SAAS or Hybrid ERP: Which type of ERP fits your purpose?
Many businesses are on the verge of a digital transformation and are looking for new ERP solutions. In the recent years the SAAS model for ERP solutions gained popularity and has a growing adoption by businesses. They pay a monthly fee for their ERP licenses and the vendor takes care of the upgrades and support. Other companies decide to implement a Hybrid ERP. In a Hybrid ERP setting, companies buy the ERP licenses, run it on a Infrastructure as a Service (IAAS) in combination with Managed Services and Upgrade services backed-up with an Service Level Agreement. Both SAAS and Hybrid ERP models have their advantages and disadvantages. Depending on your specific business needs both of them can be the right choice for you or not.
For a software vendor, SAAS is a great business model since it generates a recurring and predictable cash flow. It also creates a big vendor lock-in for the ERP software, services, support and infrastructure. This is the main reason why there is such a hard push from technology vendors on bringing SAAS solutions to the market. And this quite often results in a subjective approach to the pros and cons of deploying SAAS software in most publications you will find.
In this article we want to provide an objective perspective on both models. We dive into six different evaluation points that you should consider when you compare both options. This will help you to choose an ERP-system that fits your purpose. Which ERP model and solution best suits your company entirely depends on your business needs and how they compare to the specs that SAAS and Hybrid ERP offer.
1. Scalability and performance of infrastructure:
With a Hybrid ERP you have deployment flexibility with the following options:
- Deployment on a Infrastructure as a Service (IAAS): you have more control over the systems performance in this model than in a SAAS model, because you decide what IAAS capacity and performance you need. When using an IAAS, you make use of all security and data-accessibility and services of the IAAS provider.
- Deployment On-Premise (local servers) or in a data center can still be an viable option since you are in full control of your systems performance, security and data accessibility. An on-premise system can also have a better performance when daily processing high volume data and transactions. Since you are in full control of your technical infrastructure and you are not dependent on an internet connection as SAAS or IAAS does (higher latency).
In a SAAS ERP model you have limited flexibility in deployment. Some vendors offer the possibility to scale up the underlying infrastructure at a higher price, but in general you are using a SAAS service in a multi-tenant environment, where all customers will have a more or same level of service. The SAAS model provides full security and data accessibility from the vendor.
2. Scalability of license model
In a Hybrid ERP model you buy the amount of licenses that you need. When needed, you can buy additional licenses with the vendor. So scaling up is relatively easy. Scaling down is not possible, except for cancelling your maintenance contract on the users which you don’t need anymore.
In a SAAS model you can formally scale up and down when you need more or less users. In practice there are some limitations to this, as many businesses decide to buy an large number of users for a longer contract period to get higher discounts. In that case scaling down can only be done after the contract terminates. In many cases this reduces the option to scale down. Scaling up is never a problem.
A SAAS ERP comes with full support for the standard application including regular upgrades, issue and bug solving, helpdesk for logging tickets etc. In most situations, the SAAS model offers a limited flexibility in support models and might not provide all the support you need. Support of customizations, integrations and other applications is usually not a part of the SAAS service offering. This will in most cases be done by a service or implementation partner at additional cost.
The Hybrid ERP can be extended with additional applications and technical (incl. upgrade) support services. This offers a similar service as a SAAS ERP model, but includes the support of customizations, integrations and third party software. In a Hybrid ERP you also have more flexibility in the level of support. Not every business needs 24/7 support. Some companies might need four hour resolution times and others a 100% guaranteed uptime. In a Hybrid model you can choose which service level and costs are appropriate for your business needs.
4. Control over your Upgrades
With a Hybrid ERP you are in full control of system upgrades. Unlike SAAS ERP, there are no forced upgrades. Forced upgrades (SAAS) can highly disrupt the business, since it demands regular intensive testing and possibly rework on customizations.
In the Hybrid ERP model, you can decide your own pace of upgrading. You will also need intensive testing and rework of customizations, but with a frequency which suits your business needs. A Hybrid ERP model never forces you to upgrade.
A Hybrid ERP software application gives businesses a higher degree of control of the software. It is easier to realize customizations, integrations and adding enhancements. In organizations with a more complex multi-application landscape this will give a great advantage for realizing these integrations and customization.
SaaS is a ‘closed’ software model and the vendor has full control over the core product (software) and in which way customizations can be done. In many cases customizations must be done outside of the core ERP SAAS software, which makes it more complex.
6. Total Cost of Ownership of your ERP software
The hybrid model means that you buy your software licenses. This is a heavy investment upfront. But most vendors offer finance constructions to pay of the software per month over a certain period. SAAS is a subscription model and you pay per month or quarter. This means for the business no heavy investments in software licenses, the SaaS costs are part of the operating expenses.
When calculating the cost of a Hybrid ERP model over a period of 5 to 10 years, the total cost of ownership (TCO) can be significantly lower than a SAAS solution. The reason for this is following. In a Hybrid model you pay a one-time license cost for the software licenses and after that a yearly maintenance fee (20-22%). In addition, you pay a fixed fee for the IAAS services and a fixed fee for the Managed Services and upgrade services to your support or implementation partner. This leads to a total cost, which you can calculate for a period of 5 to 10 years.
The SAAS model is much simpler in basis. You pay a fixed price per user per month and you pay this price for each user during the complete period of service. This price includes the ERP licenses, software maintenance fee, the basic helpdesk support for the standard software, standard upgrade services and infrastructure. Not included are the cost for support on customizations, integrations etc., which then need to be contracted (and paid for) with an implementation or support partner. All these costs combined lead to a total cost for the SAAS model.
As the SAAS pricing in general is relatively high compared to a Hybrid ERP model, it makes sense to calculate the total cost of ownership for both and compare them. You might be surprised about the outcome of your calculations.
Which type of ERP fits your purpose?
The graph below illustrates when which type of ERP suits your business best based on business requirements in terms of ‘Flexibility & Control’ and ‘Complexity’. Flexibility and control is determined by the deployment and infrastructure possibilities, performance and the control of upgrades (adoption pace). Complexity means the need for customizations and the IT landscape complexity (interfaces with thirds party applications.
Would you like to know more?
You’ve learned that both SAAS and Hybrid ERP models have their pros and cons. You should use these evaluation points in this article as a basis for a thorough comparison. If you have questions about this article please feel free to contact me, Frederik Haaxman, at firstname.lastname@example.org or use the button below.