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SaaS and Cloud ERP Trends,

Observations, and Performance 201

December 2011

Nick Castellina

~ Underwritten, in Part, by ~


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This document is the result of primary research performed by Aberdeen Group. Aberdeen Group's methodologies provide for objective fact-based research andrepresent the best analysis available at the time of publication. Unless otherwise noted, the entire contents of this publication are copyrighted by Aberdeen Group, Inc.and may not be reproduced, distributed, archived, or transmitted in any form or by any means without prior written consent by Aberdeen Group, Inc.

December, 2011

SaaS and Cloud ERP Trends, Observations,

and Performance 2011

Over the past five years, Aberdeen has been measuring the willingness oforganizations to consider Software as a Service (SaaS) as the deploymentmodel for their Enterprise Resource Planning (ERP) implementations. In thattime, organizations have become more educated on both the benefits andpotential issues that factor into a SaaS ERP decision. In 2007, Aberdeencharacterized ERP as theLast Bastion of Resistance to Software as a Service. Ayear later, Aberdeenrevisited the topic, and found that SaaS ERP had notkept pace with the demand for other SaaS enterprise applications.In 2009,

SaaS ERP still had yet to take off. Finally,in 2010,Aberdeen saw an overall61% jump in willingness to consider SaaS ERP. That trend has continued thisyear, with the willingness to consider SaaS ERP increasing further. At thesame time, there has been a reduction in survey respondents' willingness toconsider a traditional, on-premise ERP solution. This Analyst Insightexamines this trend, along with the reasons that organizations areconsidering SaaS ERP and the performance of organizations that havealready made the jump.

Current ERP Deployments

While this document focuses on comparing SaaS ERP implementations to

on-premise implementations, it is important to distinguish between themany ERP deployment methods organizations are using. For the purposes ofthis document, Aberdeen provides the following definitions:

Traditional license on-premise: Software may be licensed foruse on a particular computer, or by other criteria such as numberof users. The license can be either on a term basis or perpetual, andis often treated as a capital expense. The software is located in-house.

SaaSor on-demand: The software itself is not licensed or ownedby the end user; it is provided as a service. It is often paid for on asubscription basis, and can be accessed from a normal internet

connection. SaaS avoids a large upfront capital investment. Thisdeployment method is often referred to as the Public Cloud.

Hosted: Licensed applications are hosted by a third party. Thisdeployment method may be in a separate instance on a separatepiece of hardware (dedicated to an organization), or in a separatevirtual instance (dedicated to an organization) where the applicationis housed on hardware shared by multiple companies. Sometimesthis deployment method involves a Private Cloud, where the

Analyst Insight

Aberdeens Insights provide theanalyst perspective of theresearch as drawn from anaggregated view of the researchsurveys, interviews, anddata analysis
http://www.aberdeen.com/Aberdeen-Library/4287/RB-last-bastion-resistance.aspxhttp://www.aberdeen.com/Aberdeen-Library/4287/RB-last-bastion-resistance.aspxhttp://www.aberdeen.com/Aberdeen-Library/4287/RB-last-bastion-resistance.aspxhttp://www.aberdeen.com/Aberdeen-Library/5236/AI-saas-erp-barriers.aspxhttp://www.aberdeen.com/aberdeen-library/6469/AI-enterprise-resource-planning-saas.aspxhttp://www.aberdeen.com/Aberdeen-Library/6890/RA-enterprise-resource-planning.aspxhttp://www.aberdeen.com/Aberdeen-Library/6890/RA-enterprise-resource-planning.aspxhttp://www.aberdeen.com/aberdeen-library/6469/AI-enterprise-resource-planning-saas.aspxhttp://www.aberdeen.com/Aberdeen-Library/5236/AI-saas-erp-barriers.aspxhttp://www.aberdeen.com/Aberdeen-Library/4287/RB-last-bastion-resistance.aspx


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SaaS and Cloud ERP Trends, Observations, and Performance 2011Page 2

2011 Aberdeen Group. Telephone: 617 854 5200

www.aberdeen.com Fax: 617 723 7897

instance of ERP is hosted by a third party and then delivered to theend user on a subscription basis.

