Upgrading to a Cloud ERP system – is it worth it?

Whoever came up with the term “the cloud” certainly deserves some credit. Once a buzzword, this term has moved into the mainstream of consumer technology. So much so that everyone is getting in on it. Decades worth of photos and home videos can now exist in an ethereal, meta-physical state of being, freeing up some much needed attic space. But what’s happening in the enterprise world? While the importance of a well-functioning on premise ERP system is widely recognized, the relative newness of Cloud ERP systems means that there is less consensus around the cost-benefit relationship of these systems.

In this blog, I’ll attempt to shed some light on this relationship. I’ll cover some Cloud ERP basics, explain the theoretical benefits of the cloud, and dive into one of the main considerations for companies thinking about a move – cost. More specifically, with the help of Acumatica’s True Cost calculator I’ll answer the question – is upgrading to the cloud worth it?

As you’ve probably already gathered from the name, Cloud ERP systems differ from traditional, on premise installations in that they run in the cloud, as opposed to being installed and managed locally on a company’s hardware and servers. In other words, they enable companies to run their accounting, operations management and reporting in the cloud.

There are a variety of Cloud ERP systems out there. At Catapult, we support Acumatica Cloud ERP and Microsoft Dynamics 365. In this blog post I’ll focus on Acumatica, a system that we most recently implemented for Tourism Vancouver.

Cost probably has the most weight in many companies’ decisions to move to the cloud. Therefore, with the help of Acumatica’s True Cost calculator, I’m going to look at the cost of doing nothing (staying on premise) compared to the cost of moving to the cloud.

First things first, the calculator asks for some basic information:

For this exercise, I’m going to use the example of a multi-location manufacturing and distribution company interested in Financials, Distribution and Manufacturing. The complexity of the implementation is “average” and the level of the implementation, training and on-going support expected is “large.” Finally, the consultant’s hourly fee is $175.00 per hour and the full burden hourly rate of IT staff or contractors is $120.00 per hour.

After clicking on “Calculate my cost of doing nothing,” I’m provided with the below graph and table. As you can see, for our sample company the cost of doing nothing (staying on premise) is more than the cost of moving to the cloud.

More specifically, while remaining on premise avoids significant implementation and licensing fees, it results in higher annual maintenance, infrastructure and support costs. The difference in support costs is especially large; $401,750 for to maintain the on-premise system as opposed to $125,875 to move to the cloud. That’s a difference of $275,875 over 5 years – just for support!

Looking at the total price difference for all five costs – support, implementation, infrastructure, annual maintenance and licensing – we arrive at the conclusion that remaining on premise is more expensive. To be more precise, moving to the cloud saves the example company $1192 per month and $14,299 per year. That’s $71,495 over 5 years.

Anyone curious to see how these calculations differ with a lower consultant’s hourly fee and full burden hourly rate? I certainly was. Therefore, I created a second scenario. Instead of a consultant’s hourly fee of $175.00 and a full burden IT staff/contractor rate of $120.00, I used $100.00 and $60.00, respectively.

In this scenario, the cost of moving to the Cloud was slightly higher. While infrastructure, annual maintenance and ongoing support costs decreased with the cloud based ERP solution, the licensing and implementation costs were significant enough to make a move to the cloud more expensive than remaining on premise.

However, it’s worth mentioning that the difference in cost is rather small. To be more precise the Cloud based ERP system is more expensive to the tune of $103.00 a month, $1238.00 a year, and $6186.00 over 5 years.

Moreover, it’s also worth mentioning that with this level of consultant and IT staff/contractor fees ($100.00 and $60.00, respectively), you’re not getting a lot for your money. You might get the bare minimum – i.e. enough to keep your system from falling flat, but you’re not getting access to a resource that is staying up-to-date with best practices and new developments.

It should be noted that the above figures take into account only the cost of staying on premise vs moving to the cloud. They don’t address the ROI that a new Cloud ERP solution would provide. To determine this we can use the ROI portion of Acumatica’s calculator.

While Acumatica provides evidence that leaders in cloud ERP adoption experienced reductions in administration costs, inventory levels, and operating costs and an increase in profitability ranging from 11% – 17%, I’ve used a more realistic goal of 7% for our hypothetical company.

I must say the results of the ROI portion of the calculator are impressive. A $105, 000 increase in profitability and $115, 500 decrease in costs (operating, administration and inventory level costs combined) is nothing to sniff at. In sum, this leads to a potential ROI of $220, 500 per year. That’s $1,102,500 over 5 years!

With the help of Acumatica’s calculator I think I’ve been able to provide a pretty good answer to this Shakespearean question (because I’m sure cloud computing was on Shakespeare’s mind when he wrote Hamlet!)

More specifically, if you look at cost alone, the savings of a move to the cloud are not that significant. If you remember, in our first scenario the cost savings over 5 years was $71,495. And in fact, with lower consultant and IT staff/contractor rates, a move to the cloud ended up being more expensive ($6186.00 over 5 years). In sum, the results of the cost analysis aren’t mind-blowing.

However, once you consider the ROI of a move to the cloud it’s a completely different story. In our scenario, the ROI of moving to a Cloud ERP system was $220,500 a year. Over the course of 5 years that leads to a return of $1,102, 500. This is a huge figure for a company with an annual profit of $1,500,000!

If you’d like to explore the possibility of moving to the cloud and whether it’s the right step for your business, contact your Acumatica Cloud ERP partner. If you don’t have a certified partner Catapult would be happy to discuss your unique business needs with you.