The Story of ERP: From On-Prem to SaaS and Beyond
Twenty years ago, it would have been absurd to put enterprise resource planning (ERP) and “agile” in the same sentence. Back then, the systems that businesses used to track their data was cumbersome on-premises technology that bore little resemblance to the modular ERP software we think of today.
It took two full cycles of innovation for that transformation to happen. In the process, ERP fundamentally changed. It has become nimble and uniquely suited to deliver actionable insights in real time—a critical component of intelligent automation.
Led by the arrival of artificial intelligence, ERP technology is now entering a phase of development in which data flows freely across the business, sustaining cross-platform, automated workflows. This is the story of how we got here and what’s coming next.
What does ERP mean?
Enterprise resource planning refers to a “configurable information systems package that integrates information and information-based processes within and across functional areas of an organization.” In practical terms, it’s software that lets different parts of your business see what organizational resources are where, and manages workflows around those resources. ERP systems track everything from employees to sales leads to raw materials in a supply chain. Packages like Netsuite, Intacct, and Microsoft Dynamics center around accounting software to track the movement of money throughout the organization.
Over the last twenty years, ERP technology has changed significantly. Though most of its history was defined by large, monolithic systems installed on-premises, companies have been switching to cloud ERP steadily, leveraging its flexibility and efficiency. In 2017, we seem to be near an explosion in that trend.
One in five finance teams do not currently use any cloud solutions, but plan to. The number of finance teams keeping their systems on-premise has plummeted 60% in just three years, presaging a shift in infrastructure. Overall, 62% of companies are planning to use cloud ERP systems in the near future—the highest that figure has ever been.
Cloud ERP’s shift into finance orthodoxy is already having a big impact on the team’s capabilities. In order to understand this shift, we have to understand how the technology advanced from an on-premises server to a seamless ecosystem.
Background: The trouble with on-prem ERP
The story of ERP began in the 1960s, when early computer systems—arguably the first enterprise software in history—were installed in factories to track manufacturing materials. Three decades later, ERP became a common presence in large companies, aligning processes across departments by maintaining a shared “source of truth” data set. The software was a revelation to many organizations for its ability to create efficiencies and host critical processes. But the enormity of the solutions presented drawbacks.
Integrations between vendors weren’t feasible in those days, so in order to support every process across the organization, ERP software was sold in enormous packages that housed a vast array of functionality. The market was dominated by a handful of big companies (SAP, Oracle, PeopleSoft) and system architecture was a labyrinth, impenetrable to anyone but an expert. Setup required buying and installing servers on-premises, then hiring someone to configure your many customizations, which could take months and millions of lines of code. After that, you needed people to maintain and secure the hardware on an ongoing basis. Troubleshooting required teams of engineers. In addition:
The concept didn’t scale. High implementation and maintenance costs made ERP accessible only to larger companies.
Processes were brittle. An army of assistants from every department enforced strict procedures lest a user error break the temperamental software. Essential processes used by many employees had few workarounds.
Frustration led to failure. It wasn’t uncommon that employees would simply refuse to conform to the system’s process changes and the initiative would be scrapped. User noncompliance was by far the leading cause of ERP failure.
For many finance teams, these problems persist today. Three quarters of large US enterprises continue to use on-prem ERP as their primary financial system, even though 87% of enterprise CFOs report technology concerns directly related to these systems. Sticking with on-prem ERP is understandable in some cases; the average payback period, due to the huge cost of implementation, is five to seven years. But as on-prem systems age, technology continues to develop elsewhere, growing the opportunity cost of the status quo with each passing year.
Evolution #1: The cloud
In the late 1990s, enterprise software began to move online. Netsuite (originally NetLedger) launched in 1998, making accounting one of the first business applications available in a web browser. A year later, Salesforce debuted under the banner of “no more software.” These two cloud-based platforms would come to reshape the ERP landscape.
Remote computing itself was nothing new. Large companies had been time-sharing remote processors for decades. But as bandwidth and stable connections proliferated, web processing democratized. Cloud server providers like Amazon Web Services made it possible for even small businesses to run powerful applications and store large amounts of data in off-site, shared data centers.
ERP adapted to the cloud paradigm cautiously. On-prem systems were too big and ingrained to simply move online. Instead, they were augmented by a layer of SaaS components in an arrangement known as “hybrid ERP.” Eventually, finance teams started to trust heavy-duty SaaS solutions like Salesforce, Netsuite, and Workday to hold big quantities of important data. Eventually these systems became de facto systems of record.
SaaS systems were vastly more cost-effective than their on-premises predecessors, but what proved transformative was their flexibility. With both core ERP and its integration layer in the cloud, the former monolith turned into a flexible, agile platform — able to be installed quickly, access data from anywhere, and scale to businesses of all sizes.
“Cloud customers get 42% higher return on investment, spend 50% less on initial personnel, and spend one-fifth as much on consulting versus on-premises ERP customers.”
–Seth Lippincott, Nucleus Research
Evolution #2: An integrated ecosystem
One major challenge of setting up ERP on-premises was always the limitation of customizing a huge software suite to fit one company’s use case. SaaS presented a solution. Because they were built to complement on-premises systems, SaaS applications integrated from the outset. Each could connect to other components easily, augmenting the system of record at little cost or hassle.
Recognizing the potential of this new model, Salesforce launched their AppExchange in 2005. It was a watershed moment. Instead of trying to satisfy everyone at once like old ERPs, Salesforce, Netsuite (having launched their own exchange, Suiteapp) and others decided to build a great core product and allow third-party apps, connected via API, to handle other processes. Cloud ERP transformed into an ecosystem of highly-focused components.
In 2005, 38% of large companies planned to install SaaS components in their ERPs. A year later, it was 61%. Today, enterprise SaaS adoption is growing 20% a year and product offerings continue to diversify.
Because each app is built by a team dedicated to perfecting one specific function, ERP turns into a mosaic of specialized components suited to your business. SaaS apps are easy to install and swap out, lowering the risk of trying new software. Standardized integrations don’t just make it easier for apps to work with one another. They also share the data generated by each component across the entire ecosystem. This free flow of data set the stage for the third phase of ERP.
Evolution #3: Real time data & automation
The power of cloud ERP isn’t just that it collects diverse operational data into one system—though seeing feedback in real time is an essential part of being agile. More important is the ability to intelligently automate and process data into context-rich insights.
In the age of artificial intelligence, real time data is automation. Machine learning, the power behind what we call “AI,” is the process of instructing a computer to find a pattern, feeding it data, and letting the computer refine its model over many iterations. After enough cycles, the software can spot patterns that humans would never be able to identify.
Machine learning has the potential to fundamentally change the way we interpret data. Freed from having to comb through spreadsheets to gather insights, analysts will instead be presented with actionable takeaways. Being able to turn vast quantities of data into tangible intelligence will be an important capability as organizational data proliferates. Especially because this reporting won’t be a quarterly or monthly activity; it’ll be a continuous view into a wide array of business operations—what one Fortune 500 CFO calls “the collective mind of the organization.”
“Top-performing finance organizations not only expect real time information, they also need it to help paint a picture that can drive action. It’s part of being immediately responsive to an array of input, which empowers better decision-making.”
–Rich Sernyak, SAP HANA Principal at PwC
As artificial intelligence develops in power, the capabilities of cloud ERP software will multiply with it. For the 37% of US businesses who don’t even plan to use cloud-based solutions, catching up to the competition will only get harder.
A cloud ERP stack is infrastructure that doesn’t behave like infrastructure. This is the nature of SaaS technology: you pay a monthly subscription fee for a product that evolves without you needing to touch it. One consistent, familiar tool gives your team access to cutting-edge technology without any additional work. SaaS, in other words, is future-proof.
As A.I. works its way into the enterprise, cloud ERP is finally able to deliver on its original purpose: bringing real time insights on all aspects of the business, to all areas of the business. That’s a positive for everyone, but especially finance—a department meeting new demands in a rapidly changing environment.