Preconfigured on a hardware appliance: Licensed software ispre-configured and pre-installed on the hardware. Pre-configurationmay be industry-specific and include best practices templates forworkflows and role definitions.

Often times, the end user neither knows nor cares how the ERP softwarethey are using is deployed. All that matters is whether or not the functionsthey need are available when they turn on their computer. Deploymentfactors matter more to the people that are actually approving the fundingfor ERP and the IT staff that supports it. Still, there is a clear divide in thedeployment methods that organizations are currently using when deployingERP.

Aberdeens2011 ERP surveyhas found that there is currently a strong

majority of organizations using ERP on-premise. Nine percent (9%) ofcurrent ERP deployments use the SaaS model, compared to 72% for on-premise. While on-premise deployments are the consistent leader amongstall company sizes, SaaS implementations become more common as theorganizations get smaller (Figure 1). Seventeen percent (17%) of ERPimplementations in small organizations (organizations with under $50 millionin annual revenue) are deployed in the SaaS model. This is more than the 8%in midsize organizations (organizations between $50 million and $500million in annual revenue) and 2% in large enterprises (organizations over$500 million in annual revenue). Currently, 13% of ERP implementations inSmall and Medium Enterprises (SMEs, those organizations under $500million in annual revenue) are SaaS deployments, while 75% are on-premise.

Larger organizations are more likely to consider hosted environments,keeping their data in private clouds. Some of the reasons that SaaSimplementations have been attractive to smaller organizations will beaddressed more fully in the rest of this document, but the fact that smallercompanies are using SaaS does not mean that large enterprises may notalso benefit from the unique advantages of a SaaS ERP solution.

Figure 1: Current Implementations

17%

4% 6% 2%

71%

8% 6% 5% 3%

79%

2%10% 11%

2%

75%

13%5% 6% 3%

75%

0%

10%

20%

30%

40%

50%60%

70%

80%

90%

On Demand / Software

as a Service (SaaS)

ERP hosted and

managed by your ERP

vendor

ERP hosted and

managed by an

independent 3rd party

Preconfigured on a

hardware appliance

Traditional licensed on

premise

PercentageofRespon

dents,n=553

Small Midsize Large SME

17%

4% 6% 2%

71%

8% 6% 5% 3%

79%

2%10% 11%

2%

75%

13%5% 6% 3%

75%

0%

10%

20%

30%

40%

50%60%

70%

80%

90%

On Demand / Software

as a Service (SaaS)

ERP hosted and

managed by your ERP

vendor

ERP hosted and

managed by an

independent 3rd party

Preconfigured on a

hardware appliance

Traditional licensed on

premise

PercentageofRespon

dents,n=553

Small Midsize Large SME

Source: Aberdeen Group, October 2011

SaaS ERP Deployments vs. On-Premise by Industry

Methods of current ERPdeployments were found tovary from industry to industry:

Financial Services: 17% SaaSvs. 42% On-Premise

Healthcare: 17% SaaS vs.67% On-Premise

Manufacturing: 6% SaaS vs.76% On-Premise

Non-Profit: 5% SaaS vs. 79%On-Premise

Professional Services: 9%SaaS vs. 64% On-Premise

Retail: 21% SaaS vs. 79% On-Premise

Technology: 11% SaaS vs.77% On-Premise

Utilities: 10% SaaS vs. 80%On-Premise

Logistics: 9% SaaS vs. 68%On-Premise
http://www.aberdeen.com/survey/0321-ERPin2011/http://www.aberdeen.com/survey/0321-ERPin2011/http://www.aberdeen.com/survey/0321-ERPin2011/http://www.aberdeen.com/survey/0321-ERPin2011/


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Additionally, the current adoption of SaaS ERP varies from industry toindustry (see sidebar). As it currently stands, SaaS solutions are more likelyto be deployed in industries such as financial services and healthcare ratherthan manufacturing, for example. There is, in fact, some correlation betweendeployment model and the age of the currently implemented ERP system(see sidebar). Industries such as manufacturing, where the average age of theERP solution is 7.64 years, are much less likely to have a SaaS solution. Inretail, where 21% of ERP deployments are SaaS, the average age of ERPimplementations is 4.37 years. This, combined with the advantagesdescribed below, gives reason to believe that the divide between SaaS andon-premise ERP deployments will not last forever.

