line benefits of a project because it only calculates lowest cost rather than greatest return.

Get your best cloud ROI with Atlasphere Consulting

Nucleus found that Sage Intacct users realized both direct and indirect benefits, including increased productivity, increased visibility, reduced or avoided IT costs, improved inventory management, accelerated financial processes, and reduced audit costs. Need help building your business case for your next technology project? Contact the experts at Atlasphere Consulting!