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.
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.”
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.