Like many cost related questions, the answer to which type of ERP system, legacy or cloud will be more cost effective for your business depends on your needs and unique situation. However, there are several key factors to consider when conducting an ERP system cost comparison. The goal of today’s blog is to break down some of these key factors, so that you can make a smart financial decision when choosing which type of ERP to purchase. At the end of each section below, you will notice, a “bottom line” where I give a general rule of thumb of when to choose each ERP type. If you keep a note of which category you fall into most often, by the end of the blog you should have a good idea of what type of ERP system will be best for you.
ERP System Cost Comparison Factor #1: Upfront Costs
Because you buy and maintaining the hardware your on premise (legacy) ERP system runs on, these have higher upfront costs than cloud ERPs. For some businesses, making a large upfront investment could leave you strapped for cash or feel too risky. Conversely, others may prefer that an on-premise system is a depreciable capital expense, rather than an ongoing operating one.
Bottom line: Don’t have the cash to make a hefty investment in expensive hardware? Choose the cloud. Want to reduce overhead? An on-premise system may be better.
ERP System Cost Comparison Factor #2: Implementation Costs
Both cloud and legacy ERP systems take time to get up and running. Therefore, it’s key not to overlook how much this time will cost you. Some will have their internal IT team handle the implementation while others will hire an outside consultant. If you handle the work internally, the cost is largely overhead. To calculate this cost, consider how much time your staff will spend on this project and multiply that by their hourly salary, or if your staff member would normally use that time to bill out to clients, a more accurate calculation would be to multiply the number of hours they devote to this project times their hourly billable rate.
Another factor that will determine your implementation costs is the amount of customization your system needs. In general, cloud ERP implementations are faster than legacy ERP implementations because cloud ERP systems often offer less customization flexibility than their legacy counterparts. Because cloud vendors often handle a lot of the system maintenance and updates for their customers, they need to keep things more standardized. Whereas, with many legacy ERP systems, if you have the right development skills, you can customize the system to do just about anything you need. Of course, these customizations come at a price.
Bottom line: Choose a cloud ERP if you don’t need a great deal of customizations and are looking for a faster implementation. If you have unique needs an out of the box ERP system can’t meet, a legacy system may be the better choice.
ERP System Cost Comparison Factor #3: Licensing Costs
Both legacy and cloud ERP vendors require you buy a license to use their software. With legacy ERP systems, you pay a onetime “perpetual” license fee. The size of your organization (how many users you have) and which parts of the system you plan to use determine the exact cost of this. Cloud ERP vendors usually charge for the same things, but they usually use a subscription pricing model. This allows you to break down the cost of the license over time, rather than paying for all of it upfront.
Much debate still surrounds which of these licensing cost structures is more cost effective over the life of your ERP system. Some claim that cloud ERPs can save you almost 50% on licensing costs vs. on premise systems. Other studies have found that over time these costs converge, and cloud ERP eventually becomes more expensive. One reason for the disparity in these numbers is some ERP cost comparison studies do not take into account the cost of updating an on-premise ERP system at least every 2 to 3 years. With a cloud ERP system, much of that cause gets rolled into your subscription fee.
Bottom line: Like factor number one, whether a legacy or cloud ERP wins out for you depends on whether you prefer to pay most of your costs upfront, or break them down.
ERP Cost Comparison Factor #4: System Maintenance Costs
As I explained earlier, a legacy ERP runs on hardware (servers and computers) your business owns and maintains. So, when the system needs maintenance, like an update or security patch for example, it is your responsibility to handle those. If you do not have the in-house expertise to do this, you can hire an outside consultant to help you and they will charge an hourly fee for their help.
Also, if something goes wrong with your server or other hardware, you will need to fix or replace it.
With a cloud ERP, your vendor owns the server your system runs on. So, if something goes wrong with the server, it is their responsibility to fix it. They will also often handle general software maintenance, like security patches or updates. Sometimes, these updates will require some action by the customer. But they are generally less involved in the update process than they would be with a legacy ERP system.
Bottom line: If you don’t have the staff to maintain your own hardware (or the budget to hire an outside consultant to help you) a cloud ERP is usually the smarter choice. If you have an internal IT team who has the expertise to handle system maintenance, and you would like more control over your software updates (and when they get applied), a legacy ERP may be preferable.
ERP Cost Comparison Factor #5: Support Costs
This one is largely a wash. Both ERP and legacy cloud vendors will generally charge you an extra fee for support and training. Sometimes, depending on, what the vendor charges for support and how much support you need, it may be more convenient and cost-effective to hire an outside consultant. Someone who is an expert in your ERP and can jump in and help you when needed. Also, if you prefer local support, someone who can come to your office give users training or help you troubleshoot issues, you definitely should look for a consultant in your area. The costs associated with this will depend on several things, including the amount (and type) of support you need, your geographic location and your consultant’s fee schedule.
Bottom line: Again, this one is a wash and depends on your needs and personal preferences.
There you have it, a breakdown of the major cost categories to consider when deciding whether a legacy or cloud ERP will be the best fit for your business. If you would like more information on ERP costs, download our e-book “ERP Buying Is Easy If You Do It Smart.” It takes an in-depth look at each of the costs to consider when buying a new ERP system, particularly hidden costs many buyers overlook.
Questions, need an expert’s opinion on whether a cloud or legacy ERP solution is the right choice for your business? Call us at (336) 315-3935! Our experts are happy to discuss your specific needs and help you choose the solution that will serve your business well for many years to come.
