Hosted ERP Software or Installed?

The evaluation of whether to own and installing your ERP system or paying for it on a monthly basis as a hosted ERP solution is similar to evaluating whether it is better to own or rent your residence. There are a few important differences, but the majority of questions, risks and tradeoffs are exactly the same.

The first two questions to consider are the financial ones: “What will be the affect on cash flow?” and “What will be the affect on my tax liability?” The answers to these are very specific to your situation and business objectives. You may not have the free cash to invest up front, or you may want the tax advantages of accelerated depreciation.

Assessing Risk

The next couple of questions deal with product risk – what happens if the ERP system does not work as well as you’d hoped, or if the system changes in some significant way? In both of those cases, a hosted ERP solution would mitigate risk better than owning outright since the only thing to do in either case is to start over with a new ERP system or new version. The switching timing and costs in a hosted ERP solution would not be free, but they would be faster and cheaper than if you owned the wrong software outright.

The third level of questions involves security and reliability. This boils down to the reputation and track record of your hosted ERP vendor. Do you have trade secrets or business process advantages that would be compromised if your host’s security were to be breached? How much damage would be done if your host’s service went down for an hour? A day? There is a low probability that you are sensitive to questions like these, but if you are, any risk might be too much to consider a hosted ERP system. Always keep in mind the reality that while your business is the most important thing in the world to you, your business is just one of many to a service provider.

The last level of consideration involves support and ERP change management. If you sense during the ERP design phase that there are a lot of decisions which are either tentative or constantly in flux, or you foresee a time when your business process will need to change for practical reasons, then it is possible that a hosted ERP solution will give you better change management quality and speed. On the other hand, if a hosted ERP provider does not offer those kinds of support services, or guarantees around performance in that arena, then it argues for keeping all IT inside.

In the end, the decision to own or to host ERP software becomes a strategic risk and capital cost matrix. If you have low amounts of spare capital, and low strategic risk, then hosted ERP is almost certainly right for you. If you have high amounts of capital and high strategic risk, then owning your ERP system seems obvious. For all other combinations, you need to evaluate the questions above, and make the best decision possible.