Hosted or On-Premise ERP: Which is Right for Your Business

The buzz about hosted solutions has increased. They are also called Software-as-a-Service (SAAS) or Cloud Applications and promise a shift in the way of working. They are much cheaper than on premise solutions.

Initial hosted applications were CRM solutions and were pioneered by SalesForce.com. But recently, tons of solutions have come up that claim to do accounting, CRM, retail, project management and much more. Some are even free.

So is the buzz justified? As a decision maker in a SMB, should you look at such solutions? Who is using these solutions and how mature are they?

These are all relevant questions and since the landscape is changing so fast (a new solution is launched every other week) there are no easy answers. Yesterday's common knowledge may not be relevant today.

1. Features: It is very important to identify what are the key pain points will the ERP address and the necessary features that are necessary for successful implementation.
   
   On-premise ERPs, have been around for a long time, and have a much wider and mature feature set. Most hosted solutions, on the other hand, are fresh designs. Though they may provide a much simpler way of managing the system, they may not have as many features.
   
   
2. Cost: In terms of cost, hosted solutions win hands down. You have solutions starting from free - like Zoho, Outright and many more to the more expensive Netsuite or SAP ByDesign.
   
   (Many will say that they do not compete and the feature set and target users are very different. I agree but the new solutions are adding features by the very quickly and will soon be more and more complete.)
   
   On premise ERPs require an IT Administrator to maintain the servers, take backups and secure the server from virus threats. In the hosted model, this headache is outsourced and in case help is needed, online support is usually available. The hosting provider takes care when the server crashes and data has to be recovered.
   
   Licenses are another big cost. On premise solutions require a database license either form Oracle or MS SQL, a server edition Operating System and other softwares that may be required for client-server access. Hosted solutions on the other hand are web-based and have no licensed costs attached.
   
   
3. Security: Security and privacy of data is one of the first concerns people have when they are seriously looking at a hosted solution. In reality, more than 70% of data leaks are insider jobs.
   
   Most hosting providers are very protective of their client's data. Even if anyone raises a stink that their data has been stolen, it can have a bad impact on their credibility
   
   No security is perfect, whether in premise or at the data host. But the data host is much more prepared and the security is setup for many clients not just one.
   
   Counter intuitive as it seems, the data is actually more safer in the hosting model as compared to the on-premise model.

Looking at the current options, on-premise solutions are easily the safer choice to go for. You should look at a hosted solution under one of the following scenarios:

1. You are working on a tight budget
2. You are looking for a solution for a startup or a new subsidiary and your requirements in the first few months are not too much.
3. You are an early adopter and see that in future this investment will pay off.
4. You are willing to work with the provider to ensure that whatever gaps are there, will be completed.

My personal bet is that the gap between the small solutions and the big boys will close fast and in a couple of years, many of the features provided by on premise solutions will become commodity. This will help a lot of SMBs to adopt ERP solutions that were previously inaccessible due to the cost.

But if you are deciding today, then 90% of you should go for a stable solution - not many hosted solutions are stable as of yet though they have a lot of promise.

If you are the 10% that have either strong cost motivation for not maintaining in-house servers, then go for the hosted model. Evaluate both, the big boys and the upstarts and you will be in for a surprise.