Perils of Cloud-based ERP

While majority of ERP systems are implemented on premise, the rising cost of IT infrastructure, upfront investment on software licenses, and the complexity of implementation have compelled CIOs and CTOs to adopt innovative ways to optimize IT operational excellence with minimized cost. As a major tectonic shift in IT operations, the innovations in cloud computing have contributed significantly to the acceptance of cloud-based software systems in general, and cloud-based ERP systems in particular. Although the early adopters, mostly small and medium enterprises, are leveraging the benefits of affordability, accessibility, and manageability of cloud-based ERP systems, the large enterprises are still skeptical about the long-term benefits because, for them, ERP system is not just another piece of fringe software which would meet their short-term objectives, nevertheless it's a key driver of their long-term strategic goals.

This white paper attempts to touch upon various aspects of cloud-based ERP systems and deciphers the myths around realized benefits that are usually advocated by the software vendors and product evangelists. With changing business landscape, emerging customer needs, and evolving best practices in securing customer data and privacy, the large enterprises are focusing majorly on the right kind of deployment of ERP systems that would not only accelerate business productivity, but also it would ensure their business future ready and full-proof during any disaster. This paper unfolds the fact behind increasing concerns over cloud-based ERP systems and why the large enterprises are still not ready to move into cloud computing in a decisive manner.

Overview of ERP

The genesis of enterprise resource planning (ERP) solutions emerges from the requirement of management in accessing information regarding the performance of all departments and business processes in any organization. In an enterprise structure, as different business functions, such as finance, human resources, sales and marketing, customer service, manufacturing, quality assurance, and IT, are integrated to translate the organizational goals into top lines and bottom lines of the enterprise, similarly an ERP system supports the data flow of all functions in a seamless manner and provides a holistic view of enterprise-wide information in terms of reports and charts. Since its early adoption in industry in the late eighties and early nineties, the ERP systems have evolved along the ever changing business requirements of organizations.

The latest breed ERP system framework comprises modules like HRM (human resources management), SCM (supply chain management), CRM (customer relationship management), FAM (finance and account management), MRP (manufacturing resource planning), project management, and BPM (business process management), which are loosely coupled with the core ERP system database. A client can opt for an all-inclusive system or even can demand a lean system with fewer modules depending upon the business requirement. Furthermore, the ERP system vendors are smartly designing industry-specific ERP solutions, such as for manufacturing and service industries.

While integrating various functional processes, the ERP systems ensure businesses eventually increase productivity, reduce turnaround time, improve customer satisfaction, increase transparency and accountability, speed up decision making process, and save money and time.

When it comes the deployment, the real fight begins amongst the decision makers of the organization. While cost becomes an alpha factor for deployment type, the management team often deliberates upon various sensitive issues including privacy, control, data security, dependency, performance, and integration. Depending upon client requirements and organizational conviction, the ERP vendors provide flexible options like on premise, hosted, and SaaS-based deployment.

Understanding Cloud-based ERP

Cloud computing has opened new avenues for delivering an array of IT services over the Internet. With the advent of service oriented architecture (SOA) and Web 2.0 technologies, software vendors have started offering various cloud-based services such as IaaS (Infrastructure as a Service), PaaS (Platform as a Service), and SaaS (Software as a Service), easing the upfront investment required by any client. Multi-tenancy, hardware virtualization, and flexible software architecture contribute to the drastic cost reduction in cloud-based offerings. And that's the vantage point which prompts many leading technology behemoths like Amazon, Google, Microsoft, IBM, and Apple to provide cloud-based services to enterprises across the geographies.

With changing business dynamics, market competitions and sheer economic reasons are becoming more palpable to the management. This endorses a paradigm shift in the managing of IT and software services in any organization. Most small and medium enterprises (SMEs) are now shifting towards the cloud-based services for the singular reason that initial investment becomes a pain area while acquiring enterprise-grade software; however, with a fraction of that cost they can even realize immense benefits, if they adopt cloud-delivered services. In fact, a typical ERP solution, which is a huge capital-intensive product, for a small company with 100 users, would cost around $500,000 plus the investment on IT infrastructure for on-premise deployment; whereas, the same system on cloud-based delivery would almost cost half of that price, and that too without infrastructure burden.

Apart from initial investment point of view, cloud-based ERP systems have a number of tangible advantages that appeal to SMEs. Some core advantages include:

• Decreased infrastructure cost
• Reduced maintenance staff
• Quick implementation
• Lower implementation cost
• Faster customization
• Easy integration with other systems
• High scalability

However, large enterprises where user base accounts more than 10,000, the implementation of ERP on cloud gets extremely cumbersome. Adding further, data security, control, and customization are other critical areas that turn stumbling blocks for the decision makers to promptly switch over from on-premise mode to on-demand implementation over cloud.

Challenges of Cloud-based ERP

While cloud-based software services are defining new dimensions in IT offerings, large enterprises are still not fully convinced about the future trajectory of these offerings. Although many SMEs are taking the lead in adopting cloud-based ERP solutions, big organizations are treading with a caution. The major point of concern is data security. When the entire business-critical data are stored on cloud, the management is doubly skeptical about the control and portability of data. Irrespective of big assurances of cloud service providers regarding the security and privacy of information, the large enterprises are yet on evaluation mode. Here are some challenges that restrict large enterprises to adopt cloud-based ERP solution.

Data Security & Privacy

The biggest fear about cloud-based services is the breach of data security and privacy. Despite continuous assurances from cloud-based service providers, the large enterprises are still doubtful about the measures taken by data centers. And to exacerbate their doubts, the growing incidents of cyber attacks across the world only add more distrusts. According to a report published in Security Week, last September noticed a number of cyber attacks on top US financial institutes including Bank of America and JPMorgan Chase. The fact that people generally believe that client machines are more vulnerable to attacks; however, in this case the denial of service was originated from the servers in data centers. According to Internet Security Threat Report Volume 17, Symantec, April 2012, 93% of data theft identified in 2011 were from the companies in the computer software, IT, and healthcare sectors.

Since enterprise-grade ERP systems capture the business critical data from all functions of the organization, exposing them to a third party service provider would not only sometimes breach the SLA between the company and its clients, but also it jeopardizes business secret when they become vulnerable to large scale cyber attack. For big enterprises, the security of customer information, business strategy, and business-sensitive data weigh more than the growing trend of cost optimization. Although cloud service providers come out with innovative methods such as data encryption techniques, multiple authentication process like dual password system and sequential log-in, and multilayer fire-walling, today's hackers are smart enough to intrude into data centers quite easily. Certainly, there is no 100% guarantee from the cloud service providers that their data centers would never be vulnerable to such attacks.

Data Control

When cloud service providers take control of enterprise data, it becomes imperative for the enterprises to agree upon various service level agreements (SLAs) to accommodate service requests. However, once the data are moved into data center servers, enterprise control gets diminished. Any request for accessing a specific type of reporting or maintenance of data becomes binding to the SLAs. As large enterprises place thousands of requests from various functions, these requests turn out to be additional cost overrun. Moreover, when an enterprise wants to change the cloud service provider, the real trouble arises because data migration from one data center to another data center is the toughest task they have to handle.

Integration

For large enterprises, cloud-based ERP system is not the only program that they entirely bank upon; there are scores of other critical software programs that run on the premises are also equally important. Synchronization of data lying at the local servers with the data available on cloud sometimes becomes difficult. When integration of data sources becomes essential, the inability to do so or inordinate delay in execution impacts the business.

Portability

All cloud service providers are not in a democratic structure, which would enable transitioning of data from one data center to another smooth and painless. When a large organization invests hugely on cloud-based ERP solutions, it doesn't essentially corroborate to the fact that the business relationship would last for eternity. Sometimes, the services provided by the cloud service provider won't suffice to the relevant needs of the business. In this case, a shift in vendor becomes indispensable. However, simply shifting the vendor won't resolve the issue because the huge corporate data lying with the previous vendor might not be migrated to the new vendor's data center as it is. Then the real crisis begins.

Dependability

In comparison to on premise deployment, cloud-based ERP has a major bottleneck, which essentially represents the dependability on the vendor for all and sundry. Even a small report, which might have some urgency for now, can't be retrieved at the moment because everything needs a proper process and it takes time to execute. Too much dependability on the vendor for everything sometimes hampers the decision making process of the client as well.

Conclusion

The evolution of of cloud computing combined with the power of Internet technologies and the service oriented architecture (SOA) has opened a floodgate of opportunities for cloud service providers and software vendors to expand their services. From multiple deployment opportunities to flexible services to easy customization, the cloud-based software services have already made their marks in the SME segment delivery. However, the large enterprises are not fully convinced about the benefits articulated by cloud service providers. Especially, in case of cloud-based ERP solution, the short-term benefits may seem quite exiting, but for many good reasons such as data security, privacy, super control, integration, and data migration, the big companies have a valid point to differ with the service provider's views. Vulnerability of business-critical data, customer information, and strategic corporate information is not a mere narrative, but the stark realities of today's cyber attacks. While hackers are stealing millions of customer data from the data centers, then it dismantles the real vulnerability of cloud service providers, as how helpless they are. And all these ground realities only substantiate the skepticism of large enterprises on the promises made by cloud service providers. There is a long way to go for the cloud-based ERP solutions for large-scale deployment because the unquestionable risks attached to data security and privacy shouldn't be undermined.