On-premises ERP Systems: 7 Hidden Costs

On-premises vs. Public Cloud: Conventional Comparisons often fall short

When it comes to calculating the cost of a new ERP system, the purchase price is often multiplied by the number of assumed user licenses and an annual amount for maintenance is added for on-premises systems. The resulting sum is then compared with the fees of an ERP system on a SaaS basis. These are basically made up of the number of users, which is multiplied by the monthly or annual fee per user. However, such a comparison has major shortcomings. On-premises operation in particular incurs many costs that are not noticeable at first glance. It is important here to consider the Total Cost of Ownership (TCO). This is an approach that attempts to take into account all costs incurred over the course of the entire product or service life.

Hidden Costs of ERP Systems from the Public Cloud

To anticipate an objection: ERP systems from the public cloud can also have hidden costs. Examples of this are Virtual Private Network (VPN) software and a replacement internet connection, which are recommended to ensure greater security and availability. Another frequently cited example is the cost of a possible vendor lock-in, i.e. the high cost and difficulty of switching to another vendor. In the case of vendor lock-in, however, many fears have not yet materialized, or not to the extent assumed. Because competitive pressure is strong, many cloud service vendors are more interested in making it as easy as possible for potential customers to switch vendors or not scaring them off excessively. However, this argument can become relevant for very specific cloud solutions. In principle, however, the costs for SaaS ERP software are much more transparent because the provision model is simpler and more standardized from the user’s perspective.

1. Local ERP Software: Indirect Costs for Hardware

In addition to direct server costs, i.e. their acquisition, indirect costs are also relevant for the hardware costs of locally operated software. These include electricity costs for direct operation and cooling, which can amount to several hundred euros per server per year. Moreover, servers usually have to be replaced every five years on average. This results in additional costs for acquisition, implementation and configuration. Old servers also have to be disposed of.

2. Infrastructure Costs for On-premises ERP Solutions

If a data center is operated on site, other infrastructure costs should also be taken into account. These include direct and indirect costs for building and space management of the data center. Additional expenses may include premiums for theft/fire insurance and a higher premium for business interruption insurance.

3. On-site ERP Systems: Costs of Limited Mobility

Mobile work processes in the company are often only possible to a limited extent with an on-premises ERP solution. Uninterrupted data access for employees and managers, both within the company and on the road or in on-site meetings with customers, is then difficult. If there is no mobile access to important data, processes are delayed or even costly wrong decisions are made. With a SaaS-based ERP system, on the other hand, a computer with Internet access and a browser is usually sufficient, and data can be accessed from almost anywhere. Solutions for mobile data collection can significantly increase the benefits of mobile working by providing the ERP system with up-to-date, near-real-time data.

4. Additional Software Costs for On-premises ERP Solutions

Excessive Acquisition Costs

The scope of the on-premises software on offer is often not as flexible in terms of customization. In many cases, traditional ERP systems require the purchase of a minimum number of modules or a certain level of functionality. In addition, with on-premises ERP software, a decision is made for several years. Risks must be taken here, as it is often not known how the order situation and business will develop during this time. However, because expansions are usually complex and costly, it is often obvious from the buyer’s perspective to err on the side of caution. As a result, the decision is often made in favor of oversized and overpriced solutions.

Additional Operating Costs

The operation of the ERP software also incurs additional costs. Updates and upgrades should be carried out regularly. Subsequently, there must be functionality tests. It may also be necessary to carry out software patches at unfavorable times, such as peak periods. You should also factor in the effort and cost of backup. Some vendors of local ERP systems charge extra fees for database licenses in addition to the user license fees. If there are problems with the ERP software, contractual clauses often oblige the customer to provide free support for troubleshooting and documentation. However, the vendor can charge for any additional services required.

5. On-premises ERP Solutions and the Cost of Poor Scalability

On-premises ERP solutions are less scalable than their counterparts in the public cloud. If, for example, you urgently need more computing or storage resources because orders have increased significantly, this is not easily possible with on-premises software. Orders may then have to be canceled - resulting in opportunity costs (costs of lost opportunity). Resources from the public cloud, on the other hand, can usually be adapted promptly to fluctuations in demand. No new hardware or software purchases are required.

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6. On-site ERP Systems: Higher Costs for IT Employees

On-premises ERP systems also place a significantly greater burden on IT employees, with in-house IT having to configure and update many parameters in the system as required and then monitor its operation. In a public cloud environment, the majority of configurations are carried out automatically. This includes settings for compliance, the latest legal and tax regulations and country-specific settings for taxes and currencies.

Shadow IT is getting out of Hand due to Traditional ERP Systems

In addition, excessive adherence to on-premises software often leads to the increase in so-called shadow IT. Here, employees in the specialist departments procure software bypassing the official processes in order to solve current problems. Because local ERP systems slow down the rapid implementation of new functionality, third-party or SaaS solutions are becoming increasingly attractive. However, this also increases security risks and such software is more difficult to integrate functionally and strategically into existing systems. As a result, processes become increasingly independent and new organizational and functional silos are created. The effort and costs for IT then increase accordingly. If, on the other hand, the decision is made in favor of a cloud-based ERP solution, IT employees can devote more resources to collaborating with other departments. Precisely because work and production processes are becoming increasingly complex and interwoven, they require more intensive interdisciplinary collaboration between specialist departments. This can take the form of the popular DevOps approach or another form that promotes collaboration.

Internationalization: Longer Working Hours for IT Staff

ERP cloud solutions enable uninterrupted working in different time zones - around the clock. The internationalization and increasing partner cooperation are becoming the decisive drivers here. If the ERP software is operated on site, it may be necessary to maintain IT operations outside official working hours, at weekends or on public holidays. This results in additional costs, including for the IT staff supporting the system.

7. On-premises ERP Systems: High Costs due to Complex Processes

One disadvantage of SaaS ERP systems that is often mentioned is the restrictions caused by a high degree of standardization, which means that the software cannot be adapted to individual customer requirements, or only with difficulty. This is certainly true for companies with more complex IT landscapes or highly individualized business processes. In everyday practice, however, it is not uncommon for a lot of unnecessary and error-prone IT/business process complexity to arise over time. It does not deliver any significant added value or even slows down work processes. This can be the case, for example, if currently operated processes have been built around solutions that are no longer needed. In such cases, moving to the cloud can serve as an opportunity to declutter and streamline work processes. Even with specific IT solutions that are largely used, cloud-based ERP systems should not be hastily dismissed. It is worth considering the well-known 80/20 rule, which also applies to IT solutions in general. According to this rule, an average of 80% of the existing on-premises functionality can be retained with a cloud solution, at a fraction of the original effort and cost.

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Conclusion

The costs of on-premises ERP systems are in many cases significantly higher than generally assumed. Among other things, the indirect costs for the operation of hardware, infrastructure, software and the costs due to limited mobility are often underestimated. In addition, the acquisition costs are often higher in order to counteract the risks of long-term investments. Furthermore, on-premises ERP systems are poorly scalable, which drives up costs, especially at peak times or when capacity utilization falls sharply. IT employees are also significantly more stressed when operating on-premises software and cause additional costs. In addition, local ERP solutions sometimes favor unnecessary and costly work processes. These points should be taken into account when comparing the costs of on-premises ERP systems with SaaS alternatives.