Increasing Future SaaS and Cloud Investment

The Q4 2010 Aberdeen Business Review found that cloud computing /virtualization will be the top technology investment that organizations are

making in 2011. This is a jump from theprevious year,when cloudcomputing was found to be the third leading technology investment. Thesepotential future investments in the cloud saw amplified results this year inorganizations that Aberdeen considers to be High Growth (see sidebar).Thirty-nine percent (39%) of High Growth organizations planned to investin cloud computing, compared to 25% of No Growth organizations (Figure2). While cloud computing is gaining steam across all organizations, it isparticularly important for organizations that are planning to expandoperations.

Figure 2: Top Technology Investments for 2011

24%

27%

25%

29%

31%

31%

27%

27%

39%

0% 10% 20% 30% 40% 50%

Enterprise Applications

Business process management tools

Cloud computing / Virtualization

Percentage of Respondents, n = 1,519

Hi Growth

Low Growth

No Growth

Source: Aberdeen Group, January 2011

In addition to organizations' current ERP deployment methods, Aberdeens2011 ERP survey polls respondents on which deployment methods theywould be willing to consider in the future. Over the past 5 years, Aberdeenhas seen an increased willingness to consider SaaS ERP (Figure 3). This year,the willingness to consider SaaS saw its largest increase yet. Conversely, thewillingness to consider an on-premise solution has steadily decreased. Therehas been a comparatively smaller increase in the willingness to consider

Average Age in Years of ERPImplementations

Financial Services: 4.75 Healthcare: 7.17 Manufacturing: 7.64 Non-Profit: 7.03 Professional Services: 5.14 Retail: 4.37 Technology: 6.37 Utilities: 6.88 Logistics: 5.36

Definition of GrowthCategories

In January 2010 Aberdeendefined growth in relativeterms. High growthcompanies as the top 20% interms of:

Revenue growth from 2009to 2010

Anticipated revenue growthin 2011

Growth in operating profitsfrom 2009 to 2010

Anticipated growth inoperating profits in 2011

Low Growth companieswere the middle 50% and NoGrowth companies weredefined as the bottom 30%.
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hosted, or private cloud, solutions. Not pictured is the interest in ERPpreconfigured on a hardware appliance, which has consistently stayedbetween 18% and 19%. If these trends continue, there will come a timewhen these percentages meet in the middle and organizations searching forERP solutions will focus on what matters most to the ultimate performanceof the ERP system: functionality and ease of use.

Figure 3: Willingness to Consider

23%

33%

17%

80%

37% 37%

27%

67%

52%

39%

31%

65%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

On Demand / Software as aService (SaaS)

ERP hosted and managed byyour ERP vendor

ERP hosted and managed byan independent 3rd party

Traditional licensed onpremise

Percentage

ofRespondents

2009 2010 2011


It is also interesting to examine how the willingness to consider individualdeployment models varies among industries (see sidebar). In someindustries, such as professional services and retail, organizations are equallywilling to consider SaaS and on-premise. In others, such as financial services,there is still a large divide. In this specific industry, it may be because thoseorganizations are wary of putting customer financial data in the cloud.Industries such as manufacturing, which has a huge divide between currentSaaS and on-premise deployments, have become more willing to considerSaaS ERP. Many of these industries have current ERP solutions over sevenyears old, meaning they may be considering making the move to SaaS thenext time they refresh their ERP. This further proves that the benefits ofSaaS ERP are being noted across most industries, and the deployment modelis becoming viable for businesses expecting to grow.

Factors Influencing SaaS Decisions

The reasons that organizations are becoming more receptive to purchasing

SaaS ERP solutions stem from the current perceptions about SaaS ERP.Many of the top reasons that organizations are willing to consider SaaS ERPinvolve costs (Figure 4). A SaaS solution may have a lower total cost ofownership, and lower upfront costs. A key benefit of ERP paid for in thesubscription model is that it can be recorded as a monthly operatingexpense rather than a large upfront capital expenditure. There are noupgrade costs because upgrades are handled automatically. These reasonsmake SaaS an attractive option for smaller, growing businesses. With a SaaS

The Willingness to ConsiderSaaS by Industry

The willingness to considerSaaS vs. On-Premise ERPsolutions varies from industryto industry:

Financial Services: 22% SaaSvs. 44% On-Premise

Healthcare: 42% SaaS vs.58% On-Premise

Manufacturing: 48% SaaS vs.69% On-Premise

Non-Profit: 67% SaaS vs.72% On-Premise

Professional Services: 56%SaaS vs. 58% On-Premise

Retail: 50% SaaS vs. 56% OnPremise

Technology: 58% SaaS vs.68% On-Premise

Utilities: 42% SaaS vs. 68%On-Premise

Logistics: 68% SaaS vs. 55%On-Premise


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solution, organizations can receive the improved efficiencies that ERPprovides while acquiring the resources they need to expand operations.

Figure 4: Positive Factors Influencing SaaS Decisions

38%

38%

41%

44%

49%

52%

75%

0% 20% 40% 60% 80%

Limited IT resources

Focusing internal resources elsewhere

Seeking best fit solution regardless of delivery model

Perceived ease of implementation

Lower up front costs

Reduces the cost and effort of upgrades

Lower total cost of ownership

Percentage of Respondents, n = 553


Some cost savings of a SaaS solution are not immediately evident. SaaS ERPminimizes the strain on internal IT departments, as IT support is handled bythe ERP vendor. Again, this is attractive for organizations that want to focusthe resources that would be used to staff an IT department on otheressential areas of the organization. There is no need to build an IT staff tosupport ERP with a SaaS solution.

Another factor that positively influences SaaS ERP decisions is theperception that SaaS is easier to implement. Aberdeen has found that thetime from installation to the first Go Live milestone is significantly shorter

for SaaS ERP than it is for on-premise (Figure 5). SaaS ERP is attractive fororganizations that want to quickly get up and running especially fororganizations in a massive growth phase, which could quickly spiral out ofcontrol without ERP.

Figure 5: SaaS Means Quicker Jumps Out of the Gate

11.0

6.7

0

2

46

8

10

12

Time from installation to first"Go Live" milestone

Months,

n=553

On Premise SaaS



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Larger organizations may also benefit from SaaS ERP's shorter time to GoLive. AberdeensSaaS and the Multi-tiered ERP Strategy(November 2011)explored how organizations that are acquiring new business units or startingsubsidiaries are using SaaS ERP to quickly and cost effectively bring theseunits to full operation. This unique advantage of SaaS ERP can benefit allorganizations that need an ERP system as soon as possible.

Lastly, 41% of organizations that are willing to consider SaaS ERP are lookingfor the best fit solution, regardless of deployment model. This is consistentwith the trend that SaaS and on-premise are approaching equalconsideration. AberdeensERP Selection: Starting Out on the Right Foot(August 2011) laid out strategies for selecting an ERP solution. AberdeensERP in SME 2011: Setting the Stage for Growth(September 2011) illustratedwhat the top factors should be (see sidebar). In fact, deployment model wasnot one of the top 7 factors. It is becoming more and more clear thatdeployment model for ERP is only a small piece of the ERP puzzle.

What is holding them back?

Of course, there are some negative perceptions that organizations unwillingto consider SaaS ERP are citing (Figure 6). For the most part, theseconcerns have decreased over the past three years, as organizations havebecome more informed about SaaS ERP. The only factor that has actuallyincreased is the concern about the security of SaaS ERP. Sixty-seven percent(67%) of respondents listed security concerns as a reason they are unwillingto consider SaaS ERP. They may be wary of exposing internal financial orcustomer data to competitors, or the potential for data to become corrupt.These are valid concerns, but Aberdeens reportWeb Security in the Cloud:

More Secure! Compliant! Less Expensive!(May 2010) found that, on average,on-premise solutions had 11 incidents of data loss or data exposure in thelast 12 months, compared to 6 incidents for those that are cloud-based.This is evidence that the actual impact of cloud based solutions on securityhas been communicated poorly. Are on-premise solutions truly as secure asthey are believed to be, or is security best left to those organizations (theSaaS ERP vendors) whose existence depends on their ability to provide safeand secure environments?

Top Selection Criteria for ER

Respondents for AberdeensERP in SME 2011: Setting theStage for Growthrated ERPselection criteria on a scale oone to five, with five being thmost important. The topfactors were:

4.27 Functionality 4.03 Ease of use 3.94 Must be an integrated

suite rather than multiplepoint solutions

3.92 Total cost of owners
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Figure 6: Decreasing Concerns Influencing SaaS Decisions

47%

55%

40%

51%

50%

47%

38%

50%

29%

35%

36%

67%

0% 20% 40% 60% 80%

We want to control our own upgrade process

ERP is too basic and strategic to running ourbusiness

Downtime risk - concern over predictableperformance

Security concerns


2011

2010

2009


The other top concern is downtime risk, or concern over predictableperformance. Still, this concern has decreased over time. Again, accordingto the Web Security report, on-premise solutions had 11 incidents ofsecurity related downtime, compared to 6 for cloud-based solutions. Sothese top two negative perceptions may actually be overstated.

The final two concerns that ERP is too basic to the running of the businessto be moved to a SaaS model, and that in a SaaS model upgrades are notunder the organization's control - come down to the ultimate preference ofthe organization. In the past, some organizations thought that ERP was toocritical to their business in order to consider a SaaS solution. Organizationsare starting to realize that SaaS ERP solutions are offering comparable

functionality to on-premise solutions. These organizations may also want tohandle their own upgrade processes rather than letting the vendor handle it.These concerns should be weighed against the advantages of the SaaS modelcontains, when evaluating ERP options.

The Benefits of SaaS ERP

Beyond the cost and resource savings that interest respondents in SaaS ERP,there are the actual business benefits that these organizations expect to seefrom cloud deployments. Aberdeens 2011Manufacturing OperationsManagement surveyasked respondents to state the two biggest benefitsthat they can receive from cloud technology (Figure 7). Again, the topbenefit involves cost. These costs include the actual cost of the software,

along with the cost savings gained by not having to acquire the internalinfrastructure to support ERP. To many organizations, the impact cloudcomputing has on the bottom line is its key benefit.

2011 ERP Research

Aberdeen's 6th annual ERPbenchmark study is being held

throughout the year and isaimed at quantifying ERP usage,identifying preferences for fullyintegrated suites versus pointsolutions, measuring Total Costof Ownership (TCO) as well asthe business benefits derivedfrom Best-in-Classimplementations. The surveyalso compares the performanceof organizations using ERP tothose without ERP. To takepart in the survey, please click

here.
http://www.aberdeen.com/survey/0382-MOM2011/http://www.aberdeen.com/survey/0382-MOM2011/http://www.aberdeen.com/survey/0382-MOM2011/http://www.aberdeen.com/survey/0382-MOM2011/http://www.aberdeen.com/survey/0321-ERPin2011/http://www.aberdeen.com/survey/0321-ERPin2011/http://www.aberdeen.com/survey/0321-ERPin2011/http://www.aberdeen.com/survey/0382-MOM2011/http://www.aberdeen.com/survey/0382-MOM2011/


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Figure 7: Top Two Biggest Benefits of Cloud Technology

36%

41%

44%

0% 20% 40% 60%

Ability to respond quickly to businessdemands

Efficient collaboration acrossgeographies

Lowering the cost of optimizinginfrastructure



To the business user, there are other benefits to be gained from cloud

computing. First is efficient collaboration across geographies. By interactingwith a SaaS solution on the internet, employees that are located far apartcan more efficiently collaborate with each other leading to betterperformance. Inherently, all parts of the organization, no matter where theymay be located, can share a common view of enterprise data. Asorganizations grow, they often become more geographically dispersed,making SaaS ERP an attractive option. SaaS lowers the bar to smaller andmore remote parts of the organization to have access to ERP, thus enablingthe basic transactional collaboration that ERP is known for.

Next is the ability to respond quickly to business demands. In todays 24 / 7business world it has become increasingly important to be constantly

connected in order to compete. Real time visibility allows organizations toquickly react to adverse events or take advantage of opportunities.AberdeensThe Analytical SMB: More Data, More Users, Less Time(November2011) examined the shrinking decision windows that confront modernorganizations. A SaaS ERP solution helps to enable more agile decisionmaking.

Who inside the organization is receiving the benefits described above? TheManufacturing Operations Management surveyasked respondents whichfunctional areas in their organizations could most benefit from cloudtechnology (Figure 8). These areas have a wide range in the organization.Areas such as supply chain appear to receive more benefit because they aremore likely to be distributed, and have more to gain from being connected

through SaaS. Marketing and sales are also likely to benefit from cloudcomputing, because they can access customer data while on the road.Contrary to the outdated beliefs that cloud computing only impacts IT,cloud computing can help improve operations across many functions in theorganization.
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Figure 8: More Functions Benefit from Cloud Computing

21%

33%

38%

56%

67%

0% 50% 100%

Research and Development

Enterprise Management (financials, HR, projectmanagement)

Production Managemnet (process control, qualityassurance, etc.)

Demand Management (marketing, sales, etc.)

Supply Chain Management (logistics, demandplanning, etc.)



Quantifiable Benefits

Aberdeens 2011 ERP survey has found a correlation between improvedperformance and the implementation of SaaS ERP solutions. In order tocompare apples to apples, Table 1 shows the performance of SMEs withSaaS ERP to SMEs with on-premise ERP. While this does not necessarilymean that a SaaS solution alone provides better company performance, itdoes show that organizations that are run more effectively are choosingSaaS for their ERP deployments. Organizations using SaaS are closing theirbooks more quickly, making faster decisions, serving their customers moreefficiently, and satisfying more customers. This superior performance leadsto prosperity for these organizations.

Table 1: SaaS ERP Performance

Definition of

Maturity ClassMean Class Performance

SMEs with SaaS

ERP

5.25 days to close a month93% complete and on-time shipments21% year over year improvement in time to

decision

92% internal schedule compliance96% inventory accuracy91% customer satisfaction

SMEs with On-

Premise ERP

5.36 days to close a month89% complete and on-time shipments18% year over year improvement in time to

decision

90% internal schedule compliance93% inventory accuracy86% customer satisfaction



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These organizations are also seeing enhanced benefits as a direct result oftheir ERP implementations (Figure 9). These include reduced costs andimprovements in inventory turns and schedule compliance. Theseimprovements help keep costs low and operations smooth. These are keybenefits to growing organizations.

Figure 9: Benefits of SaaS ERP

43%

18% 18%20%

36%

16% 15%17%

0%

5%

10%

15%

20%

25%

30%

35%

40%

45%

50%

Improvement ininventory turns

Reduction inoperating costs

Reduction inadministrative

costs

Improvement ininternal schedule

compliance

Percenta

geChange,n=553

SaaS ERP On-Premise ERP


Key Takeaways

When SaaS ERP was first introduced to the public, organizations were,understandably, wary of actually taking the step to implement a SaaS

solution. It has taken some time, but SaaS ERP is finally beginning to gainacceptance as just another deployment option. Soon, organizations will bejust as willing to consider a SaaS ERP solution as they are to consider an on-premise solution. Organizations are now more informed of the benefits ofcloud computing, and looking for ways to take advantage of it in theirbusinesses.

Deployment model should be looked upon as just one of the factors whenselecting an ERP. When selecting an ERP solution, organizations shouldconsider the following factors:

Does the ERP system have the functionality needed to effectivelyrun the business?

How easy it is for employees to actually use the system in order togain full benefits from it?

Will the system be up and running in the time needed? What is the total cost to the business? Can the IT department effectively support the ERP system?


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By combining these factors with the unique benefits of a SaaS ERP system,organizations can ride this technology trend toward future growth.

For more information on this or other research topics, please visitwww.aberdeen.com.To take part in Aberdeen's 2011 ERP research, clickhere.

Related Research

SaaS and the Multi-tiered ERP Strategy;November 2011ERP in SME 2011: Setting the Stage forGrowth;September 2011ERP Selection: Starting Out on the RightFoot;August 2011

SaaS ERP: Trends & Observations 2010;October 2010SaaS ERP: Trends and Observations;December 2009

Are the Barriers to SaaS ERP BreakingDown?;June 2008ERP: The Last Bastion of Resistance toSoftware as a Service;July 2007

Author: Nick Castellina, Senior Research Associate, Enterprise Applications andBusiness Intelligence ([email protected])

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cloud 2012 7190 ra enterprise resource planning